Workers could retire “a year early” by taking advantage of a benefit offered to anyone with a workplace pension, according to retirement savings experts.
New research by Scottish Widows shows that workers with an average salary of £34,963 per year could retire 12 months earlier than planned by opting into a workplace salary sacrifice scheme, also known as salary exchange.
Scottish Widows calculated that average salary workers, who take home £27,294 annually after tax, could increase their take-home pay by £140 a year by opting into their employer’s pension scheme and taking advantage of the tax benefits.
Workers redirecting this extra cash into their pension savings, along with the employer’s savings from reduced National Insurance contributions, could add an extra £463 to their pension each year.
Over 25 years and assuming 5.4 percent growth, this addition could increase the person’s pension pot by £35,900 – equivalent to a whole year’s salary.
However, Scottish Widows warned that the salary exchange scheme is “too often overlooked or misunderstood”.
It explained: “Salary exchange is an arrangement where employees exchange part of their salary in return for an employer pension contribution.
“Because the salary is being exchanged rather than paid directly, it benefits both employers and employees as neither pays National Insurance contributions on the amount exchanged. This means there will never be a reduction in an employee’s take-home pay.”
It also comes with certain tax benefits, especially for the 700,000 workers that have now been dragged into the higher tax bracket paying 40 percent on their earnings over £50,270.
Scottish Widows said by opting into salary exchange, these workers move down a tax bracket, reducing their tax liability and increasing net pay.
Susan Hope, retirement expert at Scottish Widows said: “The term ‘salary sacrifice’ is really misleading because neither employee nor employer needs to sacrifice anything.
“‘Salary exchange’ is a much more accurate description because workers are essentially missing out on free money that they could be seeing in their take-home pay or adding to their pension savings by not taking advantage of this scheme.
“While it might sound complicated, it’s just a slightly different way to make pension contributions and importantly, it will never mean workers take home less pay. A common myth that needs to be dispelled.”
The analysis comes as Scottish Widows research found a fifth (22 percent) of workers have never heard of salary sacrifice or salary exchange, and while some have heard the name (31 percent), they know very little about it.
Misconceptions around salary sacrifice remain high with 34 percent believing it will result in them taking home less pay and 12 percent are under the impression it is only available to higher earners.
A significant proportion (57 percent) said they would opt for salary sacrifice if it was guaranteed their take-home pay would not be reduced. Meanwhile, two-fifths (40 percent) believe making it simpler and easier to understand and access should be a top priority for employers and the pension industry.
Ms Hope added: “Getting more people to save more for the future is incredibly important and increasing the awareness of salary exchange, while tackling some of the misconceptions, is one way to do this.
“Speak to your employer and see if it is something they offer and if so, ask them to run you through what it would mean for both your money now, but also your future savings.”
