How much is prudent to have in savings (S&S ISA, savings account) when drawing pension

SarahB16

I am approximately 10 years away from retirement but am definitely looking at pension planning and when will be the most appropriate time for me to retire.  I plan to retire when my annual pension income (2 x DB pensions plus one very small DC pension plus my state pension at 67) will provide me with an annual income which I believe is satisfactory to live off for the rest of my life.

I would like to retire before 67 but this will require me meeting the pension shortfall from my savings and likely drawing one DB scheme before 67 and taking the DC scheme when the financial markets look favourable. 

I am currently recording what I spend each month as many people on this very helpful forum have advised this helps to budget what you need to live off when in retirement as I do not know what my annual pension income would need to be in retirement. 

What I was wondering and this is very much hypothetical but let’s just say for this example, myself, a single woman wishes to retire with an annual pension of say £32k (in today’s money) how much would be a prudent amount to also have in cash savings.  When I say cash savings this could be a combination of a S&S ISA (low risk), cash savings account, etc.  I’m really not sure how much people think is prudent to have in savings for those unknowns (new house roof, etc) whilst actually being able to live off their pension.  

Thank you for your help. 

Albermarle

When I say cash savings this could be a combination of a S&S ISA (low risk), cash savings account, etc. 

An S&S ISA is not the same as cash, however low risk it is supposed to be . Many low risk funds are down significantly this year.

However you could use the ISA to fund some large item long term , like a new car in 8 to 10 years time.

Otherwise around £10K cash savings could be enough, if you could replenish then from the pensions over a period of time, after any expenditure. So to get back to £10K again.

If replenishing them could be difficult the probably need £20K +

Remember in 10 years time you may have to add 50% ( hopefully less), to these figures to account for inflation.

dunstonh

I would like to retire before 67 but this will require me meeting the pension shortfall from my savings and likely drawing one DB scheme before 67 and taking the DC scheme when the financial markets look favourable. 

What are the penalties/reduction for taking the DB scheme earlier?  
How about funding the DC pension to use for the gap until state pension age?

What I was wondering and this is very much hypothetical but let’s just say for this example, myself, a single woman wishes to retire with an annual pension of say £32k (in today’s money) how much would be a prudent amount to also have in cash savings.

Think about your capital spending for the next 30 years.    Not just income.   It is all very well saying the income will cover your monthly spending needs but what about things like cars, boiler, redecoration & refurbishment?   You need to factor those in as well.  And that is what you will need in capital.  If you intend to keep it in savings and not investments then you would need to increase it accordingly for inflation.

When I say cash savings this could be a combination of a S&S ISA (low risk), cash savings account, etc.  

S&S ISAs are not cash savings.   And why limit yourself to certain wrappers?   DC pensions are more tax-efficient than S&S ISAs unless you are subject to the lifetime allowance charge.  So, limiting yourself could be costing you money.

You basically need to model your income and capital expenditure using assumptions.

[Deleted User]

I would take your annual needs, subtract DB pensions and multiply the result by a number between 3 and 5, depending on your comfort level.  That’s you cash cushion, to be replenished annually from investments. 

SarahB16

dunstonh said:

I would like to retire before 67 but this will require me meeting the pension shortfall from my savings and likely drawing one DB scheme before 67 and taking the DC scheme when the financial markets look favourable. 

What are the penalties/reduction for taking the DB scheme earlier?  
How about funding the DC pension to use for the gap until state pension age?

What I was wondering and this is very much hypothetical but let’s just say for this example, myself, a single woman wishes to retire with an annual pension of say £32k (in today’s money) how much would be a prudent amount to also have in cash savings.

Think about your capital spending for the next 30 years.    Not just income.   It is all very well saying the income will cover your monthly spending needs but what about things like cars, boiler, redecoration & refurbishment?   You need to factor those in as well.  And that is what you will need in capital.  If you intend to keep it in savings and not investments then you would need to increase it accordingly for inflation.

When I say cash savings this could be a combination of a S&S ISA (low risk), cash savings account, etc.  

S&S ISAs are not cash savings.   And why limit yourself to certain wrappers?   DC pensions are more tax-efficient than S&S ISAs unless you are subject to the lifetime allowance charge.  So, limiting yourself could be costing you money.

You basically need to model your income and capital expenditure using assumptions.

What are the penalties/reduction for taking the DB scheme earlier? 

This DB scheme that I refer to above as taking early is from a previous employer and is definitely something I will find out when I can.  On the statement I received in 2008 it forecast an annual pension at 65 of £3,550 and I have inflated it by the lower of RPI and 5% and a guesstimate is this will give me an annual pension of c.£5k when I am 65.  When I am 50 I will request a forecast as though I am drawing it at 55.

Are the penalties for taking this earlier something I can enquire about now or is it too early to ask (I am 49)?  I wonder if all they will do is provide me with forecasts which are 5 years away.    

I plan to delay taking the current DB scheme I am in (with my current employer) for as long as possible.  However, using the forecasting model I have access to for the current DB scheme if I take my pension at 65 I will get £28,743 (no lump sum taken) at 62 it is £22,159 (no lump sum taken) and 60 it is £18,603 (no lump sum taken).  

I may possibly inherit some money but there are so many uncertainties as to whether my mum will continue to live in her house or need to go into care that I do not include it in any of my assumptions but if I were to inherit some money then I would be able to meet the shortfall using my inheritance.  


How about funding the DC pension to use for the gap until state pension age?

I only worked for this employer for just over a year (left in 2009) and this scheme is managed by Standard Life.  The valuation at 31 December 2021 was £11,524 which at the age of 65 they say could give me an annual pension of c.£500 per annum.  I presume as I no longer work for that employer (they were taken over in 2009 during the financial crash) that I could not pay into an old DC pension?    


Think about your capital spending for the next 30 years.    Not just income.   It is all very well saying the income will cover your monthly spending needs but what about things like cars, boiler, redecoration & refurbishment?   You need to factor those in as well.  And that is what you will need in capital.  If you intend to keep it in savings and not investments then you would need to increase it accordingly for inflation.

You are absolutely right.  I am currently only monitoring my monthly expenditure but you're correct I need to also budget for capital expenditure too. 

My thought process was at say 62 (say my retirement age) anything in savings will get eroded by inflation but a low risk S&S ISA may, on average, over the following 15-20 years (if I live that long) keep up with inflation but as you helpfully say anything in savings and not investments would need to be increased to take account of inflation.  I think a mixture of both is sensible so I don't need to draw on my S&S ISA when the investment has taken a sudden fall but that strategy is something for me to think about in c.8 - 10 years when I am drawing on my pension and whether it would be more prudent for all of my rainy day and capital expenditure funds to be in savings.  As I get older I plan to increase the corporate bond element (currently nil) and reduce the equity element of what I hold in my S&S ISA.      


S&S ISAs are not cash savings.   And why limit yourself to certain wrappers?   DC pensions are more tax-efficient than S&S ISAs unless you are subject to the lifetime allowance charge.  So, limiting yourself could be costing you money.

It would be very helpful if you could kindly expand on your advice here please.  My comment was based on what I would do with 'savings' when I am retired, i.e. where to keep that capital expenditure and rainy day fund.  

I am not in any way subject to a lifetime allowance charge but at the moment I am in a LGPS defined benefit pension scheme and assuming I continue to work for my current employer until I retire this is where my pension contributions are going.  

In terms of other wrappers surely the best thing for me to do whilst working is to continue to contribute to my work's pension scheme and outside of that save what I can in either an ISA or a savings account?  I should add I'm not sure if I may move house in a few years' time (I have my eye on a possible nearby housing development that may be built) so that is currently holding me back from putting more money into my existing S&S ISA for the next few years and instead I have opened a one year fixed term savings account.  

If we can put the house move to one side and let's presume that I wasn't planning on moving house (and currently putting savings into savings accounts) where would be the best place do you think for me to invest as I had always thought my current employer's pension scheme first then S&S ISA?    

Thank you very much for your reply it really has been very helpful and if you are able to answer some of my additional questions that would be appreciated as I realise I had only provided limited information in my original post.  

dunstonh

I only worked for this employer for just over a year (left in 2009) and this scheme is managed by Standard Life.  The valuation at 31 December 2021 was £11,524 which at the age of 65 they say could give me an annual pension of c.£500 per annum.  I presume as I no longer work for that employer (they were taken over in 2009 during the financial crash) that I could not pay into an old DC pension?    

Just because you have this old one doesn't mean you cannot pay (or transfer this one) into a modern new one.  This existing plan almost certainly wont support most or all of the modern options.  So, a new plan would likely be needed.

Pension contributions are more tax efficient than ISA.   Especially if you are using the pension to fund the gap before a DB pension/state pension kicks in.  You get 20% relief as a basic rate taxpayer which equates to a 25% uplift.    Early retirement prior to state pension age means you have £12570  personal allowance available to take from the pension tax free each year (which equates to just over £16k if drawing from the pension).

Pension beats ISA even after state pension age.  Pension can be your rainy day fund.  It can be your capital expenditure fund.  Cash is great for short term money ( e.g. things you want in the next 3 years) but you want to be investing for longer periods and the pension wrapper beats ISA.

Cannot expand further now as I am just on a tea break.  Others will probably kick in with more as follow up and I will again later.

jim8888

Personally and from experience, I budget all our regular spending - bills, mortgage, monthly pocket money allowance, groceries, car payments etc - so I know pretty accurately what is going out every month come what may.  Then, on top of that, I need to add another 30% to cover things that I haven't planned to spend, things like holidays, car repairs, household repairs and so  on. So, if my pension income was £32k to live on, I'd be looking to have about £10k additional savings for the "extras" each year.  (It does depend how you are budgeting though. I'm sure a lot of people might budget a fixed £5k every year for holidays, for example, and they'd split that into 12 monthly budget payments.)

Arthurian

I would recommend easing yourself into retirement over a few years, working just 4 days a week, and maybe eventually 3, so you can see how things go, in all sorts of ways, including financially.

SarahB16

Arthurian said:

I would recommend easing yourself into retirement over a few years, working just 4 days a week, and maybe eventually 3, so you can see how things go, in all sorts of ways, including financially.

At present I'm still fine working full time however you're right this may be something to perhaps consider in the future.  I read posts on here about how people say they are worn out however at the moment I'm just being practical regarding my retirement planning as I wouldn't wish to look back when I'm 60 and think if only I'd done that when I was 50.  

I know I will not have a problem being retired as I volunteer in my local community, love walking/days out with friends and would wish to go to exercise classes and not forgetting the freedom to go on holiday when I wish it would only be the financial aspect hence why I wish to get my calculations right before retiring however regarding your suggestion of working 4 days a week and maybe three days a week who knows that may be what I do feel like doing. 

Does anybody know if going from full time to say three days a week has a detrimental effect on DB pension schemes?  My current employer's pension scheme used to be final salary before moving in 2014 to 1/49 career average so surely if I go part time in my last three or so years of employment then my final salary would be lower (due to working part time) and will then lead to a much lower annual pension for the scheme up until 2014 which will be based on my final salary before switching to career average in 2014?   

AlanP_2

Take a look at opening an AVC alongside your main LGPS scheme.

Works like a DC scheme, in as much as it is invested, but can be taken tax free at same time as main scheme benefits 

So get tax relief on contributions and pay no tax when taken as a lump sum.

AlanP_2

Pre 2014 final salary benefits will be calculated against equivalent full time salary so no detriment to going part time.

The CARE element each year will accrue based on actual salary so less than if working full time.