I'll be receiving a Christmas bonus of somewhere in the range £6-11k. I have the option of sacrificing bonus directly into my pension fund, and I'm trying to check whether that's the right thing to do.
If I take the bonus as cash, I'll pay:
- 40% higher rate tax.
- 2% National Insurance.
- 9% towards my Student Loan (currently £8.5k, 1.25% interest, projecting to be paid off in ~3.5 years)
If I put the bonus into Pension, I pay no tax, NI or Student Loan, and the 13.8% Employer's NI that my employer doesn't have to pay gets added to the pension too. Under current rules, when the pension matures I get 25% tax free, and the rest is paid as an income, taxed at 20%.
So for each £1k of bonus:
- I could take £490 cash-in-hand, plus £90 deferred by 3.5 years (the Student Loan gets paid off £90 earlier), plus save £5-10 interest on the loan.
- Or I could take £1138 into my pension, of which (before growth) I would get (£285 + £683 = £968) back when it matures.
If I were to take the case, then I could spend the windfall, or put it in a 1.5% interest account (other higher interest accounts are "interest on the first $X k, and are all saturated.), or I could make an early payment on my mortgage (£175k, 3.84%)
- Paid against the mortgage, that £490 could save me ~£1k of interest over the lifetime of the mortgage.
- Put into savings that £490 would earn £880 in interest over the same period in the savings accounts.
I currently have £8k of savings, saving ~£150/month. No other CC debt or loans, but a predicted upcoming housing expense of ~£5k expected to be billed over the next 3-5 years.
Taking all the above into account, it seems like sacrificing into the pension pot is the clear choice, as it instantaneously gains about half of what the cash option could gain over 30 years.
(I'll probably still take some small (£500-800) windfall, to enjoy)
Are there any factors that I've missed in this consideration?