Monthly premiums may deliver better results than annual lump sums
Joanne Smith, senior financial adviser with Moneycoach, shares tips on getting a better bang for your pension buck
Traditionally in self-employed professions the trend was to contribute to a pension in one lump sum on an
annual basis. However, not many people realise that it is possible to substantially increase the growth of your pension fund by contributing the SAME amount of money, but in regular monthly instalments instead of in one annual lump sum.
How does this work?
It is possible for market volatility to work in your favour, but market timing (buying when the market is
low and selling when it is high) is notoriously difficult – mis-timing your move could mean making some
unnecessary losses or missing out on substantial gains.
However, regular investing through a pension or savings product removes the need to get the timing right. Regularly investing small amounts of money into the market means you can benefit from something known as ‘euro-cost averaging’.
For example, if you invest a monthly sum of €500 into a fund, in a month in which the market falls, you will get more shares for your money, if the market rises, you will of course buy fewer shares, but your existing shares will also be worth more. Your contributions buy more units when prices are low. So, provided that the market subsequently improves, all the units purchased by your plan will benefit from this recovery.
There can be huge benefits to contributing to your pension on a monthly basis. It can also ease pressure on cash flow by spreading the contributions over the course of the year, which can be extremely beneficial to professionals with irregular & unpredictable income streams.