Workers can boost their pension savings by as much as £41,200 – more than a year’s annual salary – by making just one change.
Pension experts at Scottish Widows say average salary workers who take home £37,430 annually can boost their take home pay by £150 per year simply by opting into their employer’s salary exchange scheme. If the extra cash is then redirected into their pension, alongside the savings the employer makes through reduced National Insurance contributions, their pension savings would be boosted by £528 per year.
For a worker aged 30 and retiring at age 67, this would add a whopping £41,200 to their pension savings, assuming a 5% investment growth, according to the firm. But it’s never too late to opt into a salary exchange scheme as those who join a decade later at age 40 would still get a £24,500 boost to their pension pot.
Scottish Widows research found that only 35% of UK workers are enrolled in their company’s salary exchange scheme, while 20% weren’t even aware their employer offers such a scheme, meaning millions are currently missing out on huge savings for their retirement.
Salary exchange, which is also sometimes referred to as salary sacrifice, is an arrangement where workers exchange part of their salary in return for a pension contribution from their employer.
As the salary is being exchanged rather than paid directly, it benefits both workers and the employer as neither has to pay National Insurance contributions on the amount.
The exchanged money can then be paid into a worker’s pension plan as an employer contribution, creating savings for both while also boosting a worker’s retirement savings.
But with the future of salary exchange under the spotlight following recent HMRC research, Scottish Widows says workers should take advantage of these schemes while they can to maximise their pension savings.
Susan Hope, Scottish Widows Retirement Expert, said: “Questions loom over the future of salary exchange, despite it being the best way to maximise workers’ retirement savings.
“Cutting or abolishing it completely would ignore the long-term boost it delivers to people’s finances. Our data shows not only the positive impact on people’s take home pay, and pension wealth, but also the halo effect it has on people’s financial confidence.
“The term ‘salary sacrifice’ is a red herring because neither the employer nor employee has to give anything up when they take advantage of this scheme. It’s truly a win win.
“The key to unlocking additional savings into pensions is awareness, and this needs improving so schemes like salary exchange can positively impact more people’s finances. We should be empowering our workforce’s future and salary exchange is one way to do this.”