Is saving in cash a good idea to fund early retirement?

steveinfinity

My wife and I are planning early retirement next year. We're able to draw on a couple of final salary pensions but expect an annual shortfall of £15k between early retirement and when my other pensions mature in 2025.

We've saved up a fund of £75k to cover this but it's in cash ISA's and 90 day notice accounts which are returning about 2%.

Would it make more sense to put this money into one of my private pensions in order to claim tax relief and then draw down £15k per year till 2025? I believe you can claim tax relief for this year and the previous three.

mark55man

so cash is bad long term but short term is OK and 2% is only marginally less than inflation

wrt to tax relief. As long as you have taxable income in this year you can
* you can pay £40K into your pension from this years allowance (unless you have made some contributions already used or it is restricted eg MPAA)
* you can pay £40K into your pension from the last three years, but you can't use income/tax from those previous years

Ie assuming you made no pension contributions in last 4 years you could pay £160000 into your pension and get tax relief provided you had £160000 of income in THIS year

I'm not a professional, but that's how I've always understood it

At the lower end of the scale you could consider contributing to your partner's scheme as even is they earned the Personal Allowance you get get tax relief of money that counts towards tax (independently of whether you were actually liable to pay any) - so if your partner earned £10K and was liable to £0 tax you could still get tax relief on £10K

tacpot12

If you can get tax relief on all of your £75K by putting it in your SIPP, you will be getting a 20% return on the money, which is better than inflation.

You might even invest some of the money into very low risk investments such a Money Market fund. Such funds should return more than the rate of interest that the SIPP provider pays. Check the interest rate on cash held in your SIPP.

mark55man

I think you would need to check if savings counts as income - personally I very much doubt it.

that is you can't shovel in your life savings to get a 20% boost at he point of adding them into your pension fund

xylophone

Re tax relief

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-relief-and-contributions


With regard to "carry forward" see

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.

You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.

xylophone

I think you would need to check if savings counts as income - personally I very much doubt it.

He might contribute to his workplace pension from his salary and to his Sipp from his savings.


The important point (for tax relief) is that the contributions are covered by his relevant earnings and are within the annual allowance.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/pension-contributions-the-basics/

SMcGill

Would it make more sense to put this money into one of my private pensions in order to claim tax relief and then draw down £15k per year till 2025? I believe you can claim tax relief for this year and the previous three.

It’s what I’m doing. I’m not a financial expert but it seems worth considering moving at least the money from your 90 day account into your personal pension if this will allow you to take advantage of carry forward rules while you’re still working.

nigelbb

When you are within a few years of drawing your pension you have a big incentive to pay as much as possible into your pension in the knowledge that you will be accessing the money in only a few years. In the short term you don't need to worry about investments as the tax savings are guaranteed & risk free. If like many you are currently a higher rate tax payer but will not have pensions exceeding £50K then laundering your money through a pension reduces your tax from 40% down to 15%. Don't forget that to help your cashflow & maximise what you wash through the pension you can take up to £7.5K/year as a TFLS even while you are paying in to your pension.

steveinfinity

Many thanks for all your replies. Its seems that this is possible within the limits given above. I’ll give this some further thought and keep all your advice in mind.