Pension - Just Checking My Thinking

DanglyBits

I receive a performance based bonus in June. I've reached the stage in life where I don't need the bonus to fund anything so I've explored options and seen a thing my company do called Bonus Waiver, where they pay my bonus straight into my pension thus avoiding paying tax and NI. Unfortunately though, I've missed the cut off. So I'll receive cash after tax and NI. 

My thinking is though, I could make and additional voluntary contribution(s) next month, or the next few months if one month would take me higher than the allowed 80% of salary in any one month, into my pension and my pension company would apply for tax relief and add that to my pension, so in effect getting the tax I've paid back, is that right? Am I thinking correctly?

EthicsGradient

Yes, that would get you the tax back, though not the NI, unfortunately.

DanglyBits

Thanks for reply. What if I put the bonus cash into a savings account or ISA until it's earned enough interest to cover the NI loss then pay it into my pension?

Dazed_and_C0nfused

It seems like your employer operates salary sacrifice for the bonus.

If they do this for your normal pay couldn't you simply increase your normal salary sacrifice amount and live off the bonus instead?

Or are you already sacrificing down to NMW level?

cloud_dog

DanglyBits said:

I receive a performance based bonus in June. I've reached the stage in life where I don't need the bonus to fund anything so I've explored options and seen a thing my company do called Bonus Waiver, where they pay my bonus straight into my pension thus avoiding paying tax and NI. Unfortunately though, I've missed the cut off. So I'll receive cash after tax and NI. 

My thinking is though, I could make and additional voluntary contribution(s) next month, or the next few months if one month would take me higher than the allowed 80% of salary in any one month, into my pension and my pension company would apply for tax relief and add that to my pension, so in effect getting the tax I've paid back, is that right? Am I thinking correctly?

What are your earnings, including the bonus?

The reason is, D&C posted, that you may be financially better off taking the bonus and significantly increasing the regular monthly contributions (possibly allowing you to save in the 8% NIC band as opposed to the 2% band).

silvercue

Sounds like my company pension scheme.  Bonus Cut off is March and if you miss the window you can't change it until next year.  I learned the hard way and now catch it in March.

You could pay the bonus into your pension scheme as a one off payment, if it allows that, and receive 25% tax relief, effectively cancelling the 20% element of the tax you paid.  You can claim the rest via Tax Return if you are a higher rate payer.

The other option you are suggesting is increase your salary sacrifice each month, which you can also do.  80% of salary is a very high bar, so gives you a lot of flexibility.  My pension maxes out at 50%.  This will mean you pay less tax for a period too.

With 80% of salary allowed, if you wanted to contribute more every month, you may even be able to bring yourself down to paying 20% tax and not higher rate (obviously, I have no idea how much you earn, so may not apply)

El_Torro

DanglyBits said:

Thanks for reply. What if I put the bonus cash into a savings account or ISA until it's earned enough interest to cover the NI loss then pay it into my pension?

I can kind of see your logic but you'll probably be better off in the long run by putting money in your pension as soon as you have it available. Time in the market is the most important thing when investing in the stock market. The money you gain in a savings account will probably (no guarantees) be less than having the money in your pension for longer.

DanglyBits

Thanks for your help everyone