Bonus into pension

[dchange]

Should I sacrifice bonus and pay into pension? Fortunate to have a lump sum but will get taxed heavily. I have enough savings for 6 months in case I lose my job. No debt except mortgage.

How old are you OP if you don’t mind me asking. Personally, I would rather make a mortgage overpayment and put some more money aside

I am 34. Already making overpayment of £500 a month. Could increase but I just keep saving for an extra rainy day.

I would ask HR/Payroll with regard to if you can have the bonus paid to pension and how that would affect your taxes. It may not be possible to do, or it may not make any difference to the taxes payable on that bonus amount. So I would gather the facts before making a decision.

Also be aware of the annual allowance that applies to pension contributions. This may not be an issue depending on your personal situation.
www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance

Thanks @nannynick. in terms of allowance I am still in non taxable limit. I believe it affect those that are earning over £250k.

I do this every year with my bonus. I would get taxed nearly half of any bonus so it just seems a no brainer to me! Particularly if you are just going to put it into savings.

@whensmynexthol1day that's what I am thinking. Or alternatively split in half and put £10k into pension tax free and get sacked in the other £10k. Keen to hear others experience as I am so turn

Definitely or pay a chunk off the mortgage

That's a good half way house- be sensible with half and spend the rest on nice things as a reward for hard work.

But so long as you have sufficient savings and aren't saving for anything in particular it makes no economic sense to get taxed on it and use it for mortgage payments (which should be low interest) or general savings (ditto) at the moment. Unless of course you think you will max your pension pot past the £1m point at any point!

You’re 34, so putting it into your pension now will maximise the returns over and above your mortgage so I’d do that, given that you already overpay and have savings for 6 months off already. But I do think I’d want at least some of it to spend on something more fun. Nice problem to have!

@whensmynexthol1day I am hoping to max pension one day . But for now I am still way off.

@NoSquirrels it's indeed a nice problem to have. Just wanted to sense check what's a reasonable approach. Taking the whole money did not feel right. Splitting 50-50 I.e. put £10k in pension and other £10k as bonus seems like the right approach. Planning Disney next year with the kids and hubby so might just splurge a little as part of the holiday.

I'd put it all into your pension if you don't need the money as you'll be taxed heavily on it otherwise.

So confused now 😭

The limit on your annual contribution is the lower of your annual income or £40k.

Money paid in early gives you such a great return, your future self would be very grateful.

If you can already afford Disney relatively easily just chuck the whole wodge in, then reduce your mortgage overpayments if you need a bit extra. That’s most tax efficient. Or do £15K pension £5K Disney...

But really, extra pension right now is the best and most biting financial choice.

biting = boring

@NoSquirrels it's a boring topic indeed. Thanks all for suggestions. Really appreciate

Honestly wish they would teach people some of these skills at school... Finance sector would probably whinge if they did, because they get a lot of money for nothing in my honest opinion..

Factors I've not seen mentioned above:

1. Will you need to access the money before age 57? If you plan to retire very early, an ISA may be a better vehicle for you and allow you a pot to be invested, with the growth tax free.

1. Do you have a Pension, if so if its Defined Benefit.. and you plan to retire before the normal pension age, ie. before 67'ish... Define benefit schemes will actuarily reduce their payments to you if you retire early, so if you want to retire and have money earlier than that, an ISA or a SIPP is the way to go.

1. Pensions obviously have a tax free element of the contributions - but if you are currently defined benefit - and this excess money goes into a SIPP - you/the platform can get the tax rebate sorted between you... This would allow you to access it at 57 and thereby hold you over to a defined benefit scheme which pays in full at 67...

1. ISA's don't tax the growth... So they are secondary in nature to Pensions, but beware the lifetime allowance on pensions... Its much easier to hit than most people realise... If you had £100k right now in your SIPP, invested correctly, you will be at the current lifetime allowance at 57, possibly even sooner....

1. ISA's allow instance access.... within the confines of your investments... Ive been pro pensions my entire life, been a trustee numerous times, but if im reading your messages correctly, you have that sorted... And you have an immediate emergency fund too, maybe 6 months of income worth.... (Dave Ramsey tactics are well proven). ISA's whilst they take money which has been taxed, can grow significantly and if you were also to do some dollar cost averaging of maybe £25 a month, you'll find that within 20 years, you're wealth will be significant and nicely split between pension and isa. And when that rainy day comes at 51 and redundancy in a young persons game occurs, you will be able to access that nest egg and live well for 6 years... Experience of a close friend taught me to teach that one to people.

1. Mortgage Overpayments... Ive always liked mortgage overpayments, but there are different views on the best approach to take.. Personally I like as little debt in my life as possible, but, investment returns are generally far greater than the interest charged on a mortgage... However, if you are looking for a quick win, like to see less debt, and are still within the first 8-9 years of your mortgage when overpayments kill the highest levels of interest, and get the mortgage company to keep the repayment level the same as before (because they usually move them down to keep the term the same to keep their interest as high as possible) and you don't breach any fixed mortgage limits on repayments (there's usually a 10% max over repayment rule) then it can be worth it... Usually mortgage overpayments (rather than investing) don't make financial sense if they are beyond that 8 or 9 year point, but emotionally/mentally taking say £5k chunks out of a £60k balance is a nice feeling....

1. Have some fun.... If you have decent immediate savings, some long term easy access investments, and some long term pension savings, don't have a car or bank loan to clear and no house things to fix... (a) You are very lucky (and/or manage your finances well) or (b) you deserve to have some fun, because its painful to be that in order with all your finances and you'll have had to go without... Take some of it, spend it on 'experiences' not 'stuff' and go make some fantastic memories with your family, whilst being very clear its a special one off...

Best wishes, Brian