Pension to savings ratio

stulaunch

I'm hopefully thinking of retiring in 2-3 yrs time. Will be around 65 at that time.

For a years, I've been able to both save in Isa's & contribute to my pension (sipp)

Self employed sole trader, if it helps. Lower rate tax payer.

I'm a bit unsure which to contribute to more.

Atm I have around 130k in pension & 110k in savings. I also already have an annuity of £390 a month, which I make sure I put back into sipp to offset the tax that I pay on it.

What does that ratio seem like? Just not quite sure of what I need to contribute more to.

Would love some opinions?

twopenny

My experience over both watching friends who retired early and us plebs that had to keep plodding on is that the interest on savings is the lifebelt or for extras. They go up, they come down.

The pension keeps rolling in. That's your bread and butter, literally 🙂

So make sure the pension is strong. Then add any extra to your savings.

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/82002545#Comment_82002545

Perhaps your friends had defined benefit pensions with a guaranteed sum for life. OP has a defined contribution pension with a finite pot.….unless they purchase an annuity.

OP, what is your state pensiion age and what amount is forecast? Taxation may be a factor in your decision. When you say £110k in savings, hopefully you mean an ISA?

DRS1

My pension was maybe twice the size of my ISA but when I was contributing you could put a lot more into a pension than an ISA - I think the ISA limit was £7k when I started. People on here would say pay more to the pension because it is more tax efficient. An ISA can be beneficial because you can access it whenever you want but you are old enough that you can access your pension when you want so that is neutral for you.

Maybe a better question would be how much do you spend a year (how much of that is essential how much will you stop spending when you stop working and how much is luxury spend which you could give up if you have to).

Look at that figure and then see how long £240k will last.

The £390 pm annuity will be a good base for your income when you stop work and stop putting it in your pension. It will help your pension and ISA go further but how much of your spend does it cover? Does it increase at all?

Hopefully the state pension will kick in at say 67 and give you say £12k pa to meet some or all of that spending. That does increase. So you could draw more from your pension or ISA between when you stop work and when you get to SPA and then reduce what you draw afterwards. As above do check your state pension forecast..

mrklaw

you’re already past pension access age. I’d be tempted to do the maths on pumping as much of that ISA into the pension as you can over the next few years - and what additional contributions you plan to add.

I don’t really understand the desire for high ISA pots unless you are early in life and want the liquidity/access, or have a pension hitting the PCLS limits

NormalNorman

SS ISA is great if you feel you have enough in your DC pension for your needs. I think that's one of the issues with DC as it encourages you to over provision? Certainly for us having a mix with DB. Trouble is with the current ever tightening tax regime the BRT tax band is very narrow in Scotland so I'm effectively limited to what I can put in an ISA when avoiding HRT. Come retirement age in April 2029 esp by 2031 fiscal drag will be brutal so looking forward to not having money subject to the personal allowance, tax bands and PAYE codes.

Albermarle

If you are a basic rate taxpayer today and will be in retirement, then saving via a pension gives you a minimum 6.25% tax benefit over the ISA ( this is due to the 25% you can take tax free from a pension).

However apart from the tax issue, there is more than type of ISA. As you mention in the thread title ' pensions to savings ratio' I assume you mean a Cash ISA. In that case, assuming that the SIPP is invested in the financial markets, the comparison is more complicated. It also depends on what kind of investments you have in the SIPP.

Savings are useful for the short term, where you might need the money in the next 5 years. On the other hand investments are normally better for the long term. So which is better depends to some extent on how you plan to fund your retirement. Taking into account the state pension will kick in at some point - have you checked your state pension forecast ?

Veloflyer

Echoing others perhaps….for me, maxxing out a pension is a no-brainer due to the tax benefits/HMG contribution. My pension pot is currently split roughly 50/50 equities/bonds. How you invest is a whole different question, but given your age you need to consider how much risk you wish to take. Equities are subject to markets and are risker than bonds. Extra annuity may also be a consideration.

I do have a cash ISA pot, but limited to what I perceive to be for emergencies only - new roof that sort of thing. It is useful if you want immediate access, but beware that inflation could eat it away.

Simon11

At the age of 65, you only really need to have a pot of savings to cover emergencies, any major projects and cover a year or two of spending. Anything else should be invested, ideally in pension pot.

If you were planning to retire say under 57, then you naturally need a higher percentage of savings -v- pension pot in order to cover period of spending until you can access pension.

dunstonh

What does that ratio seem like?

Ratio is unimportant. You can hold the same investments inside a pension or an ISA. You can hold cash in a pension. So, ratio of tax wrapper doesn't matter. Being optimal with your tax wrappers and how they align with your goals is more important

And with the pension being the best tax wrapper in most cases, you could well look to put more into the pension each year.

poseidon1

Although the OP is not affected in the same way, worth mentioning that for 40% tax payers in retirement like myself, on a like for like basis the dividend and interest income stream I generate to spend via my ISA is far more valuable than the exact same income generated via Sipp withdrawals which attracts additional self assessment income tax each year.

In the OP's case there is a potential future 20% tax saving on isa dividend and interest income stream, compared to the exact same income stream produced by a sipp. Seems to me, that even for 20% tax payers an ever growing ISA pot has more to commend it than a similar growing Sipp pot in terms of the value of the resulting income.

To make matters worse in my case, whereas I can remove and deploy ISA funds towards IHT mitigation strategies, beyond the 25% TFC no such easy avenues exsist when my Sipp falls into 40% IHT terrority in its entirety next year.