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!