Transcript: The bonus secrets of Financial Times readers

This is an audio transcript of the Money Clinic podcast episode: ‘The bonus secrets of Financial Times readers’

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Claer Barrett
This bonus season, will you be maxing out your credit cards or maxing out your tax free allowances? Nearly 3,000 Financial Times readers have trusted us with their bonus secrets in our annual anonymous survey. But even well-paid professionals lucky enough to receive a bonus say they are feeling the pinch. 

Voice clip
Despite consistent salary increases for me and my partner, our outgoings, especially our mortgage, have increased at a higher rate. We are poorer now than we were five years ago. 

Voice clip
Childcare spending is my number one financial priority. We can’t afford a holiday this year, despite having a joint household income of 165,000. 

Claer Barrett
These comments are from some of the top earners in the UK, so to hear that they’re finding it tough may surprise you. Nevertheless, the majority of readers are still planning to invest the bulk of their bonus in the most tax-efficient way possible. So even if you received a doughnut this year — that’s slang for a bonus of zero — this episode contains plenty of lip-smacking money management tips.

Welcome to Money Clinic, the weekly podcast about personal finance and investing from the Financial Times. I’m Claer Barrett, the FT’s consumer editor.

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Well, it’s nearly springtime, and that means it’s bonus time — at least for some. For the past three years, me and my colleague Lucy Warwick-Ching, the FT’s communities editor, have been quizzing FT’s readers about their bonus expectations and what they intend to do with the money. Well, Lucy joins me now in the studio. And you’re armed with a record number of responses. 

Lucy Warwick-Ching
Yes, Claer. And I’d like to start by saying a huge thank you to the nearly 3,000 FT readers who completed our anonymous survey and shared their thoughts and fears about finances in the year ahead. That’s a record number for this type of survey. 

Claer Barrett
Well, I echo those thanks. And just to put some context around this, bonus expectations this year have really been overshadowed by the threat of recession, rising redundancies, especially in the banking world. Investment banks have been laying off staff because there’s been this sustained drop in global dealmaking, and fewer companies have listed on the stock market in London. So we were expecting this year’s answers to reflect some of that gloom. But Lucy, what did the survey say? 

Lucy Warwick-Ching
So let’s just start by talking about cold hard cash.

Claer Barrett
OK.

Lucy Warwick-Ching
So the first question we asked readers is whether they expected their bonus to be bigger or smaller than last year. 

Claer Barrett
And (makes boing sound effect) . . . our survey said? 

Lucy Warwick-Ching
Fifty-eight per cent of readers said they expected to get the same or less than they did last year. But 42 per cent said they expected to receive more than last year. 

Claer Barrett
Right. OK. So 42 per cent having a better year. So not everyone is suffering. But nevertheless, those who have received a windfall are not planning on splashing that cash. 

Lucy Warwick-Ching
Yes, exactly. So when it comes to what’s influencing how these people will use their bonus money this year, it’s the three Rs. So that’s remortgaging. Fear of redundancy and rebuilding cash reserves. So the more you can earn, the more you’re likely to spend. But it’s clear from the detailed comments that readers gave us that they’re finding it hard to adjust as their living costs rise, but their salary and bonus payments don’t keep pace. 

Claer Barrett
Here’s a few comments from the survey. 

Voice clip
I got a bonus, but I haven’t received any pay rise in the last two years. It’s just the increased cost of living is eating up my base salary, and I’m just no longer able to save. 

Voice clip
Both myself and my husband work in the financial sector, and are acutely aware that our roles aren’t secure. We want to use our bonuses to pay off our mortgage when our fixed rate ends. 

Voice clip
My strategy remains the same: live on my salary and invest my bonus. 

Claer Barrett
Mmm. Well, we’ll unpick some of those comments later. But finally Lucy, every year we ask readers what they intend to do with the majority of their bonus money — invest, save, spend or use it to pay down debt. How has that played out this year? 

Lucy Warwick-Ching
For the past three years, the majority of readers have said they intend to invest the bulk of any bonus money they receive, and there are many good tax-saving reasons for doing so. But the numbers who are able to do so has been falling. In 2022, 58 per cent of people said they intended to invest most of their money. But this year that’s dropped to 49 per cent. And at the same time, there’s been a sharp increase in the numbers saying they’ll use their bonus money to pay down debts — so from 11 per cent in 2022 to 18 per cent today. And plus we’ve seen a further rise in the number of people who want to save some cash for a rainy day. 

Claer Barrett
Well, thank you so much for sharing these insights from the survey, which certainly reflects a lot of unease and uncertainty, even from people who are on very high salaries.

But whether you got a bonus or not, listeners, I’m sure many of you will have similar feelings. Well, the good news is help is at hand because at this point in the podcast, I’m gonna bring in two very special studio guests who’ve been listening to Lucy presenting those findings. They are Nimesh Shah, the tax expert and CEO of advisory firm Blick Rothenberg . . .  

Nimesh Shah
Hi, Claer. thank you for having me on. 

Claer Barrett
And financial planner Adam Walkom, who is a partner at Permanent Wealth Partners and author of the book Plan for Happy. 

Adam Walkom
Thank you. Claer. Nice to be here. 

Claer Barrett
Well, Nimesh, what did you find the most striking about the survey data this year? 

Nimesh Shah
Firstly, the record numbers, which we talked about before. But I’m interested in the investing side as well. With the backdrop of high interest rates, saving for a rainy day, lots of people still want to invest it. And with tax being a big key driver and lots of noise over the last few years about fiscal drag, people paying more taxes than ever — Jeremy Hunt reduced the top rate of the tax threshold down from 150 to just over 125,000 — so I wonder if some of the noise around tax are influencing people’s decisions on investing tax-efficiently their bonus this year? 

Claer Barrett
Now, Adam, lots of your clients are professional workers in their 30s and 40s, kind of people who get a bonus, but are these kinds of concerns reflected in what they’re telling you? 

Adam Walkom
Absolutely. And I think one thing that particularly struck me about the data and the results that came out, I was actually somewhat surprised at the figure of how much of the bonus was still being invested, because anecdotally, in terms of the type of clients we work with, which are typically, as you say, the professionals, mid-career professionals, the type of people who do get bonuses . . . So much of the focus and the discussion is really around paying down debt. And I’ll kind of give you a sort of an analogy of that. So typically, let’s say we’ve been through 2020, we went through lockdowns, people at lockdowns were still professionals, still being paid very good wages. And during that point, everyone living at home, staying at home, a lot of people said, right, I need to move out. I want some space. Mortgage rates were really low, so a lot of people took the big mortgage, bought the big house. That’s fine. So let’s say you bought a, you know, you’ve got a £1mn mortgage at that point. You can finance a £1mn mortgage at 1-1. 5 per cent. When that million-pound mortgage jumps to 5, that makes a big difference to your life. And so, so many of the people I’ve talked to over the time really have focused in the last couple of years at really driving that mortgage down as low as possible. And so really for the last year or even two years now, there’s been a real switch away from taking bonus money and investing for the future, to just refocusing and saying, OK, I can still invest for the future, but actually I want to de-risk altogether. So that de-risking is taking that mortgage down. 

Claer Barrett
And we really heard that in the different comments. Well, let’s move on to investing, because obviously the people who answered our survey are high earners. They might be high spenders, but they’re certainly, Nimesh, high taxpayers. Now, if you listen to the recent Money Clinic episode where I interviewed the tax minister, there is a lot of pressure for the government to deliver meaningful tax cuts at the Budget next month. But Nimesh, what are the different tax implications of spending rather than investing your bonus money? 

Nimesh Shah
So from a tax perspective, if you spend it, there’s no tax relief. If you invest it tax-efficiently, you have the chance of getting some decent tax relief. So I suppose I have three orders of how to go about investing my bonus. So firstly do the basics around pensions — lots of tax relief associated with that. Once you’ve maxed out your pension and there are limits which I’m sure we’ll come on, to look at then Isas. So invest your money through some form of tax wrapper — the Isa is the most common that people can go and access. Why invest in your own name? The income and gains will be taxed on you as an individual. If you’re not a top-rate taxpayer, you’re losing 45 per cent of the income that’s arising. And then for the more exotic investor, there are very attractive tax reliefs associated with venture capital-type schemes. So venture capital trusts and the Enterprise Investment Scheme carry lots and lots of valuable tax reliefs. But they are very high-risk investments, so you must take some investment advice around them. 

Claer Barrett
And interestingly, fewer people in this survey . . . so they were doing those esoteric tax-saving things. Now something that was top of mind with people who’re responding to our survey was what’s called the 100k tax trap. When you earn more than £100,000 a year, you’re effectively taxed at 60 per cent because your tax-free personal allowance, bit by bit, is withdrawn. Plus, you lose valuable entitlements to childcare. Now, Lucy, this was the fourth most common answer when we asked people what had influenced their financial decisions this year. Did that surprise you? 

Lucy Warwick-Ching
It didn’t actually, because I write a column every week for FT Money called the Your Questions column, and I do get lots of readers writing in about this aspect. You know, if you’re both working parents earning every cent month money, you lose the child benefit and later down the line you lose the so-called free hours. So it’s actually a lot of money we’re talking about. And so if people can avoid this by doing certain things and, you know, keeping within the law and doing salary sacrifice, then they’re going to look into that. 

Claer Barrett
Well, here’s a couple more responses from the survey that specifically mentioned this problem. 

Voice clip
Staying below the 100k tax trap is a priority. If I earn any more than this, the loss of childcare benefits would actually cost me a lot more money. Thankfully, my employer allows 100 per cent of my bonus to be paid into my pension.

Voice clip
I’ve put everything over £100,000 into my pension. And I’ve utilised the last three years of tax allowances on top. I fully expect the larger £60,000 pension allowance to disappear under Labour. 

Claer Barrett
So paying more into your pension is the key way of avoiding the 100k tax trap. But how would you go about that, Nimesh? And what are the pros and cons? 

Nimesh Shah
So lots of tax relief associated pension contributions. If you put money into a pension as a top-rate taxpayer, 45 per cent, you effectively get 45 per cent tax relief. And someone mentioned salary sacrifice along the way. So what does this actually mean? Well, what it says on the tin, that you can sacrifice — you tell your employer I am for giving my cash bonus, I’d rather not have it in my bank account, but please put it into my pension. And most employers will run some form of scheme. You need to check the detail with your HR department around how that operates for you and your specific employer. But if you can put all of your bonus if you want to into your pension and sacrifice it, then 100 per cent of that bonus — not the net amount, not the net amount after tax — goes straight into your pension. And in a pension, it’s tax-free income and gains growth until you access it upon retirement, at which point you will pay some tax. But the effect of compounding over that time will mean that you should get more return on your money.

The interesting bit, which someone mentioned, I am obsessed about trying to avoid the £100,000 tax trap. So if you’re earning somewhere around the high 90s, even into the hundreds, and you do end up losing your personal allowance, so that is a 60 per cent effective rate of income tax, 62 per cent if you’re an employee because you pay 2 per cent National insurance and you lose your tax-free childcare, there’s a real advantage for sacrificing as much of your bonus as you can to drop below the £100,000 limit, because then you pay 40 per cent income tax, not 62 per cent, and you would maintain your benefits to tax-free childcare. 

Claer Barrett
Well, Adam, this is something that your clients no doubt are also alive to. What practical tips would you offer? 

Adam Walkom
Well I think there’s a lot of tactics around how to invest in using tax relief. But I would actually go back a step and to say, OK, when thinking about pensions and thinking about Isas and how much you want to allocate between one and the other, think more about, OK, what’s . . . what do I need the money for in the short term? What do I need the money for in the long term? Pensions are fantastic wealth-building vehicles for you over a number of years. However, any money that goes into a pension you can’t touch until you’re 55 as the rules are out today. And that rule may go to 57 very shortly. So you’ve got to be very aware of that. If you’re thinking about paying down a mortgage or if you’re thinking about moving house, or you’re thinking about having school fees that potentially start for children or something like that, being tax-efficient is great, but then funnelling all your bonus into a pension when actually you’re gonna need that money for living is not the best idea. So I would suggest take a step back first, think about, OK, realistically, what am I gonna need the money for today, in a few years time? And then for the rest that can be long term. And so think strategically about the planning element first and let that drive the investment strategy. 

Claer Barrett
And also it’s true to say a lot of people who are making pension contributions, topping up previous years, like that listener we heard from, they’ll do that quite late in the tax year when they know what their financial position is. It’s not something that you necessarily have to decide before your bonus is paid. You could go back several years later and top it up afterwards and still get the benefit of the tax relief. 

Adam Walkom
Absolutely. But I think it’s very, also very important to know the levels that you’re working with. So it actually requires some relatively complex calculations to work out exactly your annual allowance that you are allowed to put in when you start carrying forward previous years. So I would just encourage someone to do the work on it, but be very careful. And it’s always helpful to have someone professional check it out as well. 

Claer Barrett
Yeah, the more you earn, the more attention you need to pay to these limits. Well, the survey data showed that this has boosted the attractions of pensions. They’re now the number two choice where you just intend to invest their bonus cash, up from third place last year. And in first place, it’s everyone’s flexible tax-saving friend, the stocks and shares Isa. But last year, over half of readers said that they would be investing cash in a stocks and shares Isa. But this year, only one-third say that they can still afford to. Adam, what did you make of that? 

Adam Walkom
Perhaps that’s something to do with markets in general, and just general market perception on markets have had a relatively rough 12 months, perhaps with the exception since October. So it may be a reflection on just confidence in the stock market in general. It may also be a reflection of the other vehicles available. Cash Isas, for example, have actually become attractive for the first time since the early 2000s. Previously, having a cash Isa investment with a guaranteed 1 per cent return was virtually pointless. 

Claer Barrett
Yeah, I’ve just got 5 per cent on mine. 

Adam Walkom
Absolutely. And that actually, if you offer someone a 5 per cent return, especially with historical returns on cash that we’ve got used to over the last 15 years, that becomes attractive. So perhaps cash Isas have popped up, at the same time paying down mortgages . . . Again, if you’re paying down a mortgage of 5 per cent, that’s effectively equivalent to a 5 per cent tax-free guaranteed return because that’s, the return you get is the interest that you are not gonna pay on that mortgage debt in the future. So I can see how that’s attractive as well. So the general, shall we say, risk-free return of interest on money has risen significantly. Therefore, people in theory should demand a higher return on risk assets. And that’s effectively what the market is. The market is risk assets. And so if people don’t have confidence in achieving that higher return, it perhaps makes them invest it towards the safer end of that spectrum. 

Claer Barrett
Well, certainly as interest rates have risen, so has the desire to get debt down or even become debt-free by using bonuses to clear a chunk of your mortgage. Now, Lucy, I mean, looking through the responses, just like again and again, like you say, the mortgage word comes up. And in the detailed responses, lots of readers were saying their mortgage hadn’t gone up yet, but they knew that a refinancing was looming. What kind of strategies could people potentially take with this? 

Lucy Warwick-Ching
Well, this is something that I hear from readers again in my Lex column. But one of the things that experts say is overpaying. I know there’s a limit that you can reach every year, but you can just start by overpaying slightly on these mortgages, and then that brings the debt down. 

Claer Barrett
Adam, what practical tips would you offer? 

Adam Walkom
Yes. So we use a common strategy. And this is typical where people who have been lucky enough to lock in a five-year rate and has still a couple of years away from that cliff edge of that rates rising significantly, but they’re also being sensible and understand that their monthly payments are gonna rise also significantly. So they want to pre-plan. And so what we’re seeing is people and what we help clients advise with is, we’re looking at things like term deposits. So if you’ve got a money sitting on a cash, you can lock in a term deposit either one or two years or something equivalent potentially to when your mortgage comes up for renewal. Let’s say your mortgage, you’re paying 1.5 per cent on your mortgage, you can lock in 5 per cent on your term deposit. Therefore, you have a positive carry on that cash which is actually benefiting you significantly over time. At the same time that cash is guaranteed. It’s in a term deposit. As long as the bank doesn’t go bust, which shouldn’t, then at the time that that term deposit matures, then that money rolls over straight into the mortgage and you don’t have to worry about any early repayment charges either. 

Claer Barrett
Yeah. I mean, this is one of the key things that people are negotiating at the moment. As Lucy said, pay a bit more off the mortgage, but also have the flexibility of saving in a separate pot. And I hate to say it, but with the other R, redundancy, coming up in the answers, we don’t know how this year is gonna play out. In the city every day, it seems has a gloomy story about some kind of bank thinking about cutting jobs. You may well need access to that cash if you do have a big financial bump in the road, like losing your job.

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Now, finally, before we end the show today, I want to take a little moment to talk about the 12 per cent of readers who said that they were going to spend the majority of their bonus money. So these were a bit happier to read. Lucy, what do you have to tell us? 

Lucy Warwick-Ching
As you might expect, holidays and home improvements were high up on the list. But here were a few that made us smile. So one reader said, what’s driving his bonus choice? His girlfriend’s desire for a big bling-y ring. (Laughter) And another reader just said that his bonus is unnecessary money that he’s absolutely committed to spending unnecessarily. 

Claer Barrett
What’s he going to spend it on? 

Lucy Warwick-Ching
Well, he said that in his case, he’s going to buy two custom-made shotguns. One for me and one for my son, he says. 

Claer Barrett
Wow, don’t you just love FT readers. Any other unusual spending habits? 

Lucy Warwick-Ching
Well, this final one shows that FT readers can be kind-hearted. This reader says I plan to donate my bonus to charity. I budget based on my income and so by definition, I don’t need the bonus. 

Claer Barrett
Wow. Well, if you are listening, the person who made that comment, I tip my hat to you because certainly charities need our cash more than ever at the moment. But Nimesh, I hate to say it, but there are also valuable tax reasons why you might consider donating part of your bonus to charity this year. 

Nimesh Shah
There are the . . . The tax adviser in me . . . Whilst it’s philanthropic, there are lots of tax reliefs again. So the charity benefits, so the charity can claim tax relief on the amount you give. So they get 20 per cent. 

Claer Barrett
That’s gift aid, isn’t it? 

Nimesh Shah
Gift aid, yeah. Gift aid. And you, if you are a higher-rate, 40 per cent or 45 per cent taxpayer, you also get some tax relief at 20 and 25 per cent. So do tick the gift aid box if you are being generous to the charity. If you don’t tick it, you don’t get the tax relief. 

Claer Barrett
And Adam, if you do get a bonus, it is something to be celebrated. And spending the money on something meaningful, in your bigger financial plan, should it have a place? 

Adam Walkom
Absolutely. This comes back to the element of planning. So if you’ve got a really good idea on your general direction of financial travel . . . Now of course there’s gonna be some bumps in the road. But if you’ve got a really good idea that actually if I continue to put away £50,000 a year or £20,000 a year or whatever you need to do to get to that sort of area on the retirement goal that you’ve got — and so I’m implying here that you actually have a retirement goal — anything on top of that can be seen as superfluous. So absolutely, I mean, life is there to be enjoyed. Go and spend the money. 

Claer Barrett
You might not spend it on shotguns. (Laughter)

Adam Walkom
You can spend it on shotguns. You can donate to charity. You can, you know, when I was in the city in 2006, hedge fund managers would buy themselves another Ferrari. I don’t think those days are still around anymore. But you know, there is plenty of positive energy you can get by spending and enjoying that money because frankly, you’ve worked really hard for it. And if that, if, once you work really hard for something, you spend the money, if that gives you a sense of enjoyment to encourage you to continue to work hard, fantastic. Go for it. 

Claer Barrett
Well, all that remains for me to say is thank you very much to Lucy, to Nimesh, to Adam. It’s been a very valuable half an hour sitting here in the FT studio discussing the survey results with you. And thank you again to all of the readers who shared their responses anonymously. We’ve learned so much from what you have to say, and I’ll leave listeners with one final bonus. There’s a free link in today’s show notes, where you can read the full breakdown of the survey results, and more advice and tax tips from Nimesh about how to save and invest tax efficiently.

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That’s it from Money Clinic this week with me, Claer Barrett, and we hope you found this episode useful. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show, so if you’re interested in being part of a future episode and are looking for some expert money advice, then do email us. Our address: money@ft.com. You can also follow me on Instagram. I’m @ClaerB.

Money Clinic was produced by Tamara Kormornick and Persis Love. Sound design was by Breen Turner, and our editor is Manuela Saragosa. You heard original tunes here by Metaphor Music, and Cheryl Brumley is the FT’s global head of audio.

And finally, our usual disclaimer. The Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you will need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.