Pension savers could be missing out on retirement savings worth up to £24,500 due to widespread confusion about a pension scheme that actually increases their money rather than reducing it.
Research reveals that the commonly misunderstood scheme could boost annual pension contributions by £463, yet many Britons avoid it because of its misleading name
Susan Hope, a retirement specialist at Scottish Widows, warns that the term "salary sacrifice" creates unnecessary fear among workers who believe they'll lose income.
She told GB News: "People hear salary 'sacrifice' and assume they need to give something up, that's not the case."
The salary sacrifice scheme allows employees to redirect pre-tax earnings into their pension, generating National Insurance savings that can enhance either monthly income or retirement contributions.
For a 40-year-old worker, these additional contributions could accumulate to an extra £24,500 by retirement age, based on medium growth projections.
The mechanism behind salary exchange involves converting gross earnings into employer pension payments before tax and National Insurance deductions apply.
This process generates immediate savings for both workers and companies, which can then enhance retirement funds or boost monthly wages.
Britons are concerned about the rising tax burden | GETTYMs Hope clarifies: "Salary exchange is an exchange of gross salary for an employer pension contribution." The reduction in National Insurance liability creates savings that benefit employees directly, contradicting the common belief that participants lose money.
Workers never experience reduced take-home pay through this arrangement. The National Insurance savings ensure participants receive either increased monthly income or enhanced pension contributions.
She emphasised: "You should never have less take home pay as a result of salary exchange."
The scheme cannot legally reduce earnings below minimum wage levels, providing additional protection for lower-paid workers who might benefit most from the arrangement.
Misunderstood' tax rule costing savers £24,500 in retirement
| GETTYThe financial advantages become particularly striking when examined over extended periods. A 30-year-old who raises their monthly pension payment from £249 to £293 through salary exchange could accumulate an additional £41,200 by age 67, assuming moderate investment returns.
Ms Hope added: "For many people every penny counts, so using salary exchange is a chance for people to add money to their take home pay or their pension fund without having to spend an extra penny." The cumulative effect transforms modest monthly increases into substantial retirement funds.
The £463 yearly enhancement might appear modest initially, yet compound growth over decades creates significant wealth accumulation. "It may not sound much, but over time it can provide a five-figure boost to someone's retirement pot," Ms Hope states.
These calculations demonstrate how National Insurance savings, when redirected into pensions, generate considerable long-term benefits without requiring additional personal expenditure.
Opting for salary sacrifice could increase pension savings by £463 a year
| GETTYCompanies bear significant responsibility for communicating these advantages more effectively to their workforce, according to Ms Hope. She believes organisations miss opportunities to present salary exchange as positive news, failing to demonstrate individual benefits in concrete financial terms.
"Employers can and should do more to educate staff about the benefits of salary exchange," Ms Hope states. "Too often, these aren't presented clearly or individually. Everyone should know 'what's in it for them'."
The retirement expert suggests businesses should provide specific calculations showing exact monthly and long-term gains for each employee. "Proof points are so powerful," she notes, advocating for personalised illustrations rather than generic explanations.
Hope's message to workers remains straightforward: "Please do not let the jargon put you off." She urges employees to view salary exchange as a method to maximise pension value without additional cost. "Think of it as a way to squeeze every little bit of value out of your pension contributions."