Bonus sacrifice

HR sent a bonus sacrifice form recently to all employees at work. The form is to instruct HR to sacrifice a certain portion of my potential bonus into my pension. For example, if my bonus is £3,000 then, I could opt to have a portion or all of it paid into my work pension.

Doing so makes a lot of sense as I’m a good little saver anyway. I spend less than I earn and my savings rate is something between 50%-60% of my net salary. Therefore, the bonus would be extra for my living needs and I’d rather have it all tucked away nicely for the future. The added benefit is that if the bonus is sacrificed, rather than paid as salary, the employer can choose to pay their NI savings (13.8% usually) into the pension as well. This gives a further boost to my pension pot and is therefore totes worth it.

The only downside with bonus sacrifice, and pension savings (in general), is the long wait until I can access the monies. I will need to wait 25+ years until I reach 57 or 58, which is going to be the likely age pensions can be accessed at in the future – the minimum age requirement is currently 55.

I, of course, plan to live into my late 50s and well beyond that. Therefore, I am happy to delay gratification and invest the bonus for the long term. This is why I decided to sacrifice 100% of my bonus. HR confirmed that it will be processed in the March payroll.

PS: Don’t take this as advice to sacrifice your bonus, your circumstances could be very different from me. There are situations where sacrificing your bonus could be a very bad idea and lead to loads of tax to pay – for example where individuals hold Fixed Protection or Enhanced Protection for the lifetime allowance or where individuals have already “flexibly” accessed their pensions and are subject to the money purchase annual allowance of £4,000 (way below the standard £40,000 most people have). This stuff can be complicated and isn’t really the point of this blog.

My plan is to continue sacrificing my bonus into my pension each and every tax year whilst gainfully employed. This will be an even easier decision once I become a higher rate tax payer (assuming my salary will increase in the future) as sacrificing the bonus avoids paying roughly half to the taxman (accounting for income tax and employee national insurance contributions).

Don’t forget that you have the flexibility of sacrificing a smaller portion of your pension. It doesn’t have to be all or nothing.

Happy bonus season!

LISAs for first time buyers

I started thinking about buying a flat about a year ago in the beginning of 2019. Previously it seemed impossible and I simply accepted that I will always be renting.

However, my situation had changed. I wasn’t renting a room in a flatshare anymore. Instead, I had a blissful year of living together with my girlfriend (Pikachu) behind me.

After looking at our savings/investments, combined earnings and property listings online, we found out that we could actually buy something not too long down the road.

Currently we live in a Central London studio apartment paying £1,442 pcm in rent and it seemed that if we played our cards right we could end up reducing our living costs after buying a new home. This calculation took into account increased transportation costs, mortgage and service charges.

The decision to buy something was made. Now, we needed to save up for the mortgage deposit.

I had heard about Lifetime ISAs (LISAs) and remembered an article from Martin Lewis which said these were a no-brainer for first time buyers.

A LISA is essentially a savings plan with several bells and whistles. You can save up to £4,000 each tax year and will get a top up of 25% on your contributions each tax year (i.e. up to £1,000). Therefore, both of us opened LISAs with £4,000 each in February 2019 and got the full £1,000 bonus in 4-8 weeks’ time. Therefore, we had £10,000 in LISAs in 2018/19. I must caveat that my LISA was a Stocks & Shares LISA and the actual value fluctuates with the markets. Pikachu’s LISA was a cash LISA.

There are some criteria to open LISAs and restrictions to how and then you can make withdrawals. To begin with you need to be below 40 years of age to open the account. You can use the LISA pot to buy a home if you are a first time buyer (people who have inherited or have been left property in trusts don’t qualify), the new home must be priced at less than £450,000 and must be bought with a mortgage. You can make tax-free withdrawals after age 60 but if withdrawals are made earlier for any purpose other than first time property purchase you need to pay a 25% penalty on the withdrawn amount. Lastly, the account needs to be open for a calendar year before you can use it towards your home purchase.

That last point is important. If you have already found something and are already in the process of buying then opening a LISA to get an extra grand isn’t going to work. You need to open the account now to start the clock. Therefore, I’d encourage everyone who plans to buy their first home to open the account now with a small deposit – say £1 or £10. You can add more later when you are more serious about buying. This will set you up to benefit from the LISAs and will most likely make you a few thousand pounds.

Back to my story. April 6th and therefore the new 2019/20 tax year came around quickly and I added another £4,000 into my LISA. Pikachu did not contribute at that time as she wasn’t convinced about us making it to the 1 year LISA anniversary (however it was palatable to suffer the exit penalty on the first £4,000 she contributed). She thought we’d find something sooner and didn’t want to pay the 25% penalty.

I however took the risk as my friends and colleagues told me that buying in London can take many months. We agreed if we get close to the 1 year LISA anniversary and have not bought yet, then Pikachu will add another £4,000 into her LISA. That ended up being exactly what we did.

We found a property in August, agreed to buy it and appointed layers etc. However, things are taking ages and at the end of January 2020 it seems we are no closer to a completion date than we were in August 2019.

If you have done the maths, we have now received 4 lots of £1,000 bonuses with the LISAs and “made” £4,000 so far. If things with our property purchase drag on, then we will probably get another 2 bonuses in April/May 2020.

Anyway, it’s been a good idea to use LISAs and you should too if you’re in a similar position to us.

Why FIRE?

The aim of this blog is to document my journey towards reaching early retirement. I’m 31 years old. I think I’m relatively far from my goal but am confident it’s possible. It’s not so much of a question of if it will happen but more of when it will happen (at least that’s what I tell myself).

My main motivation is to have the freedom to do what I want. At the time of writing, I’m driven more by the away-from rather than towards motivators. I have a job which is going OK but I feel that it isn’t quite what I want. Unfortunately, I’m unsure of what it really is that I want to do with my life when it comes to working. As a result, it seems to be a good idea to experiment and try out various things/experiments (such as this blog) and see where it takes me.

In my free time, I like to spend time with my friends and girlfriend, read books, travel, run/train and dance – nothing too exciting. I guess once I attain FIRE, I will do more of the above.

You probably have an idea of what FIRE is all about, so I’m not going to start my lecture just yet. The gist of it is that I plan to build enough wealth, which will support me financially without me needing to rely on employment to keep the lights on and food on the table.

You might be asking yourself, why should you read my stuff? I could be a random troll on the internet. Well, I enjoy the occasional trolling as much as the next guy. However, on a more serious note, I’m a Chartered Financial Planner and a Chartered Wealth Manager. My academics include a Master’s degree in Statistics and my favourite colour is blue. I hope that’s enough for now.

As you may have guessed the name WealthPlanner comes from building enough wealth to retire and from one of my work qualifications.

Let the WealthPlanning begin!