Put your 2p or 4p NI saving into your pension for rich rewards at retirement

Putting your 2p National Insurance saving into your pension and you could be tens of thousands of pounds better off in retirement, a new study reveals.

A 25 year-old on the average salary of £35,000 using this simple savings tactic could boost their pension by £80,000 at age 67 without sacrificing any of their current salary, it shows.

It might seem ‘dry and unexciting’ to pass up a pay rise but it will reward you in the long term – especially if you cycle not just the 2p but the full 4p NI cut this year into your pension, say number crunchers at Evelyn Partners.

NI saving; The simple tactic of cycling this cash into your pension can bring rich rewards

What seems like a small saving now brings you more pension tax relief from the Government, plus potentially greater compound investment growth, and higher matched contributions if your employer allows this and they are not already maxed out.

The move could also mitigate against income tax increases if the current freeze on thresholds is about to push you into a higher bracket.

The latest 2p NI cut in the Budget will save a worker on an average £35,000 more than £37 a month, notes Evelyn – see the full rundown of savings at different income levels below.

Putting your NI savings into a pension means at age 67:

What 2p NI saving is worth across income levels (Source: Evelyn Partners)

– A 25 year old on £35,000 could be better off by £80,000;

– A 35 year old earning £60,000 could end up ahead by £100,000;

– A 45 year old on £40,000 stands to benefit by more than £27,500.

> What does that mean for you? Check the tables below 

‘That could equate either to retiring a few years earlier than planned or to a much more comfortable retirement than was ever envisaged,’ says Lucie Spencer, financial planning director at Evelyn Partners.

‘Given the cost of living pressures everyone has had to endure over the last couple of years, it will hardly be surprising if most earners gratefully pocketed that January cut and let it slide into the current account balance.

‘But canny savers can use this latest measure in a way that helps to beat the fiscal drag rise in income tax and turbo-charges their retirement savings – and all without sacrificing take-home pay.

‘Those whose general financial situation is in decent order – with unsecured debts clear and a cash savings buffer in place – could significantly increase their long-term wealth by simply paying it into their pension, leaving their take-home pay unchanged.

‘The benefits are particularly significant for younger savers because increases to pension contributions early on in the retirement saving journey can have a profound effect on the eventual size of a pot thanks to the power of compounded returns.’

How much could putting NI saving into a pension boost YOUR pot?

Evelyn’s figures assume that workers increase their monthly pension contribution by the amount their take-home pay is set to increase after the 2p Budget cut to NI, or by the full 4p cut since the start of this year.

The amount is then boosted again by pension tax relief, and grows at an annual investment return of 5 per cent.

Impact of putting 2p NI cut in the Budget into your pension (Source: Evelyn Partners)

Impact of putting 4p NI cut from the Autumn Statement and the Budget into your pension (Source: Evelyn Partners)

Paying into pension mitigates against income tax rises 

Lucie Spencer says this pension saving tactic is especially powerful at the moment because of frozen and falling income tax allowances and thresholds since 2022.

‘Millions of earners are paying more in income tax – even though the rates have not changed – and this trend will continue until at least 2028.

‘This effect will wipe out the gains from the NI cuts for many taxpayers in a year or two from now, meaning that the overall direct tax burden is on the up.’

However, Spencer points out that one of the few ways to mitigate against rising income tax is to pay into a pension.

This is because contributions benefit from tax relief at the earner’s marginal – or highest – rate of income tax.

‘Depending on their pension system, the saver will either get basic rate tax automatically and reclaim the rest if they are a higher or additional rate taxpayer. Or they pay contributions out of gross income and get all tax relief automatically.’

“Either way, the effect is much the same: you legitimately avoid paying income tax on a portion of your income while also boosting your pension pot.

‘This is why when someone receives a pay rise, a financial adviser will quite often counsel them to put part or all of it into their pension.’

How do you top up your pension with your NI cut?

You need to figure out how much your monthly take-home pay is set to increase by in April thanks to this latest 2p NI cut, says Spencer.

You can also check the full impact of the 4p NI cut, if you plan to boost your pension by the total reduction this year.

Spencer says you can then work out what adjustment you need to make to your contribution rate so that amount goes into their pension – you can ask for help from your HR department or pension provider if necessary.

The net pay landing in your bank account each month can then remain unchanged, she explains. And you may also benefit from increased matched contributions from your employer, further increasing your pension fund.

‘“This reflects a net pay scheme, where employees pay contributions gross of income tax. However, the principle extends to anyone paying into a pension.’