Tax cut trick that could make you £134k better off – and you don’t even have to lift a finger
MILLIONS of workers have a rare chance to boost their retirement wealth with a small tax change that could see them £134k better off.
It comes after the rate of National Insurance Contributions (NICs) dropped from 12% to 10% last Saturday, January 6.
Chancellor Jeremy Hunt first announced the change benefiting 27million workers last year.
The new rules mean an employee with a salary of £35,400 will be £450 better off this year.
This is a welcome break for many already struggling to keep up with rising energy bills and the rising cost of living.
However, those without the need to touch the extra cash right away have the unique opportunity to increase their worth.
This is by adding the extra cash to your pension before you even have the chance to miss it.
And though you may not notice it now, the extra top-up could drastically increase the money that you retire with.
Becky O’Connor, director of public affairs at PensionBee, said: “You might prefer the benefit of the National Insurance cut to go straight into your take-home pay.”
“In a cost of living crisis, with high mortgage rates, many people may choose to go with this option.”
“However, the NI cut may be an opportunity to look at whether you might also be able to take better advantage of your work pension and set more aside for your future, possibly reducing your tax bill further in the process.”
Basic rate taxpayers are set to see their incomes rise by up to £62.83 a month thanks to the tax cut.
Adding this to your pension every month automatically increases its worth to £78.53 as pension savings benefit from a Government-paid tax relief of 20%.
How much the total could increase by the time you retire depends on how long you have before you give up work.
Of course, the younger you are when start doing this the more it will work out to be when you retire.
A 25-year-old could have £134,389 extra, according to figures by wealth manager Evelyn Partners, reported by This is Money.
Meanwhile, a 65-year-old with just two years until retirement could enjoy a £2,064 boost.
It’s important to note that the figures assume your savings grow by 5% each year after fees, thanks to investment growth.
This is never guaranteed, so your end pot could end up being worth more or less.
As a more conservative assumption, let’s take the example of someone earning £30,000 (roughly the average UK salary) who would pay about £349 less NI a year.
If this extra amount was added to their workplace pension instead (an extra £29 a month), this worker could boost their eventual pension pot from £242,000 to £270,000, according to PensionBee.
This is assuming a salary increase of 1% each year, 3% investment growth and 8% in contributions.
And of course, anyone on a higher tax rate will see even more benefits.
Just remember these figures are estimated and will only apply if you leave the money untouched.
How you could benefit even more
Workers who pay into a pension through a salary sacrifice scheme could see even greater benefits.
The scheme refers to workers who agree to give up part of their salary to divert it into their pension.
Most employees match the contributions of the workers who pay into this scheme and both parties will get a national insurance tax relief.
All this means extra cash for you later on.
Becky said: “If you have a salary sacrifice pension at work, then there is a further tax benefit of putting more into your pension – you can reduce your income tax and your NI bill – especially handy if you are just above the threshold for paying higher rate tax.
“By paying more into your pension you may go back in the basic rate tax bracket.”
Becky advises: “If this idea appeals, it’s a good idea to check what type of pension you have with work.”
“It’s often very easy to increase your contributions either by a fixed or percentage amount.”
“Do this now, and you won’t even notice – your take-home pay should just stay the same, but you’ll have the peace of mind of knowing there’s more going into your pension.”
Other moments to boost your pension
If you can’t make extra contributions now through the NI cut, there are some other key moments when you can look to increase your pension contributions.
Any pay rise you receive may present you with an opportunity as it’s great to step in before you get used to your new income.
PensionBee calculated that someone who is 22 now, with a starting pot of £0, could see a £128,397 boost if they added a pay rise to their pension.
This is based on a salary of £27,125 and adding the extra cash from an 8.5% increase – £2,125 a year – to their pension.
Their estimated pension pot at 67 would be £182,186 without the boost, or £310,583 after.
The extra £128,000 would mean you could live off £12,480 a year, instead of £7,200.
The month you finish paying off your student loans or it is cleared is another good moment.
Make sure to properly consider whether you need the added money more now rather than in the future.
There is also the option of splitting up any rise you might receive, you don’t need to put it all in.
To find out how to add more to your pension, speak directly to your employer.
Even a 1% increase in your pension contributions – as little as £136 a year – could boost your pension pot by £25k.
You could also save more for retirement by changing how your pensions is invested – and it won’t cost a penny more.
A pensions expert has shared how a secret hack could boost your retirement by up to £128,000.
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