Little-known pension trick could boost your pot by nearly £35,900 – you won’t pay a penny more
A LITTLE-KNOWN trick could boost your pension pot by almost £35,900 – and you won’t have to pay a penny more.
A salary sacrifice scheme is where a worker agrees for a chunk of their earnings to be put into a tax-free benefit.
Often, these include benefits like a childcare vouchers, gym membership or a cycle to work scheme.
But you can also use salary sacrifice schemes to boost your pension.
The money you agree to take off your salary will be put into a pension scheme – and your employer will contribute to this pot too.
One of the main advantages of using this scheme is that you pay less in tax like National Insurance, and the full amount you’ve sacrificed will be put into your pension.
Because the money is going straight into your pension, both you and your company will pay less in National Insurance Contributions (NIC), meaning that your take-home pay will be higher.
How much National Insurance you pay depends on how much you earn per week or month.
You pay nothing on the first £242 of weekly earnings, 8% on weekly earnings between £242.01 to £967 and 2% on weekly earnings of £967 or more.
Companies pay 13.8% of your salary if it’s between £9,100 and £50,270.
Pensions company Scottish Widows has calculated that workers earning the average annual UK salary of £27,294 (after tax) could increase their take-home pay by £140 a year by opting into their employer’s pension scheme and taking advantage of the tax benefits.
Putting this extra cash into pension savings, alongside the savings that the employer makes through reduced National Insurance contributions, could result in an extra £463 paid into their pension each year.
Over 25 years and, assuming 5.4% growth, this could add a whopping £35,900 to their pension pot.
Susan Hope, Scottish Widows retirement expert said: “The term ‘salary sacrifice’ is really misleading because neither employee nor employer needs to sacrifice anything.
“‘Salary exchange’ is a much more accurate description because workers are essentially missing out on free money that they could be seeing in their take home pay or adding into their pension savings by not taking advantage of this scheme.
“While it might sound complicated, it’s just a slightly different way to make pension contributions and importantly, it will never mean workers take home less pay.”
How do I consolidate my pension?
IF you have several workplace pensions that you're no longer paying into, you might be better off consolidating them into a single pot.
There are several advantages to this.
The first is that by having your savings all in one place, you’ll only pay one set of fees.
You can also choose which pension provider you want to transfer the different savings to, so you can pick the best one for you.
It also makes it easier to keep track of your money.
You might want to move all your money to whichever of your existing pots has the best fees, or you could move it all to your current employer pension (if you have one).
Alternatively, you may wish to move money to a private pension or use a consolidator service, such as Pension Bee, Aviva, or Wealthify.
Make sure you compare and contrast your options carefully so that you’re picking the best home for your savings.
You’ll need to look at fees but also might want to consider the investment options available.
If any of your pots are over £30,000 you’ll need to get independent financial advice, but even if you have lots of smaller pots you should consider speaking to an independent financial advisor (IFA).
You can use Unbiased or VouchedFor to find a recommended advisor near you.
Also ask whether you’ll be charged a fee to exit your existing provider and to join your new provider, plus whether the age at which you can access your pension is different – for most people this is currently 55, but is set to rise to 57.
You also need to ensure the pension you’re leaving doesn’t come with valuable added perks, or you could lose out.
Stay alert for pension transfer scams as fraudsters often target people transferring their pension with promises of investments that are too good to be true.
Should I use a salary sacrifice scheme?
Although sacrificing your salary could be concerning if you’re on a lower income, remember that you pay less in income tax and National Insurance.
Which? says that if you sacrifice £1,000 for example, you won’t be losing this entire amount overall – you’ll be losing less than £70 a month in income tax alone if you’re a basic rate tax payer.
If your financial situation changes, you can also choose to opt out of the salary sacrifice scheme – or reduce the amount of money you’re taking out of your pay.
However, it’s not available to everyone – if it reduces your earnings below the minimum wage, you won’t be eligible.
The minimum wage currently stands at £11.44 an hour.
If you’re planning on buying a home anytime soon, you might want to consider if the scheme is right for you.
Lenders will base how much they’re willing to give to you on your salary – if this is lower, than the amount you can take out for a mortgage will also be lower.
Certain state benefits like maternity pay may be affected too because of your lower NIC – so it might not be a good idea for budding parents.
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