CHOOSING THE RIGHT PENSION PAYMENT STRATEGY

When planning for your future, consider increasing your pension savings. But should you do this through a lump sum or by raising your regular contributions? In this article, we look at each option.

WHY INVEST IN YOUR PENSION PLAN?

First, it’s crucial to recognise the advantages of investing in your pension plan. Saving for your future is essential for your future financial independence and security, and your pension plan is one of the most tax-efficient ways to do it.

Pension tax relief on your contributions, employer contributions (especially if they offer a matching scheme) and investment growth potential are just a few of the benefits of investing in your pension plan. All these factors make contributions to your pension plan an effective way to maximise your savings.

SHOULD I MAKE A LUMP SUM PAYMENT INTO MY PENSION PLAN?

If you suddenly receive a large sum of money, such as an inheritance, work bonus or tax refund, should you invest it in your pension plan?

Exceeding your regular pension contributions can bring you closer to achieving your retirement savings goals. A lump sum payment is a quick and straightforward method to enhance your plan while utilising your pension annual allowance before the end of the tax year.

Investing your lump sum as soon as possible allows it more time to grow, giving you more money during retirement. Additionally, depositing a work bonus into your pension plan could save you on tax and National Insurance deductions.

However, ensure that your payment doesn’t exceed your pension annual allowance to avoid tax charges. For the 2023/24 tax year, the pension annual allowance is set at £60,000, and this is the total value that can be paid into all your pensions each tax year before triggering a tax charge. Lower limits may apply if you’re a high earner or you’ve already accessed a pension.

SHOULD I INCREASE MY REGULAR PENSION CONTRIBUTIONS?

If you can’t afford a lump sum payment but still want to save more for your future, consider…

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A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age).

The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level pf pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits.