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Optimal Amount of Emergency Cash to Hold During Retirement – Tips

Retirement planning: Financial professionals recommend maintaining an emergency cash fund covering one to three years of basic needs

A hefty financial buffer, equivalent to one to three years of essential expenditure, is considered optimal for individuals after they retire, according to finance experts.

This suggestion surpasses the conventional advice of accumulating an emergency fund of three to six months’ wages for the employed, as bouncing back from financial setbacks is more manageable while there is still an income.

Hargreaves Lansdown’s Personal Finance Chief, Sarah Coles, advises that the decision on the amount to put aside for urgent needs ultimately depends on what one deems critical and the sum allocated to such necessities.

The company’s research shows that minimum wage earners spend an average of £748 per month to cover essential bills, while median wage earners spend about £1,685.

Hargreaves Lansdown suggests that people aged 60 and over should aim to keep an emergency fund ranging from £16,680 to £50,040.

‘Your position in this range depends mainly on your situation,’ says Coles.

‘If you receive a substantial, secured income from a defined benefit pension scheme, you might have extra room to save during retirement and handle some emergency expenses from your monthly pension.’

‘If your income is less, it would be best to save more tender.’

Essentials for Tax-Free Cash Withdrawal

In most cases, your emergency cash fund will comprise pre-retirement savings and parts of your tax-free pension lump sum, says Sarah Coles of Hargreaves.

However, she reminds individuals that claiming a tax-free lump sum should not be done lightly.

‘Claiming your tax-free lump sum implies forfeiting any potential growth associated with your investments, and in many cases, it could mean leaving a tax-efficient environment,’ she warns.

Consider this before Claiming or Spending your Tax-Free Lump Sum

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, provides these tips:

1. Don’t rush into taking it out all at once. There’s no obligation to take anything at all at the age of 55. You are free to take it in parts – as and when needed.

2. Don’t make any withdrawals without a solid plan. If you remove too much cash from your pension before it’s needed, it could easily go to waste.

3. Consider the effect on your pension income down the line. Whether you’re planning to buy an annuity or draw a percentage of the pot, reducing your cash intake leads to less ongoing pension income.

4. Don’t forget to consider tax as you progress. You’re removing assets from a tax-free environment, so aim not to expose them to tax where possible. Consider using a cash Isa for the first £20,000 per year.

5. Don’t overlook inheritance tax. Money retained in a Sipp or pension is usually not subject to inheritance tax. Transferring it from this environment to an Isa or bank account could lead your family with an unexpected bill.

For more Personal Finance news, click here.


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