Unexpected work bonus - tell me to put it into pension...

[Felicity28]

Hi,

I am fairly well paid and very lucky to not NEED extra money. I'd love this work bonus straight into my account but having seen the tax implications (as a higher tax payer), I lose so much of it.

The bonus is around £12,000 and I believe it is paid this month. I have until Monday to change my pension contribution so that most goes straight into there.

I currently pay 12% to my pension (Rather than the base of 3%), so I could raise this to say 50% for the one month and direct it to pension.

This is the classic: I want the money but the tax is eye watering... I know what to do, but is there any other options?

I've never had a bonus before, but do you usually try to keep a little back just so you can use it rather than save it for 10/20 years time? Or does anyone just screw the tax and take the money now - this is what a friend does.

Thanks
Felicity

[xeny]

I sometimes keep enough back for a decent night out or weekend away and the rest goes into the pension.

I look upon it as meaning I have the option to stop working "x" weeks earlier which is the bonus to me.

[stuthemong]

There are a bunch of considerations.

Pension is sensible to save tax and plan for future.

That said.

Have you got any credit card debt?
Any other high interest rates loans?
Are you saving for a house deposit?
Have you got less than 3-6months of cash available if you need it?

If the answer to any of the above is yes, then depending on your age (I’m presuming you’re not 62 and very near retirement!) it may make sense to clear debt despite tax and give you a buffer now, if you have discipline to maintain it.

So basically I don’t think anyone can advise on what’s sensible with a subset of the information needed to help advise.

Big Pension contributions generally make 100% sense if everything is sorted- it’s more blurry when things are more complex and people are earlier life imo!

Well done on the bonus btw-
Great stuff

[Evanivitch]

Do you have any debts you could pay off?

Do you have an emergency fund?

Do you have enough income as it is to treat yourself to the things that make you happy?

If you're already in a good position on all those then pension pot the majority of the bonus and, as above, tell yourself it's a few weeks or month less work on the other end of your career.

[fat80b]

Pay it into the pension and save the higher rate of tax. You’ll not regret it in the future.

I did this with a couple of bonuses of mine about 10 years ago and it makes a massive difference to the size of the pot after it’s compounded over the years.

As a real life example, a colleague of mine didn’t do the bonus sacrifice thing at the time and his pension is 100k less than mine despite us being paid about the same amount for the same time.

One thing that wasn’t clear from your post is whether it’s sacrifice or not. If it is, then the whole pre tax amount goes in, if not, you’ll pay a bunch in and claim the higher tax amount back via SA. If you do it the second way, you’ll get a payment from the tax man in a few months that you can see as the spendable cash bit of the bonus….

[onetwothreefour]

Do check (if you haven't already) that you can change the contribution two months in a row. Some employers limit the ability to change the level, presumably to reduce their admin burden. Otherwise, definitely do it.

[Felicity28]

stuthe said:

Have you got any credit card debt? No
Any other high interest rates loans? No
Are you saving for a house deposit? No
Have you got less than 3-6months of cash available if you need it? Yes

Thank you and this is responding to others too.

I get confused with pension and the types. This one is with Scottish Widows. I pay out 12%, I can then see on the portal tax relief is added and my employer amount.

For example (Made up numbers):

My contribution: £500
Tax relieft: £150
Employer: £200
Total: £850

[55palfers]

I have a SW pot.

If your employer won't play ball, SW let me pay in a lump sum via web site last year, no problems.

Tax gets added back into the account about 2 months later I think.

[Felicity28]

55palfers said:

I have a SW pot.

If your employer won't play ball, SW let me pay in a lump sum via web site last year, no problems.

Tax gets added back into the account about 2 months later I think.

Interesting... I did see a button on the site relating to paying in a lump sum.

Can I just clarify this though?

My employer are fine, I just don't know when the bonus will be paid and I have to decide when to increase my pension contribution (so that I can divert it to pension).

Do you mean that you just got paid the bonus which was taxed, but then paid it straight into pension in a lump sum and got the tax back?

[craigjm]

fat80b said:

Pay it into the pension and save the higher rate of tax. You’ll not regret it in the future.

Well they could regret it because they might not make it and pensions need to be a balance. Admittedly they wont technically regret it if they are dead but still......

This is useful advice below, pay off debt etc before just blindly throwing it into pension

stuthe said:

Have you got any credit card debt?
Any other high interest rates loans?
Are you saving for a house deposit?
Have you got less than 3-6months of cash available if you need it?

If the answer to any of the above is yes, then depending on your age (I’m presuming you’re not 62 and very near retirement!) it may make sense to clear debt despite tax and give you a buffer now, if you have discipline to maintain it.

[skeeterm5]

Spend it on something amazing.

Or put it in your pension, possibly die before you get there and lose it……..

[PositronicRay]

I probably didn't have the same tax implications but used to go 1/3'ds (pension/mortgage/treat)

I'm also unusual in that I believe in big tax bills.

[jrb43]

4 years on PH and you still don't know what to do with 12K burning a hole in your pocket?

-MX-5
-Civic Type R
-The start of a ruinous career in a TVR
-A pair of half decent hifi speakers
-start your own business and immediately become a powerfully built company director


Pftt. Next...

[Shrugging for victory]

I get the tax thing etc, but after a year of seeing people younger than me, or around the same age as me dying (I'm mid 40s), I've shifted more into a YOLO frame of mind. I currently salary sacrifice 20% into my pension and work tops it up to 30%. Previously I would be enquiring about shifting my yearly bonus money into my pension, but screw that, the tax man may do me without lube, but this money is going to pay for us going away to make memories this year. Planning for a secure future is sensible, but if you get a random windfall, enjoy it.

[stressd]

Felicity28 said:

Hi,

This is the classic: I want the money but the tax is eye watering... I know what to do, but is there any other options?

I've never had a bonus before, but do you usually try to keep a little back just so you can use it rather than save it for 10/20 years time?

Felicity

Yes, the tax is awful, but you need to keep some back, pay the tax, and spoil yourself. It's your bonus, you worked hard for it, you need to reward yourself. That's your short-term feel-good factor. And the rest goes into your pension so that you also get a longer-term feel-good factor as it grows over the years.

[jrb43]

I assume the purpose of bonuses (never worked in a profession that gives them) is both to reward hard work and to inspire future hard work. If you don't spend at least some of it then the psychology won't work on you

[okgo]

skeeterm5 said:

Spend it on something amazing.

Or put it in your pension, possibly die before you get there and lose it……..

It’s 6 grand. Not 60.

Personally I’d probably just chuck it into pension if you’re not anywhere near whatever your maximum is per annum via regular contributions. £6k is going to make no difference to anything most likely (given what you’ve said) but £12k over many years will likely be a year of retirement or two paid for.

[mikey_b]

okgo said:

skeeterm5 said:

Spend it on something amazing.

Or put it in your pension, possibly die before you get there and lose it……..

It’s 6 grand. Not 60.

Personally I’d probably just chuck it into pension if you’re not anywhere near whatever your maximum is per annum via regular contributions. £6k is going to make no difference to anything most likely (given what you’ve said) but £12k over many years will likely be a year of retirement or two paid for.

^^^ This.

Time the taxman has stuck his rapacious claws into it, what actually turns up in the bank is unlikely to be a life changing amount, unless OP is currently running quite close to the wire financially for whatever reason - in which case it might be sensible to just take it and clear debt or whatever. But assuming not, the same money could make a life changing difference when she gets closer to retirement. Maybe stick £9k in the pension, and put the rest towards a nice holiday or some other treat. At 5% compound growth a year, £9k becomes £24k (ish) in 20 years.

[craigjm]

okgo said:

skeeterm5 said:

Spend it on something amazing.

Or put it in your pension, possibly die before you get there and lose it……..

It’s 6 grand. Not 60.

Personally I’d probably just chuck it into pension if you’re not anywhere near whatever your maximum is per annum via regular contributions. £6k is going to make no difference to anything most likely (given what you’ve said) but £12k over many years will likely be a year of retirement or two paid for.

Opening post says its 12k

[Edible Roadkill]

Yeah fire it into the pension and then watch it compound in interest and become many many multiples of what you would have had in your hand following deductions of tax & NI.