How to tell clients about the power of bonus sacrifice

Clients getting a bonus this year? Time to tell them a couple of home truths about how a few years of bonus sacrifice could add nearly £40,000 to their total pension pot.

In a financial journey often shaped by the ups and downs of life, advisers know how seemingly small decisions made early, can have a lasting impact.  

With many people currently under-saving for retirement, advisers can add huge value by simply impressing upon clients how even small one-off pension contributions – like bonuses – can have a significant effect over time.  

Without a nudge, clients may miss out. While it won’t be right for everyone, understanding how bonus sacrifice works could help people make more of their money and think more confidently about retirement planning.  

It’s also worth making clients aware the government has announced plans to limit the NI exemption for salary pension contributions to £2,000 a year from 2029, but there are no changes for now.  

Many clients may not realise how sharply deductions can reduce a cash bonus. Once income tax, National Insurance and – for many – student loan repayments are taken, a £5,000 bonus can shrink to as little as £3,150 in take‑home pay for a basic rate taxpayer.  

But with the benefit of financial advice, clients can be made aware of the fact the same £5,000 paid directly into a pension through salary sacrifice would see the full amount invested before these deductions.

Over time, that difference in how a bonus is treated can have a significant impact on retirement outcomes. Someone who receives a £5,000 bonus at age 30 and diverts it into their pension for four consecutive years could increase their pot by £37,000 by age 68, by Standard Life’s number crunching.

Clearly, there’s a balance to strike between enjoying today and preparing for tomorrow – and you can nudge clients to bonus sacrifice without it having to be all or nothing.  

Someone in the same scenario who chose to keep half of their bonus for now and direct the other half (£2,500) into their pension for the four years, could see an £18,000 boost by the age of 68.

Some employees could see an even bigger uplift if their employer passes on some or all of the employer NI savings generated through salary sacrifice.

Making the financial future ‘real’ for clients is often about plugging in some numbers and sharing with them the big impact of small changes. At The Timebank, our paraplanners are numbers geniuses. And we’re happy to help shape some of your client conversations with the figures that matter. Chat with us today to see how we can work together.

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