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Salary sacrifice for your pension?

Enable’s IFA’s think it is worth sacrificing some of your salaries to boost your pension. When planning financially many worry that a pension is full of complexities but in reality a personal pension is fundamentally a fairly simple product: It is just a tax-free pot of cash you, your employer (and sometimes the Government) pays into, as a way of saving up for funds to be available in your retirement. When you decide to retire you can then draw money from your pension pot or sell the cash to an insurance company in return for a regular income until death, called an annuity.

But as you go along in your working life it is important to understand how a pension affects your income or salary. In effect, while you are working you are saving disposable income now in exchange for a future salary or income (in the form of pension income).

Paying into a pension conventionally gives all taxpayers a tax break but can be other additional ways to add to your pension if you can afford it. One way is with, Salary sacrifice. Salary sacrifice applies to a number of workplace benefits such as childcare vouchers or cycle-to-work schemes, not just pensions. To take part in this you give up some of your monthly earnings while your employer puts it towards something else like personal pension contributions.

As this money comes out of your pre-tax salary and straight into your pension, you pay a reduced rate of employees’ national insurance (NI). Your employer will also pay a reduced rate of employer’s NI which gives them the incentive to operate the scheme. If you are basic-rate taxpayers you’ll pay less income tax at 20%. You’ll also avoid your 12% NI contributions on the amount you sacrifice. This means for every £68 you sacrifice from your pay packet, £100 goes into your pension pot.

Enable Independent Financial Life Planners is a trading style of Enable Independent Limited is authorised and regulated by the Financial Conduct Authority.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.


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