Saving outside the pension

Pat38493

I would be interested to know what posters think about pitfall #4 in this recent video:

https://www.youtube.com/watch?v=5k2AVhcRrAU

You could take this pitfall 4 (not having enough money saved outside the pension), to mean that you should divert part of your pension contributions in the accumulation phase into ISAs.

I'm not sure I agree with that, especially if you are a higher rate taxpayer.  I can see why it might make it easier for an IFA who takes you on just before retirement, but I wouldn't see that as a reason to forgo the additional 20% tax relief on pension contributions as an HR taxpayer when you are still working?

retiringtoosoon

Well, bridging the gap between retirement and when you can access your pension (for me this will be about 5 years). Hence the need to have some savings outside pensions.

NoMore

As with anything to do with pensions and retirement planning - it depends!

Everybody should look at their own needs in the future and current situation and determine the best split between Pensions and non pension saving/investment. There's no one rule for all.

Billxx

Isn't there a rule of thumb that you need savings outside pensions to the equivalent value of three years expenditure.  In order to weather the storm on a draw down pension.

Interesting, I can see his point but also yours.  Other more learned than me will hopefully provide more ideas.

Doctor_Who

Billxx said:

Isn't there a rule of thumb that you need savings outside pensions to the equivalent value of three years expenditure.  In order to weather the storm on a draw down pension.

Interesting, I can see his point but also yours.  Other more learned than me will hopefully provide more ideas.

You should have some 'emergency' cash outside of the pension, but you can also hold cash-like investments inside the pension (SIPP); many people are currently holding short term money market funds. These provide a return and very low volatility (not zero!) in the event of a stock market crash and could be sold and the money withdrawn if needed.

Pat38493

Doctor_Who said:

Billxx said:

Isn't there a rule of thumb that you need savings outside pensions to the equivalent value of three years expenditure.  In order to weather the storm on a draw down pension.

Interesting, I can see his point but also yours.  Other more learned than me will hopefully provide more ideas.

You should have some 'emergency' cash outside of the pension, but you can also hold cash-like investments inside the pension (SIPP); many people are currently holding short term money market funds. These provide a return and very low volatility (not zero!) in the event of a stock market crash and could be sold and the money withdrawn if needed.

Yes understood - but in the video his argument is that you should have money outside the pension because of the fact that pension withdrawals are taxable (after the 25%).

Linton

I agree with the video that it is highly desirable to have a significant amount of money outside your pension pot , though not necessarily for the reasons given.  This is true both before and after retirement. It is all about flexibility of income.

1) Emergency fund
Here it is usually recommended that you have at least 6 months living expenses held as easy access cash.  This is on the assumption that you will find a new job in that period should you lose your current one.  As you approach retirement it could be prudent to extend the period covered. 

2) Early retirement
Particularly if you lose your job relatively late in life you may well want to or have to retire earlier than originally planned.  With the increase in the age for accessing your pension it will become more likely that you will need income from elswewhere.  

3) Large one-off expenses
Before retirement you could have large one-off expenses - eg a new car, a special holiday etc.  It is very convenient if you have the money available when you need it.

After retirement it is important as you dont want to have to draw down large lump sums possibly being charged higher rate tax.  

4) Avoiding higher rate tax in retirement
If you are in danger of being a higher rate tax payer in retirement in would be useful to have some of your required income tax free.  I use an S&^S ISA for all my income generating investments as in a pension they would incur income tax.  EVen if you are not normally a higher rate tax payer providing extra space to take larger lump sums than normal from your pension is useful.

5) Limited ISA allowance
If you want a large ISA in retirement it would be difficult to base it on your TFLS given the comparatively low annual allowance.  It could take you some years to build up the ISA to the level you want.  So it is better to create your ISA portfolio over time whilst in employment.


In my view it all depends on your overall financial management strategy.  So you should have one, and you need to set it up in the most tax efficient way.  But dont let minimising tax drive the strategy.

QrizB

Pat38493 said:

I would be interested to know what posters think about pitfall #4 in this recent video:

For anyone (like me) who doesn't want to watch an 11-minute video*, his six pitfalls are:

1. Lifestyling
2. Having too many pots
3. Not knowing your spending
   
4. Not having enough money outside pensions
   
5. Being ignorant about your options
   
6. Refusing to seek advice

I would hope that most of the regulars on this forum would be familiar with all these, and will agree that few of them are black-and-white.

* Only videos over 10 minutes get monetised by YouTube, hence the plethora of 10- to 12-minute videos discussing things that could be dealt with in half the time with a bit less waffling.

RogerPensionGuy

I found that video good and sensible. 

As said by other posters, many people on here are already aware of much of the content. 

I do like the idea of having income possibilities in different buckets, just look how pension rules have messed about with personal taxation etc etc, having a sensible % of coins in sensible ISAs I see as a very reasonable choice. 

The ISA allowance is actually very large in my opinion and if people are happy to fund them, it's reasonable to me.

Doctor_Who

Pat38493 said:

Doctor_Who said:

Billxx said:

Isn't there a rule of thumb that you need savings outside pensions to the equivalent value of three years expenditure.  In order to weather the storm on a draw down pension.

Interesting, I can see his point but also yours.  Other more learned than me will hopefully provide more ideas.

You should have some 'emergency' cash outside of the pension, but you can also hold cash-like investments inside the pension (SIPP); many people are currently holding short term money market funds. These provide a return and very low volatility (not zero!) in the event of a stock market crash and could be sold and the money withdrawn if needed.

Yes understood - but in the video his argument is that you should have money outside the pension because of the fact that pension withdrawals are taxable (after the 25%).

I was pointing out to the previous poster that you can hold some emergency cash in a pension, it doesn't all have to be held outside. Yes, withdrawals are taxable, but they may fall within your PA if you have no other taxable income (e.g. if retired before SPA).

As others have said, everything depends on your own circumstances and having money inside and outside pensions gives you flexibility and numerous options to draw income - I have S&SISA, SIPP, VCTs and cash, together with a good DB pension from 65. At present I'm withdrawing from the SIPP because I have no other taxable income and I want to use my PA and lower rate tax bands (Scottish resident), but when I draw the DB and state pensions I will be a HR Scottish tax payer, so will stop drawing from the SIPP and use the S&SISA to supplement my income or for large purchases. As Linton said, it all depends on your overall financial management strategy.

GazzaBloom

I watched the video this morning and had the same thought about the point about accumulating cash outside pension vs inside.

As the annual allowance has increased to £60K this year I have diverted more money via salary sacrifice into my pension reducing the amount I will have outside the pension in order to maximise the benefit. it's not ideal and I would prefer to have a bit more outside the pension but as a higher rate tax payer it means its pretty much £2 in the pension for every £1 of take home pay given up via salary sacrifice in my workplace pension. I will be building my cash balance but it will be inside my pension as 2 for 1 is too good to lose out on.

One way we are considering to help have a bit more outside pensions is to draw down my wife's SIPP up to her personal tax allowance each year, which is in excess of what we need to live on (my pension will cover living expenses), and get it tucked away in ISAs