How much cash in pension

Albermarle

Historical modelling seems to show that you should be better off in the long term (say 30-40 years) by staying pretty heavy in equities and only having maybe a rolling year in cash, but you have to be able to tolerate some dips in your portfolio and accept that they are in line with various historical disasters and nothing "abnormal"

Historical modelling might not help you sleep at night though, whereas having a big(ish) cash pile can help ! ( OK I know everyone is different in this respect) 

In my humble opinion ( and I could well be wrong) cash might continue to be a good medium term place to have a decent % of your money, like it was in 2022. Even before recent events, the general outlook for equities for this decade was not very optimistic, after the previous bull decade.

If you can fix  at 4 % + and if inflation drops to a similar level. Then a significant part of your overall pot, keeping up 100% safely with inflation could be worse, especially if your pot is already sufficiently big.

I know I am sort of talking about market timing/ trying to second guess the medium term future, but could be as good a strategy as any maybe.

DT2001

IMO it depends on 3 things, your attitude to risk, the % of guaranteed income (SP, DB annuity) and your willingness to have a variable income. Our % is reducing as I the longer my OH continues to work the less we need to cover the gap to SPA. At OH’s SPA we will be, hopefully, 5/7 years into retirement and our experience over that time will influence our cash holding going forward however I expect 4/5% to be the level we will be at.

MK62

It fluctuates for us depending on when I take my annual UFPLS, which is paid into the cash "pot", how much that is, and then how much we spend in the tax year.......but it's around 10-15% or so (held in a variety of accounts)......but everyone's circumstances and behaviours are different, so what's good for some might be anathema to others......
Like Linton posted above, I prefer at least a modicum of income stability, and am willing to forego some "potentially" higher returns in order to achieve that......in the end it's a set of trade-offs - you just have decide on a set you are comfortable with for your circumstances........there's no "ideal" cash percentage really.

jim8888

My strategy on retiring at 58 was to hold approx 3 years worth of living expenses in cash, which I took from part of my TFLS. My intention was then to start cashing a year's worth of expenses from my SIPP in each new tax year, I'm kind of on track to do that, exception being that I wouldn't do so if the market had really tanked and my pension pot had dropped by more than 30% year on year. In that eventuality, I'd maybe look to spend the further two years down in the hope that the market would recover a bit over that time frame. (My DC pension is all in a VLS 80/20 fund.)

Mick70

Thanks for taking the time to reply all

Happy easter 

SouthCoastBoy

In response to ablermarle, re 4% fixed, I have just moved to some 12 mth fixed rate bonds, mixture of isa and non isa and can get 4.5% for some of these, so over the next 12 mths hopefully not too far from inflation. Issue is tax on some of the cash, but either I won't be earning money, or more likely, as I've just accepted a new job, I will be a 40% tax payer and therefore will make additional contributions to my sipp so will offset the tax liability

bostonerimus

Everyone needs cash, but I would not have it inside a pension wrapper as cash should be easily available to spend. So keep it in a cash ISA or the bank. You should have at least 6 months spending in cash for emergencies and in retirement you probably should have more like a couple of years that you can spend rather than having to sell assets in down markets. For example many retirees with Target Date retirement funds are invested in long duration bonds and the size of their pot has dropped by 10% or even 20%. If they don’t have spare cash to spend they will have to sell at a loss and they will probably never recover.

DT2001

bostonerimus said:

Everyone needs cash, but I would not have it inside a pension wrapper as cash should be easily available to spend. So keep it in a cash ISA or the bank. You should have at least 6 months spending in cash for emergencies and in retirement you probably should have more like a couple of years that you can spend rather than having to sell assets in down markets. For example many retirees with Target Date retirement funds are invested in long duration bonds and the size of their pot has dropped by 10% or even 20%. If they don’t have spare cash to spend they will have to sell at a loss and they will probably never recover.

Playing devil’s advocate, is it not the point of a SWR to ‘cope’ with downturns and as long as the funds do not run out completely you have achieved your target so it does not matter that the fund will not recover.

I’m aiming for flexible expenditure, natural income to top up the cash pot and a cash holding of about a years expenses (but only in excess of guaranteed income which will change as DB and SP come on stream).

bluenose1

Good question Mick70.
I am 57 in June and thought I would be retired by now, though inflation etc and the fact I have a decent job where I can WFH has made me consider yet another OMY. 
I have all my works DC pot, approx £83k in cash, though at least they appear to be paying interest of 4% at moment. 

It was initially just going to cover 56-60 until my DB pensions will start but as I have a bigger pot with working longer than anticipated our 5 year mortgage fixed term ends Feb 25 so I am likely to use £35k of it to finally pay the mortgage.
Santander have good cash ISA rate at moment for 12/18 and 24 months. Opened a 18 month one at  4.25% which will tie in with mortgage redemption.

Plus they offer £50 if you transfer existing ISA over £10k to them.

bostonerimus

DT2001 said:

bostonerimus said:

Everyone needs cash, but I would not have it inside a pension wrapper as cash should be easily available to spend. So keep it in a cash ISA or the bank. You should have at least 6 months spending in cash for emergencies and in retirement you probably should have more like a couple of years that you can spend rather than having to sell assets in down markets. For example many retirees with Target Date retirement funds are invested in long duration bonds and the size of their pot has dropped by 10% or even 20%. If they don’t have spare cash to spend they will have to sell at a loss and they will probably never recover.

Playing devil’s advocate, is it not the point of a SWR to ‘cope’ with downturns and as long as the funds do not run out completely you have achieved your target so it does not matter that the fund will not recover.

I’m aiming for flexible expenditure, natural income to top up the cash pot and a cash holding of about a years expenses (but only in excess of guaranteed income which will change as DB and SP come on stream).

Yes, your pension pot should allow you to withdraw money in retirement without it going to zero before you die. So you then need to come up with an overall asset allocation that does that for you. There are many research papers where various combinations of equities and fixed income are stress tested using historical data and most planners will recommend a cash allocation as an every day spending pot and a hedge against long term market down turns. I would never keep that cash inside a pension wrapper, but I would include it in my asset allocation when planning for retirement income. If you have DB, SP or other sources of inflation linked income that won't go up and down with the stock and bond markets then your cash allocation could be a lot smaller. If you are all equites then you will see volatility and if that occurs early on in retirement and you have to sell at a loss then that will propagate through your retirement and affect your SWR so that you can't safely spend as much. Retirement portfolio construction is very much a balancing act and there is no single right answer.