4 sacrificed bonuses could add £37,000 to a client’s pension

A £5,000 bonus sounds generous until income tax, National Insurance and, for some clients, student loan repayments have gathered around it. For a basic-rate taxpayer making student loan repayments, the amount reaching their bank account could be as little as £3,150. Payroll has a remarkable ability to make £5,000 look considerably less celebratory.

Put the same £5,000 directly into a pension through salary sacrifice and the full amount would be invested before those deductions. According to calculations from Standard Life, repeating that decision for four years from age 30 could add £37,000 to the client’s pension by age 68. That gives advisers something more useful than the usual instruction to ‘save more’: four bonuses, £20,000 sacrificed and a potential £37,000 in the eventual pension pot.

Of course, bonus sacrifice won’t suit everybody. A client may need the cash to clear expensive debt, build emergency savings, fund a house deposit or enjoy some of the money before turning 68. Nor must the choice be all or nothing. Someone receiving the same £5,000 bonus could keep half and sacrifice the remaining £2,500; doing that for four consecutive years from age 30 could add £18,000 to their pension by age 68. Financial planning occasionally allows people to enjoy today and prepare for tomorrow without being told off for either.

Some employees could receive a further boost if their employer pays some or all of its National Insurance saving into the pension. Advisers will need to check the scheme rules rather than assume generosity has suddenly broken out in payroll. They should also note the government’s plan to limit the National Insurance exemption for salary-sacrificed pension contributions to £2,000 a year from 2029. Nothing has changed yet, but clients using the arrangement will need their strategy reviewed before the limit arrives.

The value of the advice lies in making the choice tangible. ‘Save more for retirement’ is easily ignored; comparing £3,150 in the bank today with £5,000 invested, and potentially £37,000 by age 68 after four years, is rather harder to shrug off. The recommendation still needs to account for affordability, annual allowances, the client’s tax position and employer rules, along with any effect that reduced salary could have on other benefits or borrowing.

That means modelling the options properly and producing a suitability report that explains why the recommendation works for this client, rather than merely looking attractive in an example. The Timebank’s paraplanners can handle the technical analysis and put the relevant figures behind the recommendation, leaving you to have the more useful conversation: how much of this year’s bonus does the client want now, and what could the rest buy their future self?

A bonus is temporary. The consequences of what happens to it can last rather longer.