Pensions  

Savers need more support on what to do with a bonus

Amy Austin

Amy Austin

It is a no-brainer that we all appreciate when an unexpected sum of money falls into our laps, and even more so nowadays as the cost of living continues to climb.

So I was over the moon when at the end of March my colleagues and I were greeted with a bonus in our pay packets, in recognition of all our hard work over the past year.

Being a pensions journalist my mind went straight to how I could make the most out of this money, the various options that were available to me and the split I should make between save and spend.

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This then got me thinking; I am in a privileged position to have a knowledge in personal finance, but what about the average person? How would employees across the country know how to make the most out of their bonuses?

It is important for people to take the time to think about how they will spend these funds.

But whether you are a finance professional and often get a large bonus of £10,000 plus, or a retail worker who may receive a couple of hundred pounds, the urge will always exist to spend all the funds on clothes, shoes, handbags, nights out and trips away.

While it is important to enjoy a bonus and use some in the way you would disposable income, there should be an element of long-term thinking and a bonus could be a way to save for the future.

Employers have a role to play here, and it could be argued that when bonuses are handed out to staff, the employer should send around some form of communication to help employees understand what they can do with their bonus rather than just spend it.

Such a guide could suggest that employees follow, for example, a 70/30 rule whereby they spend 30 per cent of what they have been rewarded but save the remaining 70 per cent.

One of the best ways to use a bonus, so that your future self will thank you, is to boost a pension pot.

Therefore, employers should make it known before a bonus is paid that employees can use ‘bonus sacrifice’ and put the payment into their workplace pension plan, and this way they can make tax savings on income tax and national insurance contributions.

It should also be pointed out that if an employee missed out on this route and did not mention their intentions before the bonus landed in their pay check, they could still pay some or all of the bonus into their pension, but just without receiving the tax benefits.

Another thing employers should point out is the use of a Stocks and Shares Isa, where people can put their money into a range of different investments in a tax-efficient way, or a Lifetime Isa, where people can save for their home or later life.