Personal pension investing: lump sums vs monthly contributions

Usually, if you have a workplace pension, monthly contributions will be made to your pension straight from your salary and then invested into a default fund, or investments of your choice.

Once you’ve made the most of any pension contribution matching from your employer, or if you don’t have a workplace pension, you might decide to set up and pay into your own personal pension, like the HL Self-Invested Personal Pension. You can decide where to invest and how much to pay in and when.

But when it comes to making the most of your allowances and market movements, is it better to make lump sum payments or regular monthly contributions?

This article isn’t personal advice. If you’re not sure what’s right for you, please ask for financial advice. If you choose to invest you must be happy with the risk that the value of investments can always rise and fall, so it’s possible to get back more or less than you invest.

Pension and tax rules can change, and benefits depend on your circumstances. You can usually access your pension from age 55 (rising to 57 in 2028).

Regular pension contributions

Setting up or increasing regular pension payments is a great way to save towards retirement.

Benefits

• It’s good discipline

  Setting aside money automatically makes it easier to get into good habits. You won’t forget to save towards your future, because it happens at the same time every month.

• It takes the emotion out of your decisions

  Investing your monthly payments can be a good way to manage market volatility. The stock market will always go up and down, and typical knee jerk reactions are to buy when the price is low and sell when it’s high. Investing automatically removes the ‘trying to time the market’ mindset.

• It spreads costs throughout the tax year

  Regular payments are great for people who want to save but don’t have lump sums of cash available. It’s usually easy to pause, cancel or amend your monthly pension savings in line with what you can afford.

Drawbacks

• You need to keep an eye on your bank balance

  If you don’t have enough money in your bank to cover the direct debit each month, your bank can refuse to make the payment and may charge you.

• You might not be saving as much as you could afford

  Your affordability is likely to change along with your circumstances. It’s good practise to review your monthly payments regularly, and if you can afford to save more, then update your instruction. For example, you might increase your contributions in line with a pay rise.

Lump sum pension contributions

Making lump sum payments can help you to make the most of your pension and tax allowances in one go.

Benefits

• It could help you reach your retirement goals sooner

  If you have a financial windfall, you might consider paying a big lump sum into your pension to boost your savings. Just remember, your personal contributions can’t exceed your earnings or your annual allowance (usually £60,000).

• It’s flexible. The value isn’t fixed

  This could be particularly relevant if you’re self-employed or have irregular income patterns. Just paying in what you can afford to, when you can, is better than not paying in at all.

Drawbacks

• If you choose to invest, you won’t automatically benefit from pound-cost averaging

  Pound-cost averaging is a powerful way to help smooth out the ups and downs of the market. By investing monthly, you spread your risk by investing automatically in different market conditions. With lump sum contributions, you’ll have to give ad hoc investment instructions.

• It can be time-consuming

  You’ll need to set aside some time to make your contributions. It can also be easy to forget or delay making a payment.

Which option’s right for me?

This depends on several factors, like your saving habits, affordability, and employment status. If your circumstances allow it, you might decide to set up monthly payments and make additional one-off lump sum payments as and when you can afford to. Whatever method you choose, simply making sure that you’re paying into a pension for your future income needs is a great step.

More on contribution limits