A bonus can be a real boost for your finances and allow you to make new plans you’d never even considered. You’ll always remember your first bonus, but as with so much in life, it’s important to take the time to think about what you do with it.
The urge will always be there for many of us to splash out on a holiday, or a car, or some other big one-off item, and that can be – and often is – a great use of the money.
However, for those thinking longer term, an annual bonus could also be used to help you meet some goals for your future.
The average bonus paid to workers in the UK is £2,242, which could be comfortably enough to start saving and investing with. Of course, this often varies considerably by industry and your level of experience, meaning many people may end up with far more.
Below, we set out how you can make the most of your annual bonus.
The 80/20 rule
A bonus is a reward, so don’t feel guilty for spending a little bit of it on yourself. You’ve worked hard for it. A good guide might be to use the 80/20 rule – enjoy 20% of it and allocate 80% towards making your money work harder now, to enjoy more in future.
For example, let’s assume you received the average £2,242 bonus last year. If you followed the 80/20 concept, you would have £448.40 to spend today and £1,793.60 to put towards bolstering your finances.
Boost your pension
Contributing to a pension is a great tax-efficient way to save for your future. You’re likely to have already paid income tax on your bonus. Because of the tax relief that comes with paying into a pension, you have the chance to recoup the tax you’ve already paid – effectively, you could almost think of it as getting your bonus invested tax-free.
You’re probably paying into a workplace pension already, but you can also pay into a personal pension and keep a closer eye on how your money’s projected to perform.
Adding a one-off lump sum can have a significant effect on your pot size, which – over time – can make a big difference to your final pot size. This is your chance to really enhance your retirement.
This happens thanks to the power of compounding, which gives the extra returns your pot has earned the chance to make further returns over the long term, meaning your money has the potential to grow quicker.
Pay for advice
We know that many people are put off investing because they aren’t comfortable with how it works. One way to tackle this is to use your bonus to pay for, and then act on, professional advice.
An hour or two prioritising your goals – and how you can achieve them – with a trained expert can change your financial future, so it’s well worth considering. For those who need a little extra help, Nutmeg offers a one-to-one advice service where one of our qualified advisers will offer you tailored recommendations based on your personal situation. The fee of just £350 inc. VAT can be a small price to pay to receive the value and benefit of a tailored action plan.
Open a stocks and shares ISA or a Lifetime ISA
If you’re a first-time house buyer aged 18-39, a Lifetime ISA is a great way to start saving and investing up to £4,000 a year towards your first property. It can also be used for your retirement. The government gives a 25% bonus on top of the contributions you make to the Lifetime ISA, which can be a welcome push to get you up and onto the property ladder or to support you when it’s time to retire.
At Nutmeg, we build stocks and shares ISA and Lifetime ISA diversified portfolios based on how much risk you want to take and what your financial goals are.
Take the chance to enhance it – make your bonus count for more
With a little thought, a bonus can become so much more than it might appear at first. While it might seem tempting to start spending straight away, there’s more to be gained from balancing short-term needs with long-term goals.
Whether it’s taking some financial advice, or looking for the tax benefits on offer from a pension or an ISA, a bonus is a real chance to set yourself up for financial confidence and security. Take it.
- Aaron Wallis Sales Recruitment, compiled using ONS data
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatments depend on individual circumstances and may be subject to change in the future. Past or future performance indicators are not a reliable indicator of future performance.