By: Tim Bennett
01.08.2019
01.08.2019
We should all save as much as we can afford to pay for life after work. Salary sacrifice can be a clever way to do it, as Tim Bennett explains.
To Receive Tim’s videos straight to your inbox, please click here.
Why salary sacrifice is a smart way to boost your pension
Building an adequate fund to pay for life after work isn’t easy. Fortunately for employees there is a way to reduce the scale of the challenge – salary sacrifice. Here is a short tour of all the basics.
The pensions challenge
A quick glance at annuity rates – the income a life assurance company is prepared to offer in exchange for a lump sum of £100,000 – reveals the scale of the problem facing retirement savers.
What this shows is that a 60-year old man who wants an index-linked income for the rest of his life can expect to receive around £3,000 per year as an annuity.
The question the becomes – what if his target is £1m rather than £100,000? How much would he need to save? Here is a rough idea of the answer;
The exact amount needed will depend on several factors, including the growth rate achieved on his savings and of course any costs or tax incurred along the way.
Key factors
So, how can salary sacrifice help here?
Salary sacrifice lets you save more
The fastest way to sum up how this works is it offers “a pre-tax benefit for its post-tax cost”. In other words, it allows you to save tax and have it paid into your pension.
How it works
The basic mechanics are fairly simple. You decide how much of your monthly salary you want to sacrifice, and your employer boosts the amount paid into your pension on your behalf. The clever bit is that this arrangement needn’t have much, or any, impact on your take-home pay thanks to the associated tax savings.
An example
To see how this could work, take a look at this example. You will see that although a gross (pre-tax) amount of salary has been given up, the impact on this employee’s net monthly income is non-existent. In effect they are getting a boost to their pension funding at no net cost to themselves. What’s more, the cost to an employer of allowing salary sacrifice to take place is also effectively zero as they are able to save employers’ national insurance contributions along the way.
Things to consider first
Whilst it sounds like a bit of a no-brainer, there are a few things to weigh up before agreeing to adjust your gross salary and boost your pension in this way.
Since these factors are very much driven by your personal circumstances, please feel free to contact a Wealth Planner to find out more about whether and how salary sacrifice could help you.
