Our staff all got a bonus earlier this week as a nice surprise from our CEO. It totals £500 and I want to put it towards my pension. I’m only in my 30s, but I didn’t save much towards my pension earlier in my career and I’m determined to put that right.

Obviously usually, you get tax advantages when your pensions comes out of your salary, but that isn’t the case here, as I’ve already received the money. How can I put it towards my retirement as efficiently as possible, for tax purposes.

Beth

Tom Selby, AJ Bell Head of Retirement Policy, says:

Congratulations on earning a bonus and your very sensible decision to consider using it to boost your pension pot. However, it’s worth taking a moment to make sure this is the best course of action.

If you have any high-cost debts, such as a credit card, it usually makes sense to get these paid off first, so you aren’t unnecessarily racking up interest repayments. The next priority for most people is making sure they have an emergency ‘rainy-day’ pot of money in a high interest, easy access account, just in case you face an unexpected cost like your boiler breaking down or needing to pay for repairs to your car.

It’s up to you how large you want this emergency fund to be, although financial planners often recommend you have enough to cover three to six months’ fixed expenses.

LONGER-TERM INVESTMENT OPTIONS

Once you’ve got this sorted then you can start considering longer-term investments, including saving for your retirement. Although your £500 bonus has already been subject to income tax, you can effectively get this tax back by contributing to a pension.

This is probably easiest to illustrate with an example. If we ignore national insurance payments and assume you’re a basic-rate taxpayer, the £500 bonus payment should be subject to 20% income tax, meaning you receive £400 post-tax. If you took that £400 and paid it into a pension, it would automatically be boosted back up to £500 via basic-rate pension tax relief.

If you are a higher- or additional-rate taxpayer, you can claim back additional relief from HMRC. Any extra tax relief you are entitled to will usually be paid via a refund directly into your bank account, or an adjustment to your tax code.

As you are employed, your company should have a pension scheme for staff already and it will usually be possible to simply voluntarily top-up your contributions to that scheme if you want to. Alternatively, you might decide you prefer to set up a non-workplace pension, such as a SIPP (self-Invested personal pension).

The benefits of this can include greater investment choice and flexibility, although you should be aware that while charges in automatic enrolment ‘default’ funds (the investment in your workplace pension scheme you’ll be automatically placed in if you do nothing) are capped at 0.75%, no such charge cap exists outside workplace defaults.

It is, however, perfectly possible to build a diversified portfolio of investments on your own for less than 0.75%. If you don’t have the time or inclination to pick your own investments, lots of firms also offer good value, diversified ‘ready-made’ funds aimed at investors with varying risk appetites. Keeping your costs as low as possibly is crucial, as even small differences in charges can reduce the value of your pension by tens of thousands of pounds over the long-term.

THE CASE FOR SHOPPING AROUND

It’s vital to shop around before investing your hard-earned bonus, both for the right product and the best value provider. A pension is a fantastic long-term savings option, but it is not the only option. ISAs, for example, do not offer the upfront boost of pension tax relief but your money can grow tax-free, just like a pension.

In addition, ISAs can be accessed completely tax-free from any age, whereas a pension cannot normally be accessed until age 55 (with this age due to rise to 57 in 2028). A quarter of your pension withdrawals are normally tax-free, with the rest taxed in the same way as income.

As you are in your 30s, you also have the option of investing in a Lifetime ISA. These offer a 25% upfront bonus on up to £4,000 of subscriptions annually – the equivalent to basic-rate pension tax relief.  You need to be aged 18-39 to qualify and once you’ve subscribed the government will keep providing the 25% bonus on any more subscriptions you pay in until your 50th birthday.

You can withdraw your entire Lifetime ISA fund tax-free from age 60, if you use the funds for a deposit on a first home valued at £450,000 or less, or if you become terminally ill. However, if you access your cash in any other circumstances, you will pay a 25% government-imposed early withdrawal charge, meaning you might get back less than you originally invested.

Whichever product you decide is right for you, choosing a provider that offers value for money is crucial. A big part of this equation is costs and charges, but you may also choose to consider things like service, choice and flexibility.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

‹ Previous2023-12-14Next ›