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Workplace Pensions

How a bonus could be a windfall for your employees’ retirement

Workplace Thought Leadership Team | November 26, 2019

Workplace Thought Leadership Team,

Help employees save more by showing them how adding their end of year bonus to their pension pot could help retirement investments grow.

With the end of the calendar year approaching, some businesses take the expression of ‘a season of giving’ to heart and reward employees for their efforts with an end of the year bonus.

While employees will be full of ideas about what they’d like to do with their extra cash, it can also be important for you to take the time to remind them not to overlook the benefits of saving some or all of their coveted end of year bonus into their pension pot.

Reminding employees to save more may seem like a message as popular as ‘eat your greens’, but adding a bonus to a pension pot really does yield valuable benefits.

Adding a bonus to a pension pot:

  • potentially increases savings
  • attracts tax benefits
  • reduces the employee’s compensation so they and you pay less NI where bonus sacrifice is offered
  • may include you paying part of your NI saving into the employee’s pension
  • can help reduce income to allow employees to retain child benefit or personal income tax allowances

The financial advantages of bonus sacrifice

What exactly are the financial benefits of adding a bonus to a pension pot instead of taking it as cash?

The following example illustrates the difference it can make when employees add their bonus into a pension pot instead of taking it as cash.

Let’s take a look at how this affects Maria, for example.

Maria is 45, earns £60,000 a year and is due to receive a bonus of £10,000.

If Maria takes her bonus in hand, after covering her tax at 40% and NI at 2%, Maria will receive £5,800 out of her £10,000 bonus. And, additionally, with the employer NI on top, Maria’s bonus will also cost her employer £11,380 to provide.

If Maria sacrifices her bonus in exchange for a pension payment from her employer, the full amount of £10,000 goes straight into her pension and that’s without any need to reclaim higher rate tax relief.

What’s more, Maria’s employer may be willing to pass on their NI savings, leaving them in a cost neutral position and adding a further £1,380 to Maria’s pension payment.

The result is that by sacrificing her bonus into her pension, Maria’s bonus is actually worth £11,380 in her pension instead of £5,800 in her hand.

A nice windfall indeed!

Many employers will offer salary sacrifice but even if this isn’t available to Maria, the power of her tax relief will mean she gets £10,000 in her pension instead of £5,800 in her hand.

A bonus is the only windfall that can easily boost a workplace pension

With its unique tax benefits, a workplace bonus is unlike other windfalls. No other type of bonus, whether an inheritance, lottery winnings or other cash settlement received outside of the workplace can easily receive the same preferential treatment as a workplace bonus. This makes a workplace bonus special indeed.

So as an employer, when you share the happy news with employees that a bonus is on the way, also remind them how saving some or all of their bonus away into their pension pot could help them have a better retirement.

Free resources help spread the word to employees

To help employees understand the added value they can receive when they add a bonus to their pension, and improve employee engagement with pensions, you may want to direct your employees to an online information hub such as the government’s Money Advice Service website.

So as an employer, when you share the happy news with employees that a bonus is on the way, also remind them how saving some or all of their bonus away into their pension pot could help them have a better retirement.

If you prefer to get the word out to employees directly, you may want to try one of our free ready-to-go campaigns. The ready-to-go campaigns provide you with a variety of tools designed for communicating with employees about bonus sacrifice as well as many other pension-related topics. To learn more about a ready-to-go campaign please go here.

 

The views expressed in this blog should not be regarded as financial advice.

It’s important to remember that a pension is a long-term investment and as such its value can go down as well as up. It could even be worth less than was paid.

Workplace Thought Leadership Team

Our experts use their insight and experience to develop topical and engaging content about workplace pensions.

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Workplace Thought Leadership Team

Our experts use their insight and experience to develop topical and engaging content about workplace pensions.

Read Workplace Thought Leadership Team's blogs
Workplace Thought Leadership Team,

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