How should you use a lump sum of money as you approach retirement?


Whether it’s an unexpected windfall generated by your investments, or you’ve received an inheritance from a loved one, knowing how to manage a lump sum as you approach retirement is crucial.

When you work with us at Britannic Place, we’ll always include every aspect of your money in the financial plan we design for you. That means we can plan for some of the more predictable lump sums you might be expecting, such as the 25% tax-free pension lump sum or perhaps the proceeds from a business sale.

But unless you have a crystal ball, it’s impossible for you to plan around money that you don’t yet know you’ll have at your disposal. That’s why it’s important to know how to manage this money prudently and in line with your wider strategy if and when it comes.

So, here are a few things you could consider doing with a lump sum of money as you approach retirement.

Check that your emergency fund is sufficient

Firstly, you should check that you have sufficient money saved as an “emergency fund”.

You never know when you’ll suddenly need access to a large amount of cash in a pinch. Especially with winter just around the corner, adverse weather damaging your home or events such as your boiler needing replacing can lead to unexpected bills that need paying quickly.

At times like these, having immediate access to funds held in an easy access cash account can be vital. As a result, holding at least a portion of your lump sum like this can be a judicious choice.

Views on this vary greatly, but it can be sensible to have at least six months and up to two years’ expenses in your emergency fund during retirement.

Clear outstanding debts

Next, you may want to consider clearing any outstanding debts you have, such as on credit cards.

You might think that pre-retirees wouldn’t need to worry about debt, as this stage is often associated with your greatest earning potential near the end of your career.

But actually, research by insurance provider Aviva shows that two in five people between the ages of 55 and 64 currently describe themselves as “up to their neck in debt”.

Debt can quickly become burdensome in retirement, costing you a great deal of money in interest that’s doing nothing more than eating into your diligently earned savings.

That’s why it can be useful to clear debt as soon as possible by using your lump sum.

Pay off your mortgage

As well as clearing outstanding credit card debts, you could also consider paying off your mortgage ahead of retirement.

While you’re working, making mortgage repayments from your income seems like no issue. But as your income will typically dip in retirement, paying off your home loan can put immense pressure on money you’ve set aside for your later-life goals.

For example, if you have a fixed-rate mortgage with monthly repayments of £1,000 that’s set to finish three years after you intend to retire, you’ll need to pay £36,000 from your pension or other savings and investments in retirement.

As a result, repaying your mortgage sooner with your lump sum  could free up your finances so you’re able to achieve your retirement goals without having to factor in this cost.

It’s important to note that mortgages often come with early repayment charges (ERCs). So, check with your provider whether you will have to pay ERCs before you make any additional payments.

Invest it in the stock market

If you’re confident that you have a sufficient emergency fund and you have no debts that you’re in a rush to clear, you could consider investing your money in the stock market and trying to generate a return on it.

By investing your lump sum rather than saving it in cash, you may be giving your money a greater chance of keeping up with or even outpacing high inflation.

Similarly, the potential returns your investments might generate could be instrumental in helping you to achieve your retirement goals.

There’s no pressure to immediately invest your entire sum at once, of course. You could drip feed it into the market in the months or years leading up to retirement to help smooth out returns over time from volatile market periods.

It’s important to remember that there’s always a risk your invested money will fall in value rather than rise, and you may get back less of your lump sum than you invest.

Make sure you speak to an expert before putting your money in the market.

Contribute it to your pension

Beyond investing your lump sum, you could also consider contributing it to your pension.

The powerful combination of tax relief at your marginal rate of Income Tax alongside the potential investment returns your contributions can generate can make your pension a good home for your lump sum.

Depending on how close you are to retirement, it may also be an opportunity to give your pot one last boost before you begin drawing on your funds.

Contributing to your pension can also help reduce a potential Inheritance Tax (IHT) bill when you pass away, as pensions will typically fall outside the value of your estate. So, if IHT is a concern for you, holding your lump sum within your pension could lessen the bill your family might face on your death.

It’s important to keep in mind that you may be reaching key pension thresholds at this stage of your life. For example, you might exceed your pension Annual Allowance in the current tax year, which limits how much of your savings can be made tax-efficiently.

Additionally, you may be approaching the Lifetime Allowance (LTA), a maximum cap on how much you can save into all your pensions without incurring a tax charge when you come to draw on them.

Speak to us if you’re unsure whether these thresholds will affect you.

Want to know the best ways to manage a lump sum for you? Speak to us

Knowing which of these options is best for you in your specific circumstances can be tricky. So, if you’d like advice from a financial expert, please speak to us at Britannic Place.

Email info@britannicplace.co.uk or call 01905 419890 to get in touch today.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, 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.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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