If you’re skeptical of the fact that anyone will ever be put in a situation where they have these two options, you’re not alone. While this is purely a hypothetical scenario, what we’re trying to achieve in this article is getting everyone to think about which will deliver the more beneficial outcome in certain scenarios.
Depending on our preference between the two choices, we can better understand our frame of mind and finances, as well as the career choices we have made.
Read Also: $1 Million Dollars Today or $5,000 A Month For The Rest Of Your Life: Which Is The Better Choice?
The Hypothetical Situation
You’re having your annual review with your supervisor, discussing your performance during the year. Things are going positively – you’ve accomplished most of what was expected of you, and your supervisor thinks you can be pushed to achieve more. Basically, your supervisor sees value in your work and wants you to stay.
You’re presented with this option: “Would you prefer a year-end bonus or a salary increment next year?”
At the heart of this question, is whether you prefer to take a lump sum or upfront bonus or whether you prefer to get a higher amount each month. Here are 6 implications you should be considering when making your decision.
#1 How Long You Are Going To Remain In Your Job
The first thing we should consider is whether we intend to stay in our job for a long time or if we are planning to leave soon.
In most situations, if we plan to leave our jobs soon, we would be better off taking the bonus. This is mainly because if we choose to take the salary increment, it would typically be a small percentage of our existing salary and only last for a few months.
The bonus on the other hand is already in our pockets, and we can simply leave our job whenever we want after that. If we’re not sure, going back to the adage “a bird in hand is better than two in the bushes” may help sway us one way or the other.
#2 In Which Situation You Will Be Financially Better Off?
In general, each month of bonus we get is worth 8.3% in terms of monthly salary increments. So, if we have no intention of leaving our job, we should try to beat this hurdle rate when opting for a pay raise.
For example, if we are offered a choice between a 20% monthly salary increment or 2-month bonus, we would be better off with the salary increment. The 2-month bonus would only translate into 16.7% of our monthly salary increase. If we have to choose between a 30% monthly salary increment or a 6-month bonus, the bonus, giving up to 50% increment on a monthly basis, would usually be the better option.
This argument disregards any investment returns, which we will get into in our point below.
#3 Are You Able To Make Savvy Investment Decisions?
Recapping the example above, where we should choose the 20% monthly salary increment over the 2-month bonus (which only adds up to a 16.7% monthly salary increment), the choice may not be so straightforward if we can achieve a good rate of return on an investment.
If we are able to achieve an investment return of 10% in the year, taking the bonus may become more attractive. Our 2-month bonus (or a 16.7% increase in monthly salary) now delivers 26.6%, beating the 20% monthly salary increment in the example.
Of course, we could also invest our salary increments and achieve a decent return throughout the year. However, a lump sum allows us to make a larger upfront investment.
Read Also: 4 Ways Companies Can Pay Out Bonuses, And What You Can Do With It
#4 Individual Scenarios
If we are planning to buy a home, have upcoming big-ticket payments for our home renovation, large outstanding credit card bill, or want to go on a European vacation, the lump sum bonus option becomes more attractive than getting a higher salary each month.
If we aspire to climb up the ladder within the company, gunning for promotions over several years, which usually come with a salary increment, should be the main priority.
Read Also: Salaries In Singapore To Rise 4.0% In 2019: Here’s How Much More You Should Expect To Earn
#5 Losing Out On Employer CPF Contribution
We should also note how our employer (and employee) CPF contribution rates will be impacted. There are two main things we need to know about our CPF contributions in Singapore.
Firstly, we have a monthly salary cap of $6,800 on our CPF contribution rates. This means anything above the first $6,800 will not require CPF Contributions.
If you think this sounds complicated, fret not, it isn’t. Consider the following scenarios:
Current Salary
CPF Contributions
Salary After 20% Increment
NEW CPF Contributions
Additional Employer CPF Contributions
$4,500
$1,665
(Employee: $900
Employer: $765)
$5,400
$1,998
(Employee: $1,080
Employer: $918)
20%
$6,500
$2,405
(Employee: $1,300
Employer: $1,105)
$7,800
$2,516
(Employee: $1,360
Employer: $1,156)
4.6%
$8,500
$2,516
(Employee: $1,360
Employer: $1,156)
$10,200
$2,516
(Employee: $1,360
Employer: $1,156)
0%
Employees who earn $6,800 and below will have to contribute 20% of their monthly salaries into their CPF accounts. Their employers will have to contribute an additional 17% into their CPF Account.
Anything above the $6,800-mark will not require either employee or employer CPF contributions. This means if we earn $4,500, and get a 20% salary increment to $5,400, nothing changes in terms of CPF contributions.
If we earn $6,500 and receive a 20% salary increment to $7,800, we will not be enjoying a 20% increase in our employer CPF contributions, and we won’t need to pay the full employee CPF contribution either. In the table, the employer CPF contributions is increased to $1,156 from $1,105, translating to a 4.6% increment only.
If we are earning $8,500 before our 20% increment, we can see that our employer CPF contributions do not increase at all.
One other thing we should note is that instead of only receiving 80% of our salaries in take-home pay, we will get more. Of course, this is because we also don’t have to make an employee CPF contribution on anything above the first $6,800 of our salary.
Secondly, this will not be the case if we choose to receive a 2-month annual bonus. This is because our CPF Annual Limit is $37,740. Even if we earn $8,500 a month, and make the required employee and employer CPF contributions, we will only contribute $30,192 to our CPF accounts, leaving a remaining $7,548, that we must continue making CPF contributions on from our bonuses in the year.
This is what happens in the same scenario.
Current Salary
CPF Contributions
2-Month Bonus
(As A % Of Annual Salary)
CPF Contributions On 2-Month Bonus
Additional Employer CPF Contributions In %
$4,500
$1,665
(Employee: $900
Employer: $765)
$9,000
(16.7%)
$3,330
(Employee: $1,800
Employer: $1,530)
16.7%
$6,500
$2,405
(Employee: $1,300
Employer: $1,105)
$13,000
(16.7%)
$4,810
(Employee: $2,600
Employer: $2,210)
16.7%
$8,500
$2,516
(Employee: $1,360
Employer: $1,156)
$17,000
(16.7%)
$6,290
(Employee: $3,400
Employer: $2,890)
20.8%
$10,500
$2,516
(Employee: $1,360
Employer: $1,156)
$21,000
(16.7%)
$7,548
(Employee: $4,080
Employer: $3,468)
25%
Current Salary
CPF Contributions
6-Month Bonus
(As A % Of Annual Salary)
CPF Contributions On 6-Month Bonus
Additional CPF Contributions In %
$4,500
$1,665
(Employee: $900
Employer: $765)
$27,000
(50%)
$9,990
(Employee: $5,400
Employer: $4,590)
50%
$6,500
$2,405
(Employee: $1,300
Employer: $1,105)
$39,000
(50%)
$8,880
(Employee: $6,000
Employer: $5,100)
41.7%
$8,500
$2,516
(Employee: $1,360
Employer: $1,156)
$51,000
(50%)
$8,880
(Employee: $6,000
Employer: $5,100)
36.8%
If we get a 2-month bonus, we can see that we will get a full CPF contributions for all the salary levels stated in the examples. For a 6-month bonus, we need to be aware of whether we cross the $37,740 CPF contribution limit, which happens if we earn about $5,500 a month.
In many instances, choosing to go with a bonus beats the increase in CPF contributions that we get when opting for a 20% increase in salary. These are just examples, and we need to crunch the numbers on our own to decide the best outcome for ourselves.
#6 Paying Taxes
The last consideration is that we have to pay taxes on our salaries. If we get a salary increment, we have the time to consider the tax implications in the following year, and will have sufficient time to procrastinate or put in place plans to reduce our taxes.
If we receive an annual bonus, especially if it is given after our yearly review and in the month of December, there may not be sufficient time to reduce our taxes during the year.
Read Also: Complete Guide To Personal Income Tax Rates And Income Brackets In Singapore
Knowing The Implications Of Our Preference
Preferring a lump sum bonus could mean that we want to leave our jobs as soon as we can find a replacement OR it could also mean we will be better off receiving our employer CPF contributions share.
On the other hand, opting to go with a salary increment could just be that we want to be financially better off over a slightly longer term OR it could mean that we see ourselves growing at the company and rising up to take on senior-level responsibilities.
At the end of the day, we need to know why we have a certain preference, the implications of our preferences, as well as how our preferences may actually impact our career choices.
The post Which Would You Choose: An Annual Bonus Or A Salary Increment? appeared first on DollarsAndSense.sg.
