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Enhancing retirement through lump sum contributions

Contributing additional amounts to your pension could stand to benefit you significantly in the long term

Recent research findings have brought to light a striking observation: fewer than 10% of adults in the UK contribute occasional lump sums to their pensions[1]. This statistic is particularly surprising given that such contributions could significantly amplify one’s retirement savings.

Analysis reveals that even modest lump sum investments can significantly increase the overall size of one’s pension pot due to the power of compound growth over time. For example, starting with an annual salary of £25,000 and contributing the auto-enrolment minimum (5% from the employee and 3% from the employer) from age 22 could lead to a retirement fund of around £434,000 by 66 [2].

Yet, by adding nine lump sum payments of £500 every five years from age 25 to 65, one could enhance one’s retirement savings by an additional £11,000. Those capable of making heftier contributions, such as £5,000 every five years, could see their pension pot grow to £549,000, which is £115,000 more than without any lump sum additions, not accounting for inflation.

Value of forward-thinking financial decisions

Encountering unexpected financial windfalls, whether through bonuses, gifts or other means, often tempts immediate expenditure. Currently, many are directing these extra funds towards managing monthly expenses. However, those who are financially able to contribute additional amounts to their pension stand to benefit significantly in the long term.

Pensions offer tax efficiency and the potential to outpace both inflation and interest rates on savings accounts, making them a wise choice for securing one’s financial future. With the end of the fiscal year having passed, and with it the expectation of annual bonuses for many, allocating a portion of this windfall towards a pension could substantially impact one’s retirement lifestyle.

Role of employers and providers in future planning

Employers and pension providers play a crucial role in educating individuals about the importance of long-term financial planning. It is essential to illustrate how pensions fit within a broader financial context, ensuring individuals perceive retirement savings as a key component of their overall financial strategy.

These efforts can empower individuals with the knowledge and resources needed to make informed decisions about their financial future, fostering a proactive engagement and planning culture.

Source data:

[1] Boxclever conducted research for Standard Life among 6,350 UK adults. Fieldwork was conducted 26 July–9 August 2023. Data was weighted post-fieldwork to ensure the data remained nationally representative on key demographics.

[2] Calculations assume the following: Starting salary £25,000 – Employer contributions 3.00% – Employee contributions 5.00% – Investment growth 5.00% – Salary growth 3.50% – Annual investment costs 1.00%

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

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 OF PENSION BENEFITS AVAILABLE. 

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

Adam Reeves

Author: Adam Reeves

DipPFS Cert CII (MP&ER)
Independent Financial Planner, Wealth Manager, Director

Last updated on

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Adam did a review of our financial situation, confirmed that Flexible Drawdown best suited our needs as a family, and then did all the research into the best product for us. He will continue to monitor it for me. He acted extremely promptly because we had a deadline for requiring the lump sum; went out of his way arranging meetings during non-office hours, was professional yet friendly and explained a difficult subject very well.

Clare – East Sussex

Adam did a thorough review of my pension policies, clearly explained how well they had performed, how flexible they were, how the market regulation has changed, and, crucially, what the tax implications would be if I were to leave them untouched. He accurately assessed my attitude to risk and recommended an up-to-date solution that will offer me the greatest flexibility at retirement.

Greg – East Sussex

Adam was quick to assess & understand my situation, and was able to discuss & communicate in a very concise and simple way the various options available to me, taking time for me to understand and clarify where necessary. My understanding & knowledge of taxation & pensions has increased significantly allowing me to feel much happier making financial decisions for the future.

Rob – West Sussex

Adam and his team undertook in-depth research into our existing QROPS schemes and clearly set out both pros and cons of transferring the funds back to the UK. Having decided to go ahead with the transfer, Adam and his team worked extremely hard to facilitate the transfer. The QROPS pension trustees were not always the most professional or responsive organisation – however we were very grateful for the perseverance and commitment that Adam showed us as clients.

Jonathan – East Sussex

Adam offered a range of financial products , the one he suggested was affordable and proved to be a good choice.  Returns on investments have exceeded my expectations, based on Adam’s advice and guidance. Profits have enabled house improvements to take place.

David - Surrey

Adam arranged an appointment very timely, he explained his role and qualifications as an IFA giving me reassurance , we went through my retirement and investment goals. Adam discussed my options explaining in great detail, I felt relaxed during our discussions allowing me to fully understand my choices. I feel very confident in the financial advice allowing me to enjoy my retirement.

I was very happy with Adam’s recommendations and explanations of financial products which would suit my retirement goals, I feel this has helped me review and reduce my financial risk as I reach retirement, leaving me feeling confident that I can enjoy my retirement plans.

Ron – West Sussex

After initial meeting Adam put together a very detailed and thorough written plan. At our second meeting he went through the whole booklet and explained everything in layman’s terms which made it a lot easier to understand.

I am very happy with everything that was suggested and put in place especially with something as big and important as pensions. Adam and his team have taken a huge weight off my shoulders and I would highly recommend their services to anyone needing help with their financial planning and pension.  Adam couldn’t have been more helpful, and even came outside his normal area to meet me on a number of occasions.

Richard - Kent

Unfortunately I had to claim on my critical illness insurance due to my wife being ill and because of the sound advice Adam gave in acquiring this insurance we ended up being financially safe through a tough time.

Steve - Kent
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Data is compiled by Adviser Portals Ltd every 60 minutes. Information is not realtime. Last updated: 24/07/2024 at 05:00 PM
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