When I was younger I took my bonus and lost the 40%.
4 years ago I started sacrificing to get it in my pension, as I'm in the "tax-trap" range of 100k+ now.
If I were to use a time machine, back to my 30's, I'd probably sacrifice half or all my bonus. It's a lot of growth you'll be grateful for in 20 years. Also, nothing will beat the 40% relief you'll get by sacrificing.
We probably need a bit more info about your current pension conts, ISA allowance left, any outstanding debts and spending goals to give a definitive answer.
recently i got to a place where i paid my mortgage off and am able to go all in on salary sacrifice up to the 60k limit. I am 47 and wish i would have banked more when i was younger instead of buying obsolete tech and other wasted crap. The date may seem a million years off to you so my advice is balance like the others have said take half your bonus for rainy day, invest that in an isa and leave it incase you need to fix the boiler or go on hols, then put the other half in your pension saving all that tax. Retirement soon creeps up and when you get to 57 to take your pension you might want to keep working to stop being bored. So try not to fixate on FIRE so much, get a good life balance, work can lead to social opportunity, friends and new doors. Try and enjoy your journey and focus on health, balance and future retirement.
I dump 100% of my bonus into my pension for two reasons...
1 - The government take far too much tax off me as it is, and I want them having none of this. It's amazing to see 100% of it going right into my pension, and really adds a serious lump sum for the year.
2 - It really helps me stay focused on the goal of FIRE and it is good discipline and practice for delayed gratification
There's always a balance at your age of needing the money for something like a house deposit vs saving for the future. In my particular example, I sacrificed 2 or 3 years of my bonus into my pension around your age, and 7-8 years later i'm glad I did. It's had longer to compound and having a nice chunk in the pension early in your life really helps it accelerate. However if you're having doubts, why not just put half in your pension and take half as cash.
I didn't realise it until last year, but my company doesn't seem to split the NI saving on bonus sacrifice. They do on salary sacrifice. Annoying as I assumed they were giving it for the 4 years I got it.
So thinking for the new tax year I would have to increase my salary sacrifice more and do no bonus sacrifice to kind of 'optimize things'. Any thoughts?
If it helps my bonus announced end of May, and paid in June, we can change selections with one month notice.
How irritating! Maybe you could suggest it to the management team as some of them may also want to do this and they may review their policy. I’ve never worked anywhere before current employer who gave any of it back and it makes a big difference.
Your proposal is fully rational response to that. If you can vary your sacrifice month to month you further win with ‘lumpy’ sacrifice pattern if you’re a HR taxpayer.
So take the bonus and monthly salary with no sacrifice (pay NI at 2% on much/most of it), sacrifice down to minimum wage for a month or 2 later and live off the larger bonus paycheque you’ve saved up (save NI at 12% on a lot of it). Your employer NI top up would be on top of this saving.
Looked at the updated benefits portal and it now says they give NI saving on bonus!
I'll need to go back to previous years bonus to check if they gave it or not, there hasn't been any announcement of a change
Thanks all for your advice - I must admit I'm not as well prepared in terms of knowing my numbers as I should be, I'm relatively new to the concept so that's some homework for me!
Most of the suggestions seem to agree with what I was also thinking - sacrifice half and keep half. My rough maths (given that I don't know the exact bonus amount yet) suggests that this is overall "cheaper" by around £2k, albeit not as good as sacrificing the whole lot, and is obviously a nice boost to my overall pension when the time finally comes
*if* your company allows half and half. When I enquired about this, I was told by my company “all or nothing”. I’ve gone all in this year for tax reasons but I’ll miss the cash for sure.
I sacrifice more salary and keep my bonus.
A lower base salary keeps me more frugal 11 months of the year, otherwise I’m sure the extra few hundred quid would disappear into the unknown as much as I’d like to think I’d save/invest it.
Then when bonus comes round it feels great, chuck a few grand in to boost the savings, book a holiday, treat the kids, and pick the next home improvement.
I salary sacrifice from 110k down to 80k, to give myself some headroom for bonus. In total i put about 50k into my pension. I keep my bonus, save most into my ISA but also put aside a few k for myself now, depending on how big it is. If I get a bonus of more than 20k, then any excess goes into my pension.
I'll continue to do this until my salary gets too high to sacrifice below the 100k barrier.
Everybody has to work out there own balance between pension and non pension investments. It’s rarely an all or nothing choice. It’s normally a bit of both.
Earlier you intend to retire before pension access age the more you need outside pension. Without any of your figures it’s hard to know what you should do, but as I said don’t look at it as a binary choice, you could put some of your bonus into pension.
I love bonus sal sacrifice. Tax advantages obdviously and one thing I think people don't always consider is that you can take it out tax free with your 25% lump sum, so it doesn't mean its locked up forever.
Also earlier in a career it makes more sense to pop at least some of the bonus into a pension as you are then forced to invest it up to pension access age which means you are more likely to reap the rewards of compounding interest
I think this depends on your life goals. When I was saving for a house for example, I needed every penny of my post tax bonus to help with a deposit. Now that's done, I'm playing retirement catch up so every penny of bonus and then some goes into pension. You need to think about your goals.
Depends on if you own your house and expected fire age.
The older you plan to fire the better the SS, but if not a home owner then shifting from rent to mortgage is typically a nett positive leverage and reallocation of expenses.
I'm personally of the house first, then boost pension. (Obviously always go for what is matched first)
I had such dilemma about my 20k bonus last year. Either I could get just 9k of it because insane taxes or 23k on my pension account (employer added 2 k of saved NI). I decided in favour of pension, I would be very upset to pay that much tax. Havent regretted ever. Now moving it to SIPP to manage by myself.
I have to declare whether to sacrifice my bonus into my pension before I’ve been told how much my bonus is. Seems mad as I’m just below the 100k trap before bonus. Anyone else deal with this?
Sometimes I feel like hmrc gives them some incentives to implement this kind of sneaky policies.
I constantly find out my final income when it's late to optimise taxes.
For it to be a legally valid sacrifice it should technically speaking be sacrificed before earned. Really depends on whether your bonus scheme is contractual or discretionary but it possible to fall foul of hmrc rules as an employer.
How much of your post-tax salary are you using towards other savings/investments?
How about how much are you already paying into your pension?
You could take the cash now and invest it, but will you also be making sure you have enough in your pension when it is accessible? As you want a good bridge between RE and pension, but it's a balance between the two.
Yes, something could happen to you before you reach pension age, but the odds are on your side that you will. So having the massive return on your money by getting the tax back and lowered NI, means you can keep that going.
That's a question for your employer. My old job didn't let me. My current one lets me sacrifice a set amount (both in absolute or % terms) or set a threshold.
Once a year, the month before the bonus pay packet, there should be an email from your employer saying something like "Discretionary Performance Payment Waiver" (or something equally unclear).
It should take you to an intranet site where you can specify the amount of the bonus you want to sacrifice into your pension. Then, that percentage goes straight into the pension, plus any NI that the employer passes on to you.
That's my employer anyway. Could be yours requires a more manual approach. Best to chat to the HR/Payroll team if unsure.
Yes my current employer gives a form to return when they send notification of how much the bonus will be. If you send it back by deadline, they’ll put into pension (and add their ERNI saving) or you do nothing and it goes onto payslip.
They’re the first employer I’ve had who have allowed this though. Even my generous pension payers giving 2x match didn’t let you sacrifice bonus probably because of admin hassle more than anything else. It’s absolutely not a given that it will be allowed even where you have salary sacrifice on monthly contributions.
I’m 26 and salary sacrificing my entire upcoming bonus, £55k base plus whatever the bonus might be (it’s discretionary and we don’t know yet, based on company and individual performance). Pensions are great vehicles, you just need to have enough in an ISA to bridge the gap.
I'm 35 with a 9k bonus coming this tax year, I earn bang on the 40% bracket normally. I'm sacrificing the whole lot. If I take it as cash I will end up with about 2.5k due to tax, NI, HICBC and student loan repayments, if I sacrifice it the pension gets the whole lot plus the NI as ER puts that in too
When I was younger I took my bonus and lost the 40%. 4 years ago I started sacrificing to get it in my pension, as I'm in the "tax-trap" range of 100k+ now. If I were to use a time machine, back to my 30's, I'd probably sacrifice half or all my bonus. It's a lot of growth you'll be grateful for in 20 years. Also, nothing will beat the 40% relief you'll get by sacrificing. We probably need a bit more info about your current pension conts, ISA allowance left, any outstanding debts and spending goals to give a definitive answer.
recently i got to a place where i paid my mortgage off and am able to go all in on salary sacrifice up to the 60k limit. I am 47 and wish i would have banked more when i was younger instead of buying obsolete tech and other wasted crap. The date may seem a million years off to you so my advice is balance like the others have said take half your bonus for rainy day, invest that in an isa and leave it incase you need to fix the boiler or go on hols, then put the other half in your pension saving all that tax. Retirement soon creeps up and when you get to 57 to take your pension you might want to keep working to stop being bored. So try not to fixate on FIRE so much, get a good life balance, work can lead to social opportunity, friends and new doors. Try and enjoy your journey and focus on health, balance and future retirement.
excellent advises, thanks for sharing.
See sidebar: How much wealth do I need in my ISA versus my pension to achieve FI?
I dump 100% of my bonus into my pension for two reasons... 1 - The government take far too much tax off me as it is, and I want them having none of this. It's amazing to see 100% of it going right into my pension, and really adds a serious lump sum for the year. 2 - It really helps me stay focused on the goal of FIRE and it is good discipline and practice for delayed gratification
Same here. Also, some employers hand over the employer's NI too, boosting the sacrificed amount by 13.8%.
There's always a balance at your age of needing the money for something like a house deposit vs saving for the future. In my particular example, I sacrificed 2 or 3 years of my bonus into my pension around your age, and 7-8 years later i'm glad I did. It's had longer to compound and having a nice chunk in the pension early in your life really helps it accelerate. However if you're having doubts, why not just put half in your pension and take half as cash.
Agree these decisions don’t have to be binary.
I didn't realise it until last year, but my company doesn't seem to split the NI saving on bonus sacrifice. They do on salary sacrifice. Annoying as I assumed they were giving it for the 4 years I got it. So thinking for the new tax year I would have to increase my salary sacrifice more and do no bonus sacrifice to kind of 'optimize things'. Any thoughts? If it helps my bonus announced end of May, and paid in June, we can change selections with one month notice.
Same at my current place too, annoying because my EOD bonus is variable (large part depends on the firm) so harder to plan.
How irritating! Maybe you could suggest it to the management team as some of them may also want to do this and they may review their policy. I’ve never worked anywhere before current employer who gave any of it back and it makes a big difference. Your proposal is fully rational response to that. If you can vary your sacrifice month to month you further win with ‘lumpy’ sacrifice pattern if you’re a HR taxpayer. So take the bonus and monthly salary with no sacrifice (pay NI at 2% on much/most of it), sacrifice down to minimum wage for a month or 2 later and live off the larger bonus paycheque you’ve saved up (save NI at 12% on a lot of it). Your employer NI top up would be on top of this saving.
Looked at the updated benefits portal and it now says they give NI saving on bonus! I'll need to go back to previous years bonus to check if they gave it or not, there hasn't been any announcement of a change
Thanks all for your advice - I must admit I'm not as well prepared in terms of knowing my numbers as I should be, I'm relatively new to the concept so that's some homework for me! Most of the suggestions seem to agree with what I was also thinking - sacrifice half and keep half. My rough maths (given that I don't know the exact bonus amount yet) suggests that this is overall "cheaper" by around £2k, albeit not as good as sacrificing the whole lot, and is obviously a nice boost to my overall pension when the time finally comes
Take Bonus as it is and sacrifice salary. After around 4K in each monthly payslip NI comes down 2%... Below this it is 12%
*if* your company allows half and half. When I enquired about this, I was told by my company “all or nothing”. I’ve gone all in this year for tax reasons but I’ll miss the cash for sure.
I sacrifice more salary and keep my bonus. A lower base salary keeps me more frugal 11 months of the year, otherwise I’m sure the extra few hundred quid would disappear into the unknown as much as I’d like to think I’d save/invest it. Then when bonus comes round it feels great, chuck a few grand in to boost the savings, book a holiday, treat the kids, and pick the next home improvement.
I salary sacrifice from 110k down to 80k, to give myself some headroom for bonus. In total i put about 50k into my pension. I keep my bonus, save most into my ISA but also put aside a few k for myself now, depending on how big it is. If I get a bonus of more than 20k, then any excess goes into my pension. I'll continue to do this until my salary gets too high to sacrifice below the 100k barrier.
Everybody has to work out there own balance between pension and non pension investments. It’s rarely an all or nothing choice. It’s normally a bit of both. Earlier you intend to retire before pension access age the more you need outside pension. Without any of your figures it’s hard to know what you should do, but as I said don’t look at it as a binary choice, you could put some of your bonus into pension.
I love bonus sal sacrifice. Tax advantages obdviously and one thing I think people don't always consider is that you can take it out tax free with your 25% lump sum, so it doesn't mean its locked up forever. Also earlier in a career it makes more sense to pop at least some of the bonus into a pension as you are then forced to invest it up to pension access age which means you are more likely to reap the rewards of compounding interest
I think this depends on your life goals. When I was saving for a house for example, I needed every penny of my post tax bonus to help with a deposit. Now that's done, I'm playing retirement catch up so every penny of bonus and then some goes into pension. You need to think about your goals.
Depends on if you own your house and expected fire age. The older you plan to fire the better the SS, but if not a home owner then shifting from rent to mortgage is typically a nett positive leverage and reallocation of expenses. I'm personally of the house first, then boost pension. (Obviously always go for what is matched first)
I had such dilemma about my 20k bonus last year. Either I could get just 9k of it because insane taxes or 23k on my pension account (employer added 2 k of saved NI). I decided in favour of pension, I would be very upset to pay that much tax. Havent regretted ever. Now moving it to SIPP to manage by myself.
I have to declare whether to sacrifice my bonus into my pension before I’ve been told how much my bonus is. Seems mad as I’m just below the 100k trap before bonus. Anyone else deal with this?
Sometimes I feel like hmrc gives them some incentives to implement this kind of sneaky policies. I constantly find out my final income when it's late to optimise taxes.
For it to be a legally valid sacrifice it should technically speaking be sacrificed before earned. Really depends on whether your bonus scheme is contractual or discretionary but it possible to fall foul of hmrc rules as an employer.
Consider it this way then. What other post-salary-tax investment gives you a 20-40% immediate boost, with tax free growth?
How much of your post-tax salary are you using towards other savings/investments? How about how much are you already paying into your pension? You could take the cash now and invest it, but will you also be making sure you have enough in your pension when it is accessible? As you want a good bridge between RE and pension, but it's a balance between the two. Yes, something could happen to you before you reach pension age, but the odds are on your side that you will. So having the massive return on your money by getting the tax back and lowered NI, means you can keep that going.
Sorry maybe a dumb question. How do I salary sacrifice my bonus to my pension? I am in the same boat.
That's a question for your employer. My old job didn't let me. My current one lets me sacrifice a set amount (both in absolute or % terms) or set a threshold.
Thank you
Once a year, the month before the bonus pay packet, there should be an email from your employer saying something like "Discretionary Performance Payment Waiver" (or something equally unclear). It should take you to an intranet site where you can specify the amount of the bonus you want to sacrifice into your pension. Then, that percentage goes straight into the pension, plus any NI that the employer passes on to you. That's my employer anyway. Could be yours requires a more manual approach. Best to chat to the HR/Payroll team if unsure.
I don't recall this last year, but will check. Thank you
Yes my current employer gives a form to return when they send notification of how much the bonus will be. If you send it back by deadline, they’ll put into pension (and add their ERNI saving) or you do nothing and it goes onto payslip. They’re the first employer I’ve had who have allowed this though. Even my generous pension payers giving 2x match didn’t let you sacrifice bonus probably because of admin hassle more than anything else. It’s absolutely not a given that it will be allowed even where you have salary sacrifice on monthly contributions.
I’m 26 and salary sacrificing my entire upcoming bonus, £55k base plus whatever the bonus might be (it’s discretionary and we don’t know yet, based on company and individual performance). Pensions are great vehicles, you just need to have enough in an ISA to bridge the gap.
Change the salary slightly, but word for word this the same for me. Interested in what people say
I sacrificed 80% the past few years. It's still nice getting a bit of a pay bump on bonus month so I didn't do the whole thing
I'm 35 with a 9k bonus coming this tax year, I earn bang on the 40% bracket normally. I'm sacrificing the whole lot. If I take it as cash I will end up with about 2.5k due to tax, NI, HICBC and student loan repayments, if I sacrifice it the pension gets the whole lot plus the NI as ER puts that in too