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Should I save or invest my pension lump sum?

I am 65, recently paid off my mortgage and am claiming my NHS pension, while still working part-time.

I am now wondering if I could make the rest of my money work harder. I have some savings which have been boosted by the lump sum I received when I claimed my pension.

At the moment my money is in a 31 day notice account with my local building society paying around 2.5 per cent interest.

Tough decisions: Our reader, having received a lump sum from their pension is wondering whether they should stick to savings or invest for the time

Can I get more interest elsewhere, and is it worth locking some of the money away for several years in a fixed rate account?

Or should I invest some of the money – and if so, where? I have never invested before so don’t want to do anything high risk, and from what I understand the stock market is volatile at the moment.

Would it be better to keep all of the money in my savings account for now, and think about investing further down the line?

Ed Magnus of This is Money replies: A 31-day notice account paying 2.5 per cent is by no means a bad rate compared to the rest of the market.

The average notice account is paying 1.91 per cent, according to Moneyfacts, so you’re above the average rate.

Aldermore Bank is offering a slightly higher 2.8 per cent 30-day notice account. Other than that, there aren’t any better options unless you extend the notice period to 90 days, for example.

It’s worth keeping some money in your existing notice account as an emergency fund to fall back on as and when required.

Most personal finance experts believe that this should cover between three to six months worth of basic living expenses. 

You could also transfer this backup cash to an easy-access savings account to avoid having to wait out the notice period for every time you want to make a withdrawal.

The best easy-access deal, without any restrictions, pays 2.81 per cent so you could actually secure a better rate than your current deal.

– Check out the best easy-access rates here

What you do with your remaining lump sum will depend on when you feel you may want to access these funds in the future.

For any money you may need over the next few years, it would probably be best to stick to savings.

Fixed rate savings offer the best returns at present. The best paying one-year fix pays 4.4 per cent, the best two-year fix pays 4.85 per cent whilst the best three-year fix pays 4.9 per cent, for example.

If you were to put £20,000 in the best two-year fix for example, you would earn £1,987 in interest over that two-year period.

– Check out the best fixed rates here

However, if you have spare savings that you feel you won’t need for five years or more then you should consider investing.

Yes, it has been a torrid year for investors, but over the long run investing will typically trump savings.

In fact, this year is set to be one of only four years in the last 20 in which shares have performed worse than cash savings, according to research by Janus Henderson.

A bad year might put some nervous investors off, but ultimately it won’t mask the fact that investing outperforms cash over the long term.

CPI inflation at 10.1%: It means consumer prices are rising by more than five times the Bank of England's long-term target of 2 per cent. Not one savings rate gets close to matching it

CPI inflation at 10.1%: It means consumer prices are rising by more than five times the Bank of England’s long-term target of 2 per cent. Not one savings rate gets close to matching it

For example, £1,000 invested in the MSCI World Index 20 years ago would be worth £7,036 today, compared to £1,391 for cash. The MSCI World Index is a shares index that represents large and mid-cap companies in 23 developed markets.

Even someone who invested at the worst possible moment before the most recent downturn – in October 2007 before the global financial crisis – would have seen a £1,000 nest egg increase to £3,837 today. 

Cash deposited in a typical savings account at the same time would be worth £1,170 today, according to Janus Henderson.

We spoke to Mike Stimpson, partner at wealth manager Saltus, Laura McLean, chartered financial planner at The Private Office, and Gavin Jones, chartered financial planner at Old Mill to get their advice.

Should they keep some money in their notice account?

Gavin Jones replies: It’s a good idea to keep some of your savings in an easy-access or shorter notice account, like the 31-day notice account you currently have.

The interest rate you are getting on this account seems to be very competitive for 31 days notice.

This is effectively your ‘rainy-day’ fund that you can access quickly should any unforeseen expenses arise, or if you weren’t able to continue working for any reason and your NHS pension was not enough to cover your expenditure.

Is it worth using a fixed rate saver?

Mike Stimpson replies: It is possible to get higher interest rates than the 2.5 per cent you are currently receiving, particularly if you are prepared to tie their money up for longer periods – up to 4.9 per cent per year for three years in some cases.

However, it is worth remembering that these rates are still well below the short-term inflation rate.

Generally speaking, how long you lock your money away for depends on when you might need to spend it.

In this particular case, if their NHS pension more than covers their expenditure then they can afford to tie their money away for longer and take a little more risk with their cash.

Should they invest some of the money?

Laura McLean replies: Investing should only be considered where you have at least a five-year time horizon.

Markets can be volatile – as they are right now – and the risk of making a loss is higher over shorter periods.

Cash is really the only home for money you may need to access within this timeframe, to avoid the risk of needing to sell your investments when values have fallen.

If you can leave your funds for more than five years, investing can give you the opportunity for growth above cash returns and inflation.

Silent killer: While interest rates on savings accounts might make it seem like the value of your account is increasing, inflation could be causing your savings to lose value in real terms

Silent killer: While interest rates on savings accounts might make it seem like the value of your account is increasing, inflation could be causing your savings to lose value in real terms

But if you have not invested before, it is important that you are comfortable with the bumps in the road associated with investing when values can fall, which can be a shock to those used to savings accounts where the capital value does not fluctuate.

That said, any losses will only be realised if you sell – so having other funds held in cash which can be drawn upon when markets are down is important.

Mike Stimpson adds: It is also possible to invest without having large exposure to the stock market.

If you want to achieve returns that exceed saving in cash then you must be prepared to accept some volatility, but this can be managed in accordance with your attitude to risk and it should all even out in the long-term.

Is now the right time to invest?

Gavin Jones replies: If you are asking whether now is a good time to invest, then no one has a crystal ball to make that sort of forecast.

You will see lots of opinions in the media, and some of those opinions will turn out to be right; but they do not have any foresight.

The investor Warren Buffet once famously said ‘be fearful when others are greedy and be greedy when others are fearful’ – easy to say, but emotionally far more difficult to do.

Don't panic: Those who are watching the value of their investment plummet may be tempted to cash out and avoid further losses - but this could be the worst tactic

Don’t panic: Those who are watching the value of their investment plummet may be tempted to cash out and avoid further losses – but this could be the worst tactic

If you are prepared to take a long-term view and it is the right thing for you to do then it is a good time to invest.

We define a successful investment experience as one where you sleep soundly at night, understand the investment journey you are taking and which gives you a strong chance of achieving your future lifestyle goals.

Laura McLean adds: It is impossible to ‘time the market’ or know when the best moment is to invest or sell, it is however essential to ensure your ‘time in the market’ is over the long term.

How can they get started investing?

Ed Magnus replies: If you’re looking for the most cost-effective way to start investing you may wish to consider online DIY investing platforms.

This is Money has written an extensive guide on the best and cheapest DIY investing platforms, which might help you decide. 

Many of the investing platforms will allow you to invest in a large range of funds, investment trusts and individual stocks and shares – although the range of choice varies between providers.

Many of the platforms have also created their own list of best investment fund ideas, which can help narrow down the list.

Ultimately, aiming for a mix of funds which are diversified by security, geography and asset class is often deemed to be a sensible approach.

When weighing up which one to go for, it’s important to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.

Diversify: Gilts can still play a part of a well-diversified portfolio and could be held alongside other types of bond or other assets such as shares or cash.

Diversify: Aiming for a mix of funds which are diversified by security, geography and asset class is often considered a sensible approach

If you would rather not have to make any decisions yourself, there are also options that mean you won’t have to make a choice.

Online investment management services like Nutmeg, Moneyfarm and Wealthify will invest on your behalf in accordance with your personal risk profile.

Laura McLean adds: With regard to the investments themselves, building a diverse portfolio is key and this should align to the individual’s attitude to investment risk and the investment time horizon.

For example long term adventurous investors would likely have high allocations to risk assets such as equities, with shorter term or more cautious investors diversifying their portfolios with holdings of lower risk assets that traditionally provide downside protection, such as bonds or absolute return style funds.

Gavin Jones adds: There will also be explicit costs for investing and it is a complex area, so we would always advise working with a reputable financial planner who can help you understand how much money you need over time and whether it would be sensible to invest any money.

They will also explain investment risks and ask what you think about those, for example asking you what your definition of ‘high risk’ is.

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