Best way to build and drawdown a cash buffer for retirement?

GazzaBloom

I want to build a cash buffer for use in retirement to draw from when investments take a downturn. I am saving salary sacrifice in my workplace pension and increasing contributions from my March salary that will be in a position see me maximise the savings up to the tax advantageous £40K limit per tax year including my employers contributions. I can afford to keep this level of salary sacrifice going until retirement (or I lose my job!) My target is to have an amount roughy equal to around 4 x annual retirement expenses held as cash alongside my investments for peace of mind in a prolonged downturn and to save having to drawdown from investments during that period. 

My question is how best to build a cash buffer, I'm assuming that the most efficient way is to divert some/or all of the salary sacrifice to just cash of a cash type fund within the pension for a period of time rather than save from net salary, would that be correct?

Also, if that was the case, once in retirement drawdown, with the cash buffer locked in to the pension, and so subject to 25% tax free/75% taxable as it's withdrawn, what's the best way of accessing the cash when I need to? Do I move it all into drawdown as the 25% tax free sum at start of retirement and consider withdrawal tax free into ISAs/Savings accounts? Leave it in the uncrystallised pension then move it to drawdown when I need it down the road potentially taking as 25% tax free and 75% taxable?

Any thoughts on strategies or tips on how best to build and then use a cash buffer (when needed) either inside a pension, uncrystallised, crystallised into a drawdown account or withdrawn to savings accounts/Cash ISAs would be welcome.

Keep_pedalling

Do you actually need to hold that amount of cash in retirement? Based on previous threads you have DB and SP that provide you with some guaranteed income that does not need cover. 

GazzaBloom

Keep_pedalling said:

Do you actually need to hold that amount of cash in retirement? Based on previous threads you have DB and SP that provide you with some guaranteed income that does not need cover. 

Thanks, I tentatively plan to retire maybe 8 years or more early before the SP kicks in, DB pension will only provide £6K a year so some way short of required annual expenses. In that 8/9 years I will be reliant of DC pension for drawdown quite heavily to cover the majority of expenses.

BritishInvestor

GazzaBloom said:

I want to build a cash buffer for use in retirement to draw from when investments take a downturn. I am saving salary sacrifice in my workplace pension and increasing contributions from my March salary that will be in a position see me maximise the savings up to the tax advantageous £40K limit per tax year including my employers contributions. I can afford to keep this level of salary sacrifice going until retirement (or I lose my job!) My target is to have an amount roughy equal to around 4 x annual retirement expenses held as cash alongside my investments for peace of mind in a prolonged downturn and to save having to drawdown from investments during that period. 

My question is how best to build a cash buffer, I'm assuming that the most efficient way is to divert some/or all of the salary sacrifice to just cash of a cash type fund within the pension for a period of time rather than save from net salary, would that be correct?

Also, if that was the case, once in retirement drawdown, with the cash buffer locked in to the pension, and so subject to 25% tax free/75% taxable as it's withdrawn, what's the best way of accessing the cash when I need to? Do I move it all into drawdown as the 25% tax free sum at start of retirement and consider withdrawal tax free into ISAs/Savings accounts? Leave it in the uncrystallised pension then move it to drawdown when I need it down the road potentially taking as 25% tax free and 75% taxable?

Any thoughts on strategies or tips on how best to build and then use a cash buffer (when needed) either inside a pension, uncrystallised, crystallised into a drawdown account or withdrawn to savings accounts/Cash ISAs would be welcome.

What's the high-level asset allocation (bonds/equities) aside from the planned buffer?

GazzaBloom

BritishInvestor said:

GazzaBloom said:

I want to build a cash buffer for use in retirement to draw from when investments take a downturn. I am saving salary sacrifice in my workplace pension and increasing contributions from my March salary that will be in a position see me maximise the savings up to the tax advantageous £40K limit per tax year including my employers contributions. I can afford to keep this level of salary sacrifice going until retirement (or I lose my job!) My target is to have an amount roughy equal to around 4 x annual retirement expenses held as cash alongside my investments for peace of mind in a prolonged downturn and to save having to drawdown from investments during that period. 

My question is how best to build a cash buffer, I'm assuming that the most efficient way is to divert some/or all of the salary sacrifice to just cash of a cash type fund within the pension for a period of time rather than save from net salary, would that be correct?

Also, if that was the case, once in retirement drawdown, with the cash buffer locked in to the pension, and so subject to 25% tax free/75% taxable as it's withdrawn, what's the best way of accessing the cash when I need to? Do I move it all into drawdown as the 25% tax free sum at start of retirement and consider withdrawal tax free into ISAs/Savings accounts? Leave it in the uncrystallised pension then move it to drawdown when I need it down the road potentially taking as 25% tax free and 75% taxable?

Any thoughts on strategies or tips on how best to build and then use a cash buffer (when needed) either inside a pension, uncrystallised, crystallised into a drawdown account or withdrawn to savings accounts/Cash ISAs would be welcome.

What's the high-level asset allocation (bonds/equities) aside from the planned buffer?

Currently 100% equities

BritishInvestor

GazzaBloom said:

BritishInvestor said:

GazzaBloom said:

I want to build a cash buffer for use in retirement to draw from when investments take a downturn. I am saving salary sacrifice in my workplace pension and increasing contributions from my March salary that will be in a position see me maximise the savings up to the tax advantageous £40K limit per tax year including my employers contributions. I can afford to keep this level of salary sacrifice going until retirement (or I lose my job!) My target is to have an amount roughy equal to around 4 x annual retirement expenses held as cash alongside my investments for peace of mind in a prolonged downturn and to save having to drawdown from investments during that period. 

My question is how best to build a cash buffer, I'm assuming that the most efficient way is to divert some/or all of the salary sacrifice to just cash of a cash type fund within the pension for a period of time rather than save from net salary, would that be correct?

Also, if that was the case, once in retirement drawdown, with the cash buffer locked in to the pension, and so subject to 25% tax free/75% taxable as it's withdrawn, what's the best way of accessing the cash when I need to? Do I move it all into drawdown as the 25% tax free sum at start of retirement and consider withdrawal tax free into ISAs/Savings accounts? Leave it in the uncrystallised pension then move it to drawdown when I need it down the road potentially taking as 25% tax free and 75% taxable?

Any thoughts on strategies or tips on how best to build and then use a cash buffer (when needed) either inside a pension, uncrystallised, crystallised into a drawdown account or withdrawn to savings accounts/Cash ISAs would be welcome.

What's the high-level asset allocation (bonds/equities) aside from the planned buffer?

Currently 100% equities

Before thinking about buffers etc I would want to understand how much equity % was required to give the plan a good chance of succeeding and also was something that I was happy to stick with during market downturns. Even if you reduce the equity % to around 85% (with ~4 years of 4% cash), this is still at the high end of what is "typical".

If you model lower equity % in Timeline does the failure rate/worst case outcomes become unacceptable for your plan?

NedS

GazzaBloom said:

Keep_pedalling said:

Do you actually need to hold that amount of cash in retirement? Based on previous threads you have DB and SP that provide you with some guaranteed income that does not need cover. 

Thanks, I tentatively plan to retire maybe 8 years or more early before the SP kicks in, DB pension will only provide £6K a year so some way short of required annual expenses. In that 8/9 years I will be reliant of DC pension for drawdown quite heavily to cover the majority of expenses.

Another approach maybe to look to cover those 8 years deficit, maybe holding 4 years of cash required to top up the £6K DB, and the remaining 4-5 years in a defensive fund to take you through to SPA. The rest can then stay in a high risk equity allocation.

I don't think it really matters if your cash is held within a tax wrapper (pension) or not. If you have the capacity to save more than the £40k per year you are pushing into the pension, then it probably makes sense to hold short term cash outside of the pension (e.g, premium bonds etc) and keep equities in the pension.

NannaH

Enough in the cash pension fund for tax free income (taking into account DB income).   So if DB is £5k,  you could take @ £11k TFLS. So £11k x 5 years or whatever in pension cash. 
Whatever other income required in cash savings.
Those are our plans anyway,  plus me transferring some of my PA under the married allowance.
We will be able to have at least £25k a year tax free income until State pension age.  

GazzaBloom

BritishInvestor said:

GazzaBloom said:

BritishInvestor said:

GazzaBloom said:

I want to build a cash buffer for use in retirement to draw from when investments take a downturn. I am saving salary sacrifice in my workplace pension and increasing contributions from my March salary that will be in a position see me maximise the savings up to the tax advantageous £40K limit per tax year including my employers contributions. I can afford to keep this level of salary sacrifice going until retirement (or I lose my job!) My target is to have an amount roughy equal to around 4 x annual retirement expenses held as cash alongside my investments for peace of mind in a prolonged downturn and to save having to drawdown from investments during that period. 

My question is how best to build a cash buffer, I'm assuming that the most efficient way is to divert some/or all of the salary sacrifice to just cash of a cash type fund within the pension for a period of time rather than save from net salary, would that be correct?

Also, if that was the case, once in retirement drawdown, with the cash buffer locked in to the pension, and so subject to 25% tax free/75% taxable as it's withdrawn, what's the best way of accessing the cash when I need to? Do I move it all into drawdown as the 25% tax free sum at start of retirement and consider withdrawal tax free into ISAs/Savings accounts? Leave it in the uncrystallised pension then move it to drawdown when I need it down the road potentially taking as 25% tax free and 75% taxable?

Any thoughts on strategies or tips on how best to build and then use a cash buffer (when needed) either inside a pension, uncrystallised, crystallised into a drawdown account or withdrawn to savings accounts/Cash ISAs would be welcome.

What's the high-level asset allocation (bonds/equities) aside from the planned buffer?

Currently 100% equities

Before thinking about buffers etc I would want to understand how much equity % was required to give the plan a good chance of succeeding and also was something that I was happy to stick with during market downturns. Even if you reduce the equity % to around 85% (with ~4 years of 4% cash), this is still at the high end of what is "typical".

If you model lower equity % in Timeline does the failure rate/worst case outcomes become unacceptable for your plan?

Thanks I'll have a play around with lower mix of equities in Timeline and see how it looks

GazzaBloom

NedS said:

GazzaBloom said:

Keep_pedalling said:

Do you actually need to hold that amount of cash in retirement? Based on previous threads you have DB and SP that provide you with some guaranteed income that does not need cover. 

Thanks, I tentatively plan to retire maybe 8 years or more early before the SP kicks in, DB pension will only provide £6K a year so some way short of required annual expenses. In that 8/9 years I will be reliant of DC pension for drawdown quite heavily to cover the majority of expenses.

Another approach maybe to look to cover those 8 years deficit, maybe holding 4 years of cash required to top up the £6K DB, and the remaining 4-5 years in a defensive fund to take you through to SPA. The rest can then stay in a high risk equity allocation.

I don't think it really matters if your cash is held within a tax wrapper (pension) or not. If you have the capacity to save more than the £40k per year you are pushing into the pension, then it probably makes sense to hold short term cash outside of the pension (e.g, premium bonds etc) and keep equities in the pension.

We will be able to save more than the max salary sacrifice from earnings net of tax so I plan to put extra into S&S and/or Cash ISA

Albermarle

GazzaBloom said:

NedS said:

GazzaBloom said:

Keep_pedalling said:

Do you actually need to hold that amount of cash in retirement? Based on previous threads you have DB and SP that provide you with some guaranteed income that does not need cover. 

Thanks, I tentatively plan to retire maybe 8 years or more early before the SP kicks in, DB pension will only provide £6K a year so some way short of required annual expenses. In that 8/9 years I will be reliant of DC pension for drawdown quite heavily to cover the majority of expenses.

Another approach maybe to look to cover those 8 years deficit, maybe holding 4 years of cash required to top up the £6K DB, and the remaining 4-5 years in a defensive fund to take you through to SPA. The rest can then stay in a high risk equity allocation.

I don't think it really matters if your cash is held within a tax wrapper (pension) or not. If you have the capacity to save more than the £40k per year you are pushing into the pension, then it probably makes sense to hold short term cash outside of the pension (e.g, premium bonds etc) and keep equities in the pension.

We will be able to save more than the max salary sacrifice from earnings net of tax so I plan to put extra into S&S and/or Cash ISA

Well that probably answers your original question . You can build up the cash outside the pension , earning some interest.