Sacrifice bonus or pay into savings

Silian

Each year at work I receive a bonus of between 14-16% of my salary. Going forward I'm going to save my bonus for retirement (I used to buy "shiny things" with it, but this is going to change).

If I sacrifice my bonus into my pension (workplace defined contribution scheme) I save on my tax (40%), my NI contributions (2%) and my company also contribute their NI contributions (10%). So for every £1k I pay in, I'll get £1.1k if I pay it into my pension. If I cash it in to pay into my savings only get £580. My company only does this for bonus sacrifice - for any other salary sacrifice they do not contribute the extra 10%.

On the surface the answer is pretty obvious - I should pay my bonus into my pension. The issue is that my plan is to retire 12 years from now when I'm 45.

In other words, I need enough money in normal savings (S&S ISAs) to tie me over until I can access my pension money. If I pay every second bonus into my pension and the age that you can access your pension remains 55 I should be OK. If the government changes it to 57 it will be tight. If they change it to 60 (or beyond) it will be unlikely that I'll make it and I'll have to go back to work (and who would want to hire a person who took a 10 year career break?).

I'm thinking that it might be safer to rely on my pension as little as possible and just pay up to the amount that my employer actually match.

If I instead pay my bonus into my ISA I will have to work two years longer to save enough money to last me the 50+ years I need in retirement. This is something that I would like to avoid if at all possible. I will also go over the ISA allowance if I do this and I haven't calculated tax into my projections so it might be even longer.

Is anybody else in a similar situation? What would you do if you were in my situation - salary sacrifice or savings?

Also, how many years warning does the government normally give before changing the age you can access your pension?

xylophone

You are aware that you will need 35 years paid or credited for NSP?

https://www.gov.uk/new-state-pension/overview

Silian

xylophone wrote: »

You are aware that you will need 35 year paid or credited for NSP?

https://www.gov.uk/new-state-pension/overview

Yeah - I have "voluntary NI contributions" as part of my budget from 45-60.

I exclude NSP completely from my calculations though - it will be a nice bonus when I get it, but I don't want to rely on it in any form (especially as they keep on changing that age as well).

kidmugsy

Silian wrote: »

I exclude NSP completely from my calculations though - it will be a nice bonus when I get it, but I don't want to rely on it in any form

A more thoughtful way of looking at NSP for very early retirees is discussed here:
http://www.retirementinvestingtoday.com/2015/05/insuring-against-sequence-of-returns.html


Personally I'd bung the bonus into your pension while the tax relief is still 40%, salary sacrifice is still allowed, and the annual allowance is still £40k. I'd use ISAs when pension saving had been made less attractive. I'd bet on that occurring within 12 years.


P.S. "If the government changes it to 57 ...": what do you mean "if"? The change was announced a year ago, wef 2028.

atush

f I sacrifice my bonus into my pension (workplace defined contribution scheme) I save on my tax (40%), my NI contributions (2%) and my company also contribute their NI contributions (10%). So for every £1k I pay in, I'll get £1.1k if I pay it into my pension. If I cash it in to pay into my savings only get £580. My company only does this for bonus sacrifice - for any other salary sacrifice they do not contribute the extra 10%.

Dont think your figures are right as you describe. think you are hiding the TR as it is a SS scheme. 580 from you, paid into a pension makes 1.1K into your scheme?

Silian

kidmugsy wrote: »

A more thoughtful way of looking at NSP for very early retirees is discussed here:
http://www.retirementinvestingtoday.com/2015/05/insuring-against-sequence-of-returns.html


Personally I'd bung the bonus into your pension while the tax relief is still 40%, salary sacrifice is still allowed, and the annual allowance is still £40k. I'd use ISAs when pension saving had been made less attractive. I'd bet on that occurring within 12 years.


P.S. "If the government changes it to 57 ...": what do you mean "if"? The change was announced a year ago, wef 2028.

Excellent article - thanks kidmugsy. That is an excellent way to look at it - the state pension is a great "fallback" if I do run out of money. It won't be enough to live comfortably on, but it will be enough to survive on if needed.

"If" - The change was announced, but it was not included in the Taxation of Pension act where it should have been.

Silian

atush wrote: »

Dont think your figures are right as you describe. think you are hiding the TR as it is a SS scheme. 580 from you, paid into a pension makes 1.1K into your scheme?

I think my calculations are correct.

If I get £1k bonus and I decide to take it as cash, I have to pay 40% tax on it (£400) as well as 2% NI (£20). £1000-£400-£20 = £580.

If I pay it into my pension, I get the full £1k and my company contributes another 10% (£100). That makes £1100.

This isn't for normal salary sacrifice (then I'll only get £1k paid into my pension) - it is just for "bonus sacrifice"

atush

I guess I meant the net cost to you. Which is each 1.1K of pension costs you only 580?

Your post made it sound that it cost you 1K, which isn't correct.

jamesd

Given your objectives I suggest that you try an advanced search for posts containing "VCT" from poster "jamesd" and have a read of what I've written on the subject. Briefly, 30% initial income tax relief, 10-11.2% tax free income available from a couple of them, mostly asset backed investments in those two, minimum holding time of five years or have to repay the 30%. For a suitable proportion of your total investments the accessibility and tax relief combination provided by VCTs can be a useful alternative to pensions. They are probably not suitable for all of your non-pension investing, though, just an appropriate portion. You might start out by using at a minimum the 30% tax relief as S&S ISA investing money. More is probably desirable.

Silian

jamesd wrote: »

Given your objectives I suggest that you try an advanced search for posts containing "VTC" from poster "jamesd" and have a read of what I've written on the subject. Briefly, 30% initial income tax relief, 10-11.2% tax free income available from a couple of them, mostly asset backed investments in those two, minimum holding time of five years or have to repay the 30%. For a suitable proportion of your total investments the accessibility and tax relief combination provided by VCTs can be a useful alternative to pensions. They are probably not suitable for all of your non-pension investing, though, just an appropriate portion. You might start out by using at a minimum the 30% tax relief as S&S ISA investing money. More is probably desirable.

Thanks James. VCTs are a good option for money that I have to invest beyond the ISA limit (and the £500 tax free interest that comes into effect next year). I've seen your comments about it before in other posts, but I haven't done a lot of research yet. I'll change that.

Edit: rereading your post, yes - I can do a bit more as I can use the tax refund for my Isa. Something that I never thought about before - thanks!

jamesd

What I concludes is that I slacked and gave ISA priority when I should have learned about and started using VCTs sooner. Missed an opportunity there. But do ensure that you keep a good balance, going overboard when investing isn't good whatever the investment is.