WORKERS could be missing out on a huge boost to their pension pots worth up to £50,000.
Experts say you can add tens of thousands of pounds to your retirement fund by signing up to a salary sacrifice scheme.
While salary sacrifice might sound scary, it actually doesn’t involve you paying a penny extra – and you’ll be paying less in tax.
A salary sacrifice scheme is where a worker agrees for a chunk of their earnings to be put into a tax-free benefit.
Often, these include benefits like a childcare vouchers, gym membership or a cycle to work scheme.
But you can also use salary sacrifice schemes to boost your pension.
The money you agree to take off your salary will be put into a pension scheme, and your employer will contribute to this pot too.
A huge advantage of this is that you pay less in tax like National Insurance because the money is going straight into your pension.
That means that technically your take-home pay will be higher because you’re clawing it back through tax.
Analysis from Vanguard Europe provided to The Sun estimates you can boost your retirement fund by up to £50,000 through salary sacrifice.
If you earn the average £37,500 a year and sacrifice 5% of your salary to your pension, this equates to £1,875 a year.
Then if your employer contributes 3% of your salary to your pension, this equates to £1,125 a year.
That would leave you with £3,000 in your pension pot each year.
If you chose to use salary sacrifice, your gross pay could be reduced to £35,417 a year.
But you would see your pension pot grow by £3,521 – a boost of more than £500 a year.
That’s because you would cut your National Insurance contributions from £1,994 per year to £1,828, putting an extra £166 back into your pay packet.
Plus, your income tax payments would reduce from £4,986 to £4,569 – a £419 decrease.
If you started salary sacrifice early in your career, it would add up and benefit from compounding over the years.
Vanguard estimates in this case you could be looking at more than £50,000 extra in your retirement pot.
It’s worth noting that how much National Insurance you pay depends on how much you earn per week or month.
You pay nothing on the first £242 of weekly earnings, 8% on weekly earnings between £242.01 to £967 and 2% on weekly earnings of £967 or more.
Companies pay 13.8% of your salary if it’s between £9,100 and £50,270.
Andrew Marker, head of retail pensions at Vanguard Europe, said “Salary sacrifice is an effective way to boost your pension while reducing your tax bill…
“Consistently using salary sacrifice throughout your career could result in a significantly larger pension pot without a major impact on take home pay.”
Some people might be put off by the term “salary sacrifice”, but experts say it’s well worth considering.
Maike Currie, VP of personal finance at PensionBee, said: “It’s easy to see why the term ‘salary sacrifice’ can be misunderstood and strike fear into the heart of many savers.
“In truth it is one of the most straightforward and efficient ways to boost your pension contributions while reducing the amount of income tax and National Insurance (NI) you pay.
“It doesn’t mean reduced gross pay, it’s simply a more efficient way of directing part of your salary into long-term savings.”
How to sign up for a salary sacrifice scheme
First you’ll need to check if your employer offers salary sacrifice.
If they do, you should see if they have a salary sacrifice calculator so you can work out how much your take-home pay would reduce by and how much it would boost your pension.
You should also ask them if they will pay some of all of the savings they make on National Insurance into your pension.
And you should find out how much your pay will be after salary sacrifice.
This will help you work out if you’ll gain more overall than making pension contributions from your pay.
It’s worth noting that rumours have been swirling about the Government potentially getting rid of salary sacrifice schemes – so you may want to sign up as soon as you can.
Chancellor Rachel Reeves is currently weighing up how to boost public finances to fill a £51billion black hole in funds.
When should you avoid it?
There are some circumstances where you might want to avoid using salary sacrifice.
For example, if you’re on a lower income then you should make sure you can still afford essentials with a lower gross salary.
You won’t be able to use salary sacrifice if it reduces your earnings below the minimum wage.
If you’re signed up for salary sacrifice and your financial situation changes then you can choose to opt out of the scheme or reduce the amount of money you’re taking out of your pay.
Rachel Vahey, head of public policy at AJ Bell, says: “It’s worth taking a moment to think this option [salary sacrifice] through.
“On paper it will look like a cut to your salary which could be important when it comes to things like being approved for a mortgage or claiming some state benefits.”
Mortgage lenders will base how much they’re willing to give to you on your salary.
So if your salary is lower on paper, the amount you can take out for a mortgage will also be lower.
Plus, Certain state benefits like maternity pay may be affected too because of your lower National Insurance contributions – so it might not be a good idea for budding parents.
