#91 Bonus > Cash or Pension

So, although I don't know the exact figures yet it's been confirmed I will get an annual bonus shortly. Great news.

I was all set to receive this and immediately pay off the car loan.

However, this morning my company announced that it was providing the option to pay bonuses direct into our employee pensions.

It seems that this is a fairly common practice but not one I had been aware of in previous years.

The big news is that this would be Tax and National Insurance exempt.

Now my initial reaction, and that of the wife, was well it's still going to be better to have the cash now. But, as we're planning on paying off the car loan, I think we can be more objective and simply make this a financial decision.

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My bonus is 20% of £70k salary, which is £14k.

After tax and NI this would be roughly £7k net to me.

So I'm in affect paying £7k to have this bonus as cash rather than invested into my pension.

About the car loan.

This is £8k over 5 years, I can't remember the APR but the total repayment cost is £9,646

So £1,646 in interest over 5 years.

If I received the bonus in cash now I'd pay down the capital on the loan from £8k down to £7k. At a rough guess this would reduce the interest by (7/8ths) £1,441. Meaning over the term of the loan I'd expect to pay £205 in interest if paid off early rather than £1,646.

So the choice is to receive the bonus in cash and pay off a bulk of the car loan.
or
Put the bonus into pension, which would save me £7k in tax and NI, but cost me £1441 more in interest payments on the loan.

So the pension choice appears to be net £5,559 better off.

Then there is the consideration of growth over the 5 years. Cleverer people than me would work this out properly, but my view is how much growth would I expect to get during that 5 years I was still paying off the loan?

£14k increasing @ 3% (the lowest of the FCA recommended rates for pensions) could expect to increase by £2,265 over 5 years.

Now, this isn't cash, it's equities so can and will fluctuate but at least it's giving me a clear signal that...

If we put the bonus into a pension:

a) we'll save £7k in tax and NI, and invest a total of  £14k.
b) we could expect this to grow by more than the interest I'd be paying on the car loan. This is only possible due to it being based on double the capital (ie point a).


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I should have it confirmed on either Wednesday or Thursday the exact figures and have to sign a formal letter declaring I wish to have it paid into my pension by Friday.

I will discuss further with the wife tonight but I think the financials are pretty compelling.

Obviously this whole post has been written with humility and understand we are in a very lucky position to be entertaining things like this. And it'd be interesting to see how this discussion would bear out if we weren't planning on immediately paying off a loanand so it couldn't be such a simple financial decision.

*UPDATE*

As the deadline approached I wasn't sure I was going to have enough courage to stick it all in the pension and not use any for the current debt payments.

As it turned out I settled for a middle ground and agreed to have 50% directed into my pension - with actual figures this will be £7,427.

And the remaining 50% I'll take as cash, which I expect will be roughly £3,700 net. With this I plan to pay off the everyday credit card (£1k), put £1k into an account to finally have an account to pay for annual bills to smoothen out the bill paying process and use the remaining £1,700 to either pay down some of the car loan or put in our ISA for our monthly dividend portfolio purchases, undecided yet, probably a but of both.