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

GazzaBloom

Albermarle said:

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.

Yes but not enough, it's more advantageous to divert some salary sacrifice to cash to get to the level I want isn't it? or at least buy some bonds (I'm not a fan of bonds but I guess they will earn more than zero that the cash will)

cfw1994

Albermarle said:

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.

Perhaps build that up so you have max'd out Premium Bonds?   
£100k between two people - not sure how big a buffer you want.
Clearly that money will, on average, lose out to inflation, which could be a concern over the coming few years.....but the cash is safe.

Alternatively, maybe your pension allows a cash portion inside it.  If you are able to chose how to draw down from that specifically when you want, that would still let you get the uplift from SalSac paying in - which would more than offset any inflationary concerns, I'd have thought?
If you are maxing out the 40k into pensions each, then I suspect this falls into the First World Problem bucket, if I may be so bold, without meaning any offence!   👀

edit to add - sorry, just read that you are talking about perhaps getting this money before getting the pension, in which case I would personally fill the PBs, with some S&S ISAs to balance that.   Those ISAs could also perhaps be in 'higher risk/volatility' funds to perhaps make up for the PBs being "ultra low-risk but subject to losing out to inflation" 🤷‍♂️

Albermarle

Yes but not enough, it's more advantageous to divert some salary sacrifice to cash to get to the level I want isn't it?

It all depends on how much you can put aside in addition to the maxed out pension  contributions . If it is not enough then keeping some cash in the pension as well makes sense.

If you could build up substantial savings outside the pension , then probably best to not hold cash in the pension as well. 

Secret2ndAccount

Always max out the sal-sac into the pension at 40k. Save whatever extra you can as cash outside the pension. You can get 2% for a long term cash deposit outside the pension. Probably 0% inside the pension, but the sal-sac more than outweighs that.
You should have your higher growth investments inside the pension as they are protected from tax. Would you consider holding some of the less volatile equity funds for now, then rolling over to cash/bonds as retirement looms?
In the years between retirement and SP, you can draw from the pension - cash or equities as you see fit. You would at least want to use up your tax free allowance each year. Realistically, it looks like you will be a taxpayer in retirement. Depending on your numbers, your aim might be to avoid paying any 40% tax. Either way, running money into and out of the pension results in less tax than keeping it outside, especially using sal-sac. This more than offsets 2% interest here and there.

GazzaBloom

cfw1994 said:

Albermarle said:

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.

Perhaps build that up so you have max'd out Premium Bonds?   
£100k between two people - not sure how big a buffer you want.
Clearly that money will, on average, lose out to inflation, which could be a concern over the coming few years.....but the cash is safe.

Alternatively, maybe your pension allows a cash portion inside it.  If you are able to chose how to draw down from that specifically when you want, that would still let you get the uplift from SalSac paying in - which would more than offset any inflationary concerns, I'd have thought?
If you are maxing out the 40k into pensions each, then I suspect this falls into the First World Problem bucket, if I may be so bold, without meaning any offence!   👀

edit to add - sorry, just read that you are talking about perhaps getting this money before getting the pension, in which case I would personally fill the PBs, with some S&S ISAs to balance that.   Those ISAs could also perhaps be in 'higher risk/volatility' funds to perhaps make up for the PBs being "ultra low-risk but subject to losing out to inflation" 🤷‍♂️

None taken, only I am lucky enough to be maxing my salary sacrifice to the £40K maximum, my wife isn't. I know it's a first world problem and am thankful every day to be so fortuitous.

GazzaBloom

Secret2ndAccount said:

Always max out the sal-sac into the pension at 40k. Save whatever extra you can as cash outside the pension. You can get 2% for a long term cash deposit outside the pension. Probably 0% inside the pension, but the sal-sac more than outweighs that.
You should have your higher growth investments inside the pension as they are protected from tax. Would you consider holding some of the less volatile equity funds for now, then rolling over to cash/bonds as retirement looms?
In the years between retirement and SP, you can draw from the pension - cash or equities as you see fit. You would at least want to use up your tax free allowance each year. Realistically, it looks like you will be a taxpayer in retirement. Depending on your numbers, your aim might be to avoid paying any 40% tax. Either way, running money into and out of the pension results in less tax than keeping it outside, especially using sal-sac. This more than offsets 2% interest here and there.

This makes a lot of sense, and confirms my thoughts, the instinct driving me to want to build a retirement cash buffer is also suggesting I look at perhaps a less aggressive mix of holdings during retirement. I am going to keep in 100% stocks for the rest of this year and evaluate at the turn of the year, then look at reallocation between building cash and buying some bonds from next year with the salary sacrifice into my pension. God wiling, I have some time on my side to build savings fast and hard over the next 2-3 years.

Hopefully, if this dip continues it will be a harvest of discount stock buying opportunity through the summer as I ramp the salary sacrifice to the max next month.

some great feedback - thanks all!