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By putting some or all of your windfall into your pension, you are giving yourself the option of better long-term growth Pension play<\/p>\nBonus season has arrived. Shops and restaurants are busier, and bank balances are suddenly healthier as companies wrapping up their financial year complete staff performance reviews and make payouts. If you\u2019re one of the lucky ones getting a windfall, how should you spend it?<\/p>\n
While a work bonus can feel like free money, it\u2019s actually one of the best opportunities all year to improve your financial future. Whether you use it to clear expensive debt, build savings or invest for the future, the smartest bonus decisions are the ones that keep paying off long after the celebrations.<\/p>\n
More than six in 10 organisations in Ireland provide for a bonus, and 76 per cent were planning on paying one last year \u2013 that\u2019s according to a survey of HR professionals in 178 companies by HR consultancy Adare last September. <\/p>\n
Bonuses were linked to company performance in most cases (50 per cent), and individual performance in 38 per cent of cases, according to the Adare research. <\/p>\n
The perk can typically amount to about 10 per cent of annual salary, according to 2024 research also from Adare. <\/p>\n
Considering senior finance manager, software engineer, risk manager and construction site operations manager roles are now commanding median salaries of \u20ac80,000-\u20ac100,000, according to hiring platform IrishJobs, that will mean a sweet \u20ac8,000-\u20ac10,000 bonus for some lucky employees. <\/p>\n
While fixed salary is the main reward for 39 per cent of employees, according to a survey by HR and payroll solutions company, SD Worx Ireland, variable pay such as bonus and commission is the primary reward for almost 10 per cent of staff. For these guys, most likely working in sales, the payout can be in the tens of thousands. <\/p>\n
Your bonus might sound like a big roundy number, but it\u2019s going to land in your bank account a bit differently.<\/p>\n
One of the biggest surprises for employees is how heavily bonuses are taxed, according to SD Worx Ireland. A cash bonus is treated exactly like regular pay in Ireland, which means it\u2019s subject to PAYE, USC, and PRSI. <\/p>\n
For anyone on the higher marginal rate of tax, this can be a shock: an employee taxed at 40 per cent can end up losing around 52 per cent of their bonus once income tax, USC and PRSI are deducted. <\/p>\n
All of this means the headline bonus your boss announces isn\u2019t going to be the same as the figure that actually ends up in your pocket. This can leave employees frustrated and confused at exactly the moment bosses are trying to reward them, says SD Worx Ireland. <\/p>\n
That \u20ac10,000 bonus might appear in your pay cheque as \u20ac4,800. It\u2019s a very welcome boost, of course, but talking to payroll in advance about the effect of tax on your bonus will avoid bonus shock. <\/p>\n
By putting some or all of your windfall into your pension, you are giving yourself the option of better long-term growth Pension play<\/p>\n
If yours is a discretionary bonus \u2013 not part of your contractual entitlement but rather given at your employer\u2019s discretion \u2013 you could ask your boss to put it directly into your pension<\/a> as an employer pension contribution. This comes with the advantage of some serious tax relief.<\/p>\n Instead of taking your bonus as cash through payroll, and paying tax on it, your employer could pay it directly into your pension. Any bonus going straight into your pension pot is free from income tax, USC and PRSI. So, in our example above, the full \u20ac10,000 is added to your retirement funds.<\/p>\n If getting a bonus is part of your contract of employment, however, it cannot be paid directly into your pension as an employer contribution. <\/p>\n As an alternative, you could put some of your taxed bonus into your pension as an additional voluntary contribution (AVC), depending on your salary and age, says Cian Callaghan, director of private clients at Metis Ireland. <\/p>\n \u201cBut you are only going to get income tax relief at 40 per cent if you are a higher rate taxpayer. You don\u2019t get the relief against PRSI and USC,\u201d says Callaghan. <\/p>\n \u201cTax relief is generally granted by deducting the amount of the contribution from an employee\u2019s gross pay before deducting income tax. This results in the employee obtaining tax relief at his marginal rate on the pension contribution,\u201d says Breda O\u2019Kelly, outsourced payroll manager, SD Worx Ireland.<\/p>\n \u201cSo, on a \u20ac10,000 bonus, a higher taxpayer would receive \u20ac4,000 in tax relief, provided they do not exceed age-related limits,\u201d says O\u2019Kelly. <\/p>\n Take your bonus in cash and you are spending your chips right now. By putting some or all of your windfall into your pension instead, if you can afford to do so, you are giving yourself the option of better long-term growth. <\/p>\n \u201cIf you are investing that money then in global equities, you are talking 8-10 per cent compounding while that money is in your pension as well,\u201d says Callaghan.<\/p>\n \u201cIf you are getting a 10 per cent return every year, that\u2019s your money doubling every seven years. So if you have a 15-year time horizon, that money can quadruple and that\u2019s not out of the realm of possibility if you look at what global markets do; you are talking 8-10 per cent a year. Those are reasonable numbers,\u201d says Callaghan.<\/p>\n Mortgage moves<\/p>\n Many of us fantasise about being mortgage<\/a> free \u2013 so chucking your work bonus at the mortgage balance can feel like you are bringing that feeling a little bit closer. But it may not be the best use of your bonus windfall. <\/p>\n \u201cProbably the last thing I would do with a \u20ac10,000 bonus is pay down the mortgage,\u201d says Callaghan.<\/p>\n Some younger workers can be overly keen on clearing their mortgage, he says, something he attributes to the ghosts of the financial crash.<\/p>\n \u201cI think the children of those families are now going through an over-correction,\u201d says Callaghan.<\/p>\n \u201cThere has been a mentality over the past 10 years that I need to get debt-free, I need not to have a mortgage because I saw my parents struggle … but a mortgage is the cheapest money you will ever have, particularly if your interest rate is under 4 per cent,\u201d he says.<\/p>\n