Lump sum payments vs regular contributions: how to decide which pension payment option could be right for you

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If you’re looking to prioritise saving for your future, you might be thinking about paying some more money into your pension plan. But is it better to do this through a lump sum or by increasing your regular contributions? Here’s what you need to know about each option to help you make the decision.

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Why should I put money into my pension plan? 

First, it’s important to understand the benefits of putting money into your plan. It goes without saying that saving for your future in any way is a great thing – but your pension plan is one of the most tax efficient ways to do it. 

For starters you get pension tax relief on your contributions. Typically, this means you can get a top up from the government on the payments you make into your pension plan, so it can effectively cost you less to save more. Some workplace pension schemes offer tax benefits in a different way, so do check with your employer how this works for you if you’re not sure. You can find out how it works in our guide to pension tax relief.

Also, if you’ve got a workplace pension then your employer has to contribute to your plan too. Your employer might even offer a matching scheme where they match what you pay up to a certain percentage.

Plus, your pension savings are invested. So anything you pay into your plan has the potential to grow and benefit from compounding. Remember the value of investments can go down as well as up and you may get back less than was paid in.

When you take all these benefits into account, putting any extra money you have into your pension plan could be a good way to make it work harder for you.

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Is it worth putting a lump sum into your pension plan?

If you find yourself with a sudden windfall – for example, an inheritance, a work bonus or a tax refund – should you put it into your pension plan?

Going above and beyond your regular pension contributions can get you closer to achieving your retirement savings goals. And paying in a lump sum is a quick and easy way to give your plan a boost. It could also be a handy way to use up some of your pension annual allowance before the end of the tax year.

Anything you pay in could benefit from the tax benefits and investment growth we mentioned earlier. In fact, the sooner you can invest your lump sum, the more time it will have to grow, potentially giving you more money in retirement.

Putting a work bonus into your pension plan could mean that you save on tax and National Insurance deductions too, meaning you get to keep more of it in the long run. Find out how this works in our article on bonus sacrifice.

Just make sure that the amount you’re paying in won’t take you over your pension annual allowance or you might face a tax charge. For the 2022/23 tax year, the annual allowance is £40,000 or your total salary, whichever is lower. But it's going up to £60,000 in the new tax year. Although it might be less if you’re a high earner or have already started taking money out of your pension savings. 

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Is it worth increasing my pension contributions?

Maybe you can’t afford to make a one-off payment now, but you do want to save more towards your future. You might not have a lump sum of money, but you’ve had a salary increase or maybe you’ve been reviewing your finances and have cancelled subscriptions or services. In this case, increasing your regular contributions might be the way to go. 

Increasing your regular pension contributions when you can afford to is a really great habit to get into. A small increase may not seem like much, but over time it can add up - particularly when you take into account the tax benefits and potential investment growth we mentioned earlier. Plus paying in smaller amounts regularly could also benefit from pound cost averaging. 

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What is pound cost averaging?

This is where you invest a smaller sum of money at regular intervals, rather than investing a larger chunk in one go. The reason you might want to do this is because it can reduce the risk and impact of investing a lot of money just before any potential market drops. 

For example, if you invest a lump sum of £12,000 and the market then drops over the next year, your investment could end up down 10%. But if you spread that investment out and invest £1000 each month across the year and the market drops in the same way, then you buy into the market at a lower price each time, meaning your overall investment may only drop by 5% in total. Although on the flip side, if markets rise rather than fall over the same period, you’ll make smaller profits than you would have if you’d invested the lump sum.

History has shown that markets usually recover in the long term, so although pound cost averaging might not necessarily bring you better returns, it could make it a bit easier to deal with any significant drops in the market.

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Which option is right for me?

Ultimately the best option for you is the one you can afford to do. You could even consider doing a combination of both if your circumstances allow it. Both options will allow you to potentially grow your pension pot and give you more for your future.

And don’t forget the last day of the tax year is 5 April – that’s your deadline for making the most of your pension annual allowance for the 2022/23 tax year. Watch our video for five quick tips on how to take advantage of your pension benefits before tax year end.

If you want to pay more into your Standard Life pension plan, whether that’s topping up your regular contributions or paying in a lump sum, you can do it easily online. Just log in to or register for our online services to get started, or log in through your app.  

Have a workplace pension plan with us? The way in which you can pay more into your plan is slightly different – but just as quick and easy. To find out how, speak to your employer.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

The information in this article is based on our understanding in March 2023 and shouldn’t be taken as financial advice.