More than one in five (22%) workers have said they have never heard of salary sacrifice for their pension, Scottish Widows has revealed.

The financial services firm added that a further 31% said they know very little about the scheme.

It comes as the Scottish Widows found that workers could retire a year earlier by taking advantage of the benefit, which is available to anyone with a workplace pension.

Salary sacrifice, or salary exchange, is an arrangement where employees exchange part of their salary in return for an employer pension contribution.

As the salary is being exchanged rather than paid directly, it benefits both employers and employees as neither pays national insurance contributions on the amount exchanged, meaning there will never be a reduction in the employee’s take home pay.

The analysis by Scottish Widows shows that workers on an average of £34,963 a year could retire 12 months earlier than planned, by simply opting into the scheme.

Average salary workers, who take home £27,294 annually after tax, could increase their take home pay by £140 a year, by opting into their employer’s pension scheme and taking advantage of the tax benefits.

Workers redirecting this extra cash into their pension savings, alongside the savings that the employer makes through reduced national insurance contributions, could result in an extra £463 paid into their pension each year.

Over the course of 25 years, assuming 5.4% growth, could add £35,900 to their pension pot, which is equal to a whole year’s salary.

Retirement expert at Scottish Widows, Susan Hope, said: "The term ‘salary sacrifice’ is really misleading because neither employee nor employer needs to sacrifice anything. ‘Salary exchange’ is a much more accurate description because workers are essentially missing out on free money that they could be seeing in their take home pay or adding into their pension savings by not taking advantage of this scheme.

"While it might sound complicated, it’s just a slightly different way to make pension contributions and importantly, it will never mean workers take home less pay. A common myth that needs to be dispelled.

"Getting more people to save more for the future is incredibly important and increasing the awareness of salary exchange, while tackling some of the misconceptions, is one way to do this."

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