Answered by Michael Englefield
When’s the best time to put a lump sum in my pension?
The short answer is as soon as possible.
The sooner you invest a lump sum in your pension, the longer it will have to grow. The later your start saving, the more you’ll have to pay into your pension to achieve the best retirement income.
You’ll also be able to take on more investment risk if you invest a lump sum early on, which could offer more chance for growth.
This is opposed to investing later in life as you approach retirement, when it’s likely your pension pot will effectively be ‘de-risking’. This involves a shift into safer investments, such as cash and gilts, to help insulate you from market shocks at a stage in your life where you don’t have much time left before retirement to rebuild your fund should it suffer heavy losses.
As you’ve mentioned, investing into a pension – whether regularly or as a lump sum – is a tax-efficient investment choice. You’ll benefit from valuable tax relief on any lump sum contribution into your pension, worth 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.
However, remember that you won’t be able to get your hands on your savings again until you reach the age of 55.
You’ll need to be certain that you won’t need to access to your money earlier than age 55 before you act. You haven’t mentioned any family, but some parents – acting in the capacity of the Bank of Mum and Dad – are increasingly offering their children help with a mortgage deposit, for example. Locking away a lump sum in your pension today might mean you don’t have access to your cash if you need it.
If you’re not sure, then it might be worth putting some of your lump sum into a pension and the remainder somewhere more easily accessible.
Make sure you get financial advice…
Although you’ve used up your ISA allowance for this year, there’s always next year’s to consider. From April 2017, this rises to £20,000.
Make use of the personal savings allowance
The government introduced a personal savings allowance from April 2016 which means a basic rate (20%) taxpayer can earn £1,000 in interest on their savings without paying tax and a higher rate (40%) taxpayer can earn up to £500 before tax is charged. (Additional rate [45%] taxpayers don’t get this allowance.)
With interest rates so low at the moment, assuming you’re a basic or higher rate taxpayer, the £1,000 or £500 allowance might be sufficient to cover any interest earned while you wait for April 2017.
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