Help deciding how much i need in Emergency fund

Flossymuldoo

Alexland said:

Yeah it's mad to be paying higher-rate tax in order to overpay a mortgage or build excessive savings unless you really think there is a risk you will not have enough cashflow from employment etc to service the debt until your pension access age. Even then it can be better to insure against the risks than pay so much excess tax.

Even without employer matching the tax savings (and NI savings if your employer operates a salary sacrifice scheme) from deferring the income until it can be drawn as a mix of tax-free and basic-rate are a killer deal not to be missed.

I'd definitely look at increasing that further especially if you are still paying higher-rate tax but then I guess it depends on when you want to retire, what lifestyle you expect and if you want to use any tax-free lump sum to finish the mortgage.

You may also want to catchup with a higher % from the years you were paying even lower contributions. Whatever % contribution is required to keep your income out of higher-rate tax is usually a sweet spot for middle class tax efficiency.

Thanks for this info.  I know barely anything about pensions so have only just started reading up, but i'm currently going at a pace that my brain can compute!

I would like to increase it further but i won't be able to increase it enough to stay totally out of higher-rate tax, but i can probably increase it enough to be able to avoid paying tax on my child benefit.   I would need to increase by around 5% to do that.   If i did that then between husband and I we would have around £500k in pensions when we retire in maybe 12 years.     This looks to be enough for a 'moderate' income of £43k a year which looks ok at the moment.  Plus there would be state pension on top of that.

Flossymuldoo

Exodi said:

I usually resent when this question gets raised (as you get some total mickey moues numbers), but credit where credit is due, the responses in this thread are right on the money, 'it depends'.

In practice, almost two-thirds of the public believe they wouldn’t be able to last three months without borrowing money. As to what peoples ambitions should be, generally 3 months living expenses is suggested. You're clearly way over that.

You must also consider opportunity cost. Holding vast sums of money in easy access accounts means less money in pensions, or towards the (potentially more expensive) mortgage, or in investments.

I guess i knew the answer would be 'it depends' but the great thing is that the thread has moved on from my original question to how i can make my money work better for me.   This is the kind of info i need - but didn't realise i needed.  I have never been in a position to consider these things but the redundancies woke me up so I've fought hard to get all debts cleared and i'm now debt free. But I've been so used to knowing exactly where i want my money to go to get the debts clear i hadn't thought beyond that.

I have never had family members who have ever had any money so i don't have anyone to weigh up the pros and cons of various options so it's been so helpful hearing everyone's thoughts.

Flossymuldoo

Emmia said:

I'd not hold the whole safety net in easy access, I would tie up some of it in something like a S&S ISA which might also come in handy as a drawdown option if one or both of you decided to retire a little earlier or to pay off the final bit of the mortgage. 

Alexland said:

One thing you might want to consider is to split your emergency fund between true cash savings (for immediate and first month unemployment needs) and a S&S ISA or General Investment Account which might take a few days to withdraw. For example you could hold a money market fund that holds ultra low risk investments such as short dated Bank of England bonds and pays similar to the best rate savings accounts or go with a platform like Dodl (part of AJ Bell an established FTSE250 company) currently pays 4.85% on uninvested cash balances in their S&S accounts.

That's my next lot of research - to find somewhere i can stash the bulk of my emergency fund!!!

jimjames

Flossymuldoo said:

Emmia said:

I'd work on the emergency fund over mortgage overpayments and additional pension - the mortgage and pension ties money up which if you were made redundant you'd want to be able to access.

But once you've hit the £20k (or whatever) goal I'd go back to pensions / mortgage over payments 

Instead of tying it up with mortgage/pension I'd put some of the money into a high interest savings account/ISA with a notice period - keeping enough money as free cash /instant access (probably at a lower rate)to get you through a couple of months.

Thank for this.  I didn’t think of locking the amount away for a higher interest rate, but leaving some at easy access 

Once you have sufficient easy access cash for your emergency fund then it could also be worth looking at S&S ISAs in addition to pensions so that you have a mix of assets available at different times. Paying the max into cash ISAs year after year probably isn't the most effective long term plan (not that you'd said you were intending to do that)

Alexland

Flossymuldoo said:

I would like to increase it further but i won't be able to increase it enough to stay totally out of higher-rate tax, but i can probably increase it enough to be able to avoid paying tax on my child benefit.

Worth considering if you could spread your mortgage over a longer term and/or go interest only to reduce the monthly repayments to enable you to avoid more higher rate tax then use any tax-free lump sum(s) from your pension(s) to repay the mortgage when you get access. Lower repayments also put less pressure on an emergency fund if you were to suffer a loss of income. My mortgage is arranged to run into my 80s although I expect to fully repay in my 50s.

Some of the stuff you can do with money inside a pension wrapper includes investing in UK treasury gilts that generate a fixed return around the same rate as your mortgage rate and you can even align their maturity so that you are not taking risks with the money you will use to repay the mortgage just getting the tax advantages.

This is a bit advanced and will take some careful consideration and further research when formulating your strategy and some people just want rid of the mortgage and I understand too.

Flossymuldoo said:
If i did that then between husband and I we would have around £500k in pensions when we retire in maybe 12 years.     This looks to be enough for a 'moderate' income of £43k a year which looks ok at the moment.  Plus there would be state pension on top of that.

I presume that's £500k each so £1m and if so it depends at what age you retire really for most people something like a 3.5% drawdown rate from around mid-60s rising each year with inflation seems reasonable depending on the investment strategy, asset valuations at the time, etc.

When calculating how much your existing investments and contributions will grow between now and retirement then remember to only factor in the likely growth above inflation not the whole growth as £43k income in 12 years will be worth less than £43k income now. Although for any money in a pension intended to be used for the mortgage you can consider the full growth as that liability won't growth with inflation.

Flossymuldoo

Alexland said:

I presume that's £500k each so £1m and if so it depends at what age you retire really for most people something like a 3.5% drawdown rate from around mid-60s rising each year with inflation seems reasonable depending on the investment strategy, asset valuations at the time, etc.

No, that’s between us!

eskbanker

Flossymuldoo said:
between husband and I we would have around £500k in pensions when we retire in maybe 12 years.     This looks to be enough for a 'moderate' income of £43k a year which looks ok at the moment.  Plus there would be state pension on top of that.

On what basis do you understand £43K to be a realistic annual expectation from a £500K pot - is it just for a relatively short time perhaps, or is there other money funding that income?

Flossymuldoo

eskbanker 

On what basis do you understand £43K to be a realistic annual expectation from a £500K pot - is it just for a relatively short time perhaps, or is there other money funding that income?

I’ve seen a few sites that estimate that for a ‘moderate’ income of £43k a year I’d need something like £406k in pension for annuity and something like £378k for drawdown.  My pension knowledge is non existent at the moment though.

eskbanker

Flossymuldoo said:

eskbanker 

On what basis do you understand £43K to be a realistic annual expectation from a £500K pot - is it just for a relatively short time perhaps, or is there other money funding that income?

I’ve seen a few sites that estimate that for a ‘moderate’ income of £43k a year I’d need something like £406k in pension for annuity and something like £378k for drawdown.  My pension knowledge is non existent at the moment though.

As mentioned above by @Alexland, somewhere closer to 3-4% annually, i.e. £15-20K, would be more typical, but don't know what assumptions the sites you refer to make....

Alexland

The £43k mentioned somewhere probably included 2 full state pensions. With the annuity you get more income from the start if you don't get any inflation linking but then your spending power would go down every year.