UK: 90% of workers who receive a bonus miss out on a government top up

28 Mar 2017

• Just under 1 in 10 people (9%) have opted to pay at least part of their bonus into their pension
• Less than a quarter (24%) of people know the tax benefits of opting to have their bonus paid directly into a workplace pension
• Education is key as a third of people (33%) say they would definitely opt to have all or some of their bonus paid as pension contributions when the tax benefits are explained

Employees across the UK are missing out on a government top up, in the form of tax relief, because of the choices they are making when paid a bonus by their employer.

New research from Aviva has found that only around 1 in 10 (9%) people who have received a cash bonus in the past have opted to have at least part of it paid into their pension - known as bonus exchange. Over a third (39%) had instead chosen to spend it on a treat, like shopping or a holiday. By opting to take it in their pay packet, employees are paying tax and national insurance (NI) on their bonuses - a bill that can run into the hundreds or even thousands of pounds depending on the size of the bonus.

By choosing bonus exchange, not only would they not pay income tax and NI, but they would increase their pension saving. They then can then benefit from a government top up in the form of tax relief. This could again run into the hundreds or thousands of pounds.

The survey also asked people who had not received a bonus from work to think about what they would do with the money if they were to be offered one. Again, over a third (38%) said they would spend it on a treat with just 1 in 20 (6%) saying they would pay it into their pension.

March is traditionally the month when workers receive a bonus from their employer, if they are fortunate enough to work in industries where bonuses are paid.

Knowledge gap creating a savings gap

The research indicates that the reason why so many people are failing to take advantage of this government top-up is a lack of understanding of how pensions work.

When asked to identify the differing tax implications of taking a bonus in their pay packet or putting it into a pension, less than a quarter of people (24%) knew that the bonus would be taxed if taken as pay, but not taxed if it was put into a pension, under a bonus exchange arrangement.

As part of the research, the tax implications and the tax relief available were then explained to those taking part in the survey. Following that, a third of people (33%) then said they would definitely opt to pay at least part of their bonus into their pension. Only 27% said they would still take it as cash.

Colin Williams, Managing Director of Workplace Benefits at Aviva, said:

'We live in a world of instant gratification. We want something now, not later, and to some extent that is understandable. But it's clear that a large number of people are missing out because they don't understand how pensions work.

'Tax relief along with an employer pension contribution are the two biggest reasons to pay into a workplace pension. If people don't recognise the value of these then they are not able to make an informed choice when they are offered a bonus. This knowledge gap is creating a savings gap.

'Over the years, paying at least part of a bonus into a workplace pension could have a really positive impact on someone's retirement.

'Ensuring that consumers have a good understanding of their pension is hugely important. Our research shows that people are much more likely to save for their retirement if they have a clearer understanding of the benefits of contributing to their pension.'

Worked Example

- Take a basic rate taxpayer earning £27k salary

- They receive a one-off bonus of £2000 that will be paid along with their monthly salary

- By taking it as cash they will pay o £573.30 of that bonus to income tax & NI leaving a bonus of £1426.70 in their pay packet

- By using a bonus exchange scheme they would get that £573.30 back in Tax and National Insurance Relief, so the full £2000 would be invested in their pension

- Employees can still take advantage of this, even if the window to opt to have your bonus paid directly into a workplace pension has closed, or the option isn't available. Once the bonus has been paid into their pay packet, they can opt to pay the bonus into their pension as a lump sum and receive the tax relief (they would not benefit from National Insurance relief using this method).

Surveyof 2012 UK adults carried out by Censuswide on behalf of Aviva, February 2017

Enquiries:

Media

Ben Moss, Senior Media Relations Manager +44 (0)7872 832 395 / 0117 928 5843

ben.moss@aviva.com

Notes to editors:

• Aviva provides life insurance, general insurance, health insurance and asset management to 33 million customers, across 16 markets worldwide

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