Funding A Retirement Account

Seasidegal58 · 8 April 2018 at 11:25AM

I am planning to retire in three years when I am 66 and my State Pension pays out. As well as that I will have income from a final salary pension and I also have my workplace pension when at that time I will have to decide whether to put this in a SIPP and draw an income or take an annuity (this choice isnt not exactly calling out to me at the moment).

When I do retire I want to have c.£20,000 cash in place in order to cover any ad hoc retirement expenses as I wish to move at that time and would like a 'cushion' so to speak. I do already have a comfortable emergency fund put in place.

So my query is should I keep my new savings fund in a savings/cash ISA account or use the monthly cash payment to fund extra into my workplace pension (topping up the monthly payment of 6% from my salary)and then take out the cash from there on retirement as part of my 25% tax free cash allowance. The workplace pension is currently very conservatively invested in mostly gilts, bonds and cash so the total value at the time of retirement shouldn't waiver too much.

Any comments would be greatly appreciated.

Dox · 8 April 2018 at 11:29AM

Depends which route will give you the best return and the most favourable tax treatment - not enough info to comment on either, so more info would help.

Seasidegal58 · 8 April 2018 at 11:50AM

Thanks for your reply.

I'm in the higher tax bracket. As I've only three years to retirement I don't want to take much risk with the cash. The cash would be safe in a savings / ISA account - I could fix it for three years to get a better rate (though interest rates look like they will be rising). Or if I put it in my pension, though it wouldnt grow that much what with my conservative investment stance, i would be getting the tax break because I'm using untaxed funds here? Is that right.

cloud_dog · 8 April 2018 at 11:51AM

Seasidegal58 wrote: »

I am planning to retire in three years when I am 66 and my State Pension pays out. As well as that I will have income from a final salary pension and I also have my workplace pension when at that time I will have to decide whether to put this in a SIPP and draw an income or take an annuity (this choice isnt not exactly calling out to me at the moment).

When I do retire I want to have c.£20,000 cash in place in order to cover any ad hoc retirement expenses as I wish to move at that time and would like a 'cushion' so to speak. I do already have a comfortable emergency fund put in place.

So my query is should I keep my new savings fund in a savings/cash ISA account or use the monthly cash payment to fund extra into my workplace pension (topping up the monthly payment of 6% from my salary)and then take out the cash from there on retirement as part of my 25% tax free cash allowance. The workplace pension is currently very conservatively invested in mostly gilts, bonds and cash so the total value at the time of retirement shouldn't waiver too much.

Any comments would be greatly appreciated.

As we all know savings rates are low at the moment and investing money for 3 years is really too high a risk prospect, especially when you have definitive plans for the cash.

One option might be to use your additional contributions and put them in to a SIPP. This way you would gain the 25% uplift (tax relief) on your contribution. If you were to open the SIPP with HL and then hold your contributions in cash there would be little risk to the cash (other than inflation risk over the 3 years), and no platform charges.

So, you would gain by the 25% uplift and not place the contribution at the risk of market / stock volatility.

You obviously would need to take in to consideration income tax when drawing the money from this SIPP but it may offer another option to achieve what you are looking for.

EDIT: Just read that you are a 40% tax payer so you would benefit by a reduction in tax via PAYE as well. Also, will you be a LRT payer when you retire?

Seasidegal58 · 8 April 2018 at 12:10PM

Thank you cloud dog. That is an excellent and helpful answer - a method I never thought of! I will be a LRT once retired.

kidmugsy · 8 April 2018 at 12:23PM

Seasidegal58 wrote: »

I'm in the higher tax bracket. As I've only three years to retirement I don't want to take much risk with the cash. ... Or if I put it in my pension, though it wouldnt grow that much what with my conservative investment stance, i would be getting the tax break because I'm using untaxed funds here?

If you pay HRT it's bound to be a better bet to use a pension contribution to avoid that 40%. If you can contribute at work through salary sacrifice (sometimes called "smart") you'd also avoid 2% National Insurance Contribution. In fact, if you can use sal sac you could go further and also avoid part of the 20% band and 12% NIC.

But if work doesn't do sal sac, and if you've already "harvested" the maximum employer contribution, then cloud_dog's route would be a good bet - a SIPP at, for example, HL.

Seasidegal58 · 8 April 2018 at 12:33PM

Thanks very much kidsmugsy - more food for thought here. My firm has started offering salary sacrifice. This sounds like it may be the route to take.

dunstonh · 8 April 2018 at 12:39PM

I'm in the higher tax bracket. As I've only three years to retirement I don't want to take much risk with the cash.

So, you plan on spending all the money in 3 years time?

Higher rate certainly makes pensions look attractive.

The cash would be safe in a savings / ISA account - I could fix it for three years to get a better rate (though interest rates look like they will be rising).

Not that safe. Obviously, if you are spending the lot in 3 years time, then cash makes sense. However, the money you pay into the savings has been subject to 40% tax. So, you have lost 40% already. The pension gets 40% relief.

So, if your starting point was £1000, you would be paying £600 into the ISA and losing £400 in tax. Whereas the pension would get £1000 paid into it. yes it may be subject to 10% loss potential but you are starting with a higher value.

Are you really going to spend everything you put aside over the next 3 years in 3 years time?

MallyGirl · 8 April 2018 at 12:46PM

Since you only have 3 years I would max out the sal sac. You can!!!8217;t take yourself below minimum wage with sal sac but other than that it is a matter of how much income do you need to live off. Then sal sac the rest for 42% (40% tax plus 2% NI) above the HRT band and 32% (20% tax plus 12% NI) below it (approx). If you have a flexible system you can save even more NI by focusing the sal sac in a few months rather than equally across the year but not everyone has that option. My husband!!!8217;s company also put the employer NI in his pension but mine doesn!!!8217;t.

cloud_dog · 8 April 2018 at 1:06PM

The thing to find out OP is if the work pension scheme that you could utilise provides the ability to place contributions, or a percentage thereof, in to a deposit / cash fund.

If they do then this is also an option, and if they offer salary sacrifice you would be able to benefit from additional savings (NI). The only thing to look in the works pension scheme is if the pension provider will still levy a AMC on the cash/deposit. My experience (works scheme with Prudential) is that within these scheme offerings even if they offer a cash/deposit fund it is still a 'fund' and still has a AMC associated with it (I think the Prudential Cash fund was 0.5% AMC).

EDIT: All of my thinking is focussed on a no/low-risk associated solution (ignoring inflation).

EDIT: EDIT: If you confirm your company utilises salary sacrifice then as kidmugsy and other have said you would be better off going via your company pension scheme. Even if the company pension scheme charges 0.5% AMC/OCF for the cash fund then you would still be 1.5% better off as you would gain by 2% reduction in NI.

Seasidegal58 · 8 April 2018 at 2:26PM

Thanks everyone for your comments.

I think maxing out the salary sacrifice may be the route here. You are right cloud dog about the cash fund option in the pension - I'm currently in a very low risk, coming up to retirement lifestyle fund - I think more of the fund will be moving to the cash part of it over the next three years but I will check to make absolutely sure.

It wasn't my intention to spend the whole £20,000 as soon as I retire - I just want to make sure I have enough to cover all the costs when I move (which on current plans will be the year following retirement) and in case I need to outlay anything for the new property. I'm hoping I'll have some left over!

Funding A Retirement Account

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