Pension vs Savings

[Florabella]

after a split I am trying to build up my pension and my savings, but not sure what split to do between them now, I’m 54 (self employed) and have £175k in my pension and £50k in savings. At the moment I earn between £65-£70k and support 3 children who will soon need financial help at uni. My earnings aren’t guaranteed due to the nature of my business. I am saving every penny I can, but not sure when I should say I have enough savings and put everything into my pension instead. I can usually save £1k per month to put towards either savings or pension. What would you do? Thanks

This is what i'd do:

1. Calculate the amount needed to support children through uni.
2. Set savings aim as 4x salary plus amount needed for uni.
3. Pay into savings first until you have the amount in 2.
4. Then move to put everything into pension.

Are the savings in cash or invested?

£50k is decent savings so I’d probably focus mainly on the pension given the tax breaks but put some into an ISA, given you have expensive uni years ahead of you and your income is not guaranteed.

Savings are a mix of cash isa, premium bonds and savings account. I would like to open a stocks and shares isa, but don’t really know what I should be doing for that

That’s a lot to have in cash! I think I’d ask your current bank about a stocks and shares ISA, can be very easy to open online. Just check charges carefully.

I’d say short term cash savings you’re good. (One years expenses sounds ideal plus a bit extra if eldest will be needing your help soon) I’d def start this tax year and try to fill you ISA allowance in S&S only - no further cash. Anything else put into your pension.

how many years do you have before eldest and youngest will be at uni. Will they overlap? Will your ex be paying half as well?

presumably the £1000 you’re saving currently will more than fund eldest so you’re actually planning for a change in circumstances and middle child going to uni?

Have you thought about using your pension lump sum for the help you want to give your DC, rather than doing that out of just savings/ISA? You're 54 now, so will be able to take your lump sum in a year, just missing the age increase to age 57 in April 2028.

You're paying a marginal rate of 40% tax on £15-20k of your income. Eg if you earn £70k, you only get £12k net after tax (to put in your ISA/savings) for £20k income (ie your income between £50k and £70k)

If you put that £20k into your pension instead, then you can take £5k of that tax free at age 55 to help your kids. That will still leave £15k in your pension which you'll presumably take when you're no longer working and so are only paying 20% tax - ie £12k net. Ie if you wait to take that remaining pension after lump sum until you stop working, you'll get as much net at that time as you would have got net now without the tax-free lump sum (because you're currently paying higher rate tax)!

Do be careful to only take the tax-free lump sum from your pension until you actually stop working - once you take any taxed pension, you trigger the Money Purchase Annual Allowance (MPAA), which reduces how much you can put into your pension to £10k/year. So you should think about how much money you need before that, and make sure your savings and lump sum covers it.

You' should also make sure your lump sum doesn't look like pension recycling if you keep putting lots more into pension after taking the lump sum. Worth starting pension payments a few years before you take the lump sum, to have a pattern.