Do you plan to use both savings and your pension to survive in retirement? Using your savings as opposed to your pension can provide many benefits. It can mean you are left with more cash to have fun with when your retirement day finally does arrive.
Increasing the purchasing power of all the funds you have available to you is vital in retirement. Given that you will no longer be earning a salary or earning a regular income, making the most of your savings and pension is essential. Doing so will ensure that you have the quality of life you want throughout your retirement.
However, the world of pensions and savings can be complicated. It can be confusing to understand what strategies to employ during your retirement to leave yourself with the most spare cash. Here, we investigate how to use your savings to make you better off in retirement. Doing so can be an extremely effective way to enhance your retirement pot.
Why you should use your savings to make you better off in retirement
There are several reasons using your savings in retirement can be hugely beneficial to protecting your retirement pot’s value. Consider them in comparison to drawing from your pension.
Better returns on pension
By and large, you are far more likely to get better returns on your pension investments in comparison to interest rates seen on savings products. As a result, your pension pot will stand to make you more money than your savings ever will. So, if you start using your savings first when you have retired, you will be losing out on less interest than you would do if you drew money out of your pension.
Tax efficiency is another significant advantage to using your savings in retirement than drawing from your pension. Your pension is, and will have been for a long time, one of the most tax-efficient ways to save money. Paying into your pension would have largely been before tax, and now, in retirement, this continues to be beneficial.
The interest earned on pensions is tax-free and is only taxable when you start to take an income from it. The likelihood is that you will have come down a tax band in your retirement too. Like many pensioners, you may only have to pay the marginal tax rate on your pension income, whereas you may well have had to pay tax on your salary at a higher rate.
Another benefit that may be overlooked is the ease of access you will have to many savings accounts. Depending on the product you use for your savings, taking cash out from them may not be subject to the penalties. However, it could be that your pension may penalise you if you withdraw money from it before retirement age.
How to use your savings to make you better off in retirement
There are many ways to use your savings to make you even better off in retirement. The following are in addition to simply using your savings first as your source of cash instead of your pension.
If you have a large enough pot of savings to survive on, it is possible to reinvest those and see them grow even further.
You need to find products that answer your now different needs to those you had whilst you were working. You may want to choose investments that are safer and less likely to lose value.
Bonds and ISAs are largely seen as safer investments. However, there is no total guarantee that you will never lose some or all of your original investment amount.
Having easy access is also a characteristic that may be more attractive to you as a pensioner - or at least a product with a very short maturity date.
Reap the investment
Using your savings to live off can be an effective way to be better off in retirement overall. You can simply leave your pension pot growing for even longer. Given the size of your pension pot at retirement age, the amount of return you may receive may be substantial. Reinvesting your pension in this way is, again, a tax-efficient way of running your money.
Using your retirement savings - key takeaways
Retirement is something that we all dream of. Finally, you will have the time to go on holiday to far-flung destinations or indulge in your hobbies. However, doing so is only possible if you have the funds. Having a quality of life you aspire to throughout your retirement is possible, but it does take planning to be able to afford it. Using your savings first, in comparison to drawing money from your pension, is one of the effective ways you can make your money go that bit further. Consider this tactic with respect to your own individual financial circumstances. In doing so, you will see whether it will improve the amount of money you have in your retirement.