‘Does it make sense to hold £345,000 in cash?’

Our reader wants a £50,000 yearly income but knows that inflation is eating away at his savings. By Will Kirkman

While sky- high inflation will affect everyone this year, those who hold much of their wealth in cash are most at risk. Douglas Graham, 61, from Aberdeenshire, hopes to retire in the next two years after his children graduate from university and private school.

He is in a good financial position. He has two private pension plans totalling £450,000, a final salary scheme that will pay around £7,000 a year, a second home worth £250,000, which is mortgage free and currently occupied by his daughter, and £365,000 in savings and investments.

However, Mr Graham holds £ 345,000 in cash and has just £20,000 invested, which is solely in shares in Halfords, the car and bike parts retailer. He has £ 175,000 in a cash Isa, £135,000 in a one-year savings bond and £ 35,000 in an easyaccess account.

None of the interest rates on his savings accounts matches inflation, so he will lose money in real terms this year.

He now wants to rearrange his finances to allow him to achieve an annual retirement income of £50,000 after tax while paying as little tax as possible and protecting his wealth from rising prices.

Hayley North Financial planner, Rose & North

Mr Graham could meet his £50,000 after- tax target retirement income without investing any more money, as long as his two pensions grow at 5.4pc a year and assuming his cash accounts pay 0.5pc a year. Withdrawals from his pensions, topped up by withdrawals from his cash savings, ngs, w would allow him to meet his income me target every year until the age of f 100, according to our cash flow forecasts. casts. However, he could improve his is position with some planning.

Holding lots of cash sh is not an efficient way to save for retirement; in fact, Mr Graham is losing ing money by keeping £345,000 in cash over the long term.

While inflation is currently at a 30-year high, it is not ot expected to remain this high for a long time. That said, returns urns on cash savings have been well under the long-term erm average rate of inflaation, which was 2.5pc c a year between 1999 and 2022, according to the Office for National Statistics.

We advise keeping a few months’ worth of income in savings accounts for emergencies. You are also strongly advised to keep up to a year’s worth of income on hand if you are about to retire and take an income from your pensions and investments, especially when markets are choppy.

If Mr Graham keeps £50,000 on one side, he still has £ 295,000 to invest. Cash Isas can be transferred into stocks and shares Isas. There is no guarantee that investing will beat cash this year, but over the longer term it is all but certain to.

If Mr Graham uses his £20,000 Isa allowance each year he could gradually move all his investments into Isas to make sure his profits are kept away from the taxman and to increase future tax-free income.

He should keep his investment property to rent out as this will generate additional retirement income and keep his assets diversified. It will also help him avoid having to take money out of his investments if the timing is not right, such as when stock markets are falling.

Mr Graham will have a variety of options available to take income from his pensions and will be able to use his 25pc tax-free cash entitlement as income or lump sums, depending on his position at the time.

There are big changes occurring in financial markets against a backdrop of war, the pandemic, uncertainty and supply shortages. Corporate and government bonds are not providing the ballast against stock market volatility they usually do.

There are some excellent funds that work well in volatile environments. One example is Ruffer Total Return, which f focuses on not losing money rather than chasing growth. However, investing i in just one fund or stock is risky and can have mixed outcomes.

We th therefore advise holding a diversifi diversified portfolio of highly rated funds with strong performance track records and recommend assess assessing performance over the long t term and not just over the prev previous few weeks.

W With a secure, inflationlin linked final salary pension, an i investment property, cash

savings and investments in a broad range of funds, Mr Graham will be in a strong position when he retires. In the meantime he would be wise to save as much as possible while working, as well as ensuring he has life insurance in place to cover any shortfall for his family should he die before retirement.

Richard Harwood

Financial planner, Brewin Dolphin Between Mr Graham’s state pension and his guaranteed pension of £7,000 a year, he will have an annual income of about £15,700 after tax. So he would need to find another £34,300 net of tax to reach his £50,000 goal.

He could look to provide this from his pension funds. However, this would mean withdrawing about £45,900 a year gross, as a lot of his income would be subject to the 40pc higher rate of tax.

There is an option to take some of his money as tax-free cash under the 25pc rule. Therefore, the ideal option is to make regular pension withdrawals, partly of tax-free cash and partly of taxable sums.

In the event of death, pension funds can be passed on without attracting inheritance tax. So it makes sense to take at least some income from his Isas and his property. This will maintain a portion of his pension wealth for the longer term and mean his estate does not incur a damaging inheritance tax bill.

To do this, I would suggest that he consider his cash savings. It is essential to maintain a contingency fund, but £345,000 in cash savings is excessive, especially given the current high rate of inflation. Mr Graham may wish to place £50,000 into Premium Bonds and the rest on deposit, depending on available interest rates. This could be done over time as his current fixed-rate savings mature.

It is worth looking at the possibility of transferring the private pensions into a “flexible drawdown” plan so he can keep the money invested and withdraw an income. Before doing so it is important to check whether there are any rights to benefits such as enhanced annuity rates or an additional tax-free lump sum, which could be very valuable.