We’ve already explained the many reasons why simplifying your investments for retirement could improve your financial and general well-being during retirement. In this follow-up article, we’ll outline what steps you could take to streamline your savings and investments. If you’re looking to find out how to simplify your savings and investments, read on!
1. Consolidate your cash savings accounts (while retaining FSCS protection)
Over a saving lifetime, it’s very common to amass a huge list of active savings accounts. We tend to use fixed-term savings products to get the best rate, but these aren’t generally open to new deposits, meaning we open other fixed-term accounts if we wish to save a lump sum. This produces a patchwork of savings accounts with different maturity dates. This can get very cumbersome to manage.
It’s time to bring those pots together in a way that means you have as few banking relationships as possible.
A sensible way to understand the fewest accounts you need is to picture your cash like a pyramid:
- Top of the pyramid: current account with enough cash to cover outgoings in the next two months.
- The middle level in the pyramid: instant access savings account with enough cash to cover a large one-off expense such as a holiday, gas boiler replacement, and any other large expenses you foresee in the next couple of years.
- Bottom of the pyramid: fixed-term savings accounts, holding the remainder of your cash. You should move this cash to the UK banks offering the highest savings rates for the next 2 – 5 years. To ensure that all of your money is covered by the Financial Services Compensation Scheme, you will want to open a new account for every £85,000 of cash.
For 100% coverage, don’t put precisely £85,000 in each bank, as any interest subsequently earned will take you over the limit. It’s more sensible to add £80,000 instead to future proof your plans.
In practice this could look like the following:
Current account: £1,800
Instant access: £7,000
Fixed term savings: £140,000 – split across two banks so that no single institution holds over £85,000
Assuming that your current account and instant access saver are at the same bank – this setup could be achieved with 4 accounts across two banks.
Because of the different maturity dates on your savings accounts, consolidating your cash may take several years, but it’ll feel fulfilling to finally have more control over your balances.
2. Consider a cash account platform
To streamline the above, you may want to consider using a savings account aggregation service that allows you to deposit money as a lump sum (e.g. £250,000) and then spreads your money across multiple banks to gain full FSCS protection without the administration of needing separate banking relationships.
These services, such as Flagstone, charge a service fee of between 0.15% – 0.25% in return for convenience. This fee might be a price worth paying to ensure that you’re maximising both the interest you’re earning on your savings and getting full FSCS protection with less hassle.
3. Consolidate simple defined-contribution pension schemes
If you have contributed to a defined contribution pension scheme (such as a workplace stakeholder pension scheme) at multiple employers throughout your career, you will have a collection of pension pots with different providers (such as Legal & General, Aegon, Standard Life and Aviva) when approaching retirement.
By combining these simple schemes into one pot, you can reduce the fees you pay and make life much easier when you choose to buy an annuity or convert your account to a drawdown pension scheme.
You have two options to consider when consolidating your schemes; you could pick your favourite, and bring the remaining pension pots over, or you could pick an entirely new pension provider entirely, and migrate all of your pension accounts.
Transferring a defined contribution scheme is a fairly simple affair which isn’t too different from transferring a stocks & shares ISA from one provider to another. You’ll just need to contact the incoming provider and give them sufficient details of your existing account, to allow them to reach out to your existing pension provider and initiate the transfer.
When trying to choose your favourite pension provider, look beyond the account fee if you want to find the cheapest. Most of your fees will probably be incurred by the funds themselves, this is communicated on the Fund Factsheet for any scheme, and will usually be referred to as the ‘Annual management charge’ (AMC), ‘Total expense ratio’ (TER) or an Ongoing charges figure (ONF). Please note that these definitions have different compositions, so a 0.3% management charge is not like-for-like with a 0.3% total expense ratio. Therefore do your research to avoid reaching the wrong conclusion if the fund factsheets you compare quote different metrics.
Transferring or consolidating defined benefit schemes is a different ballpark to moving defined contribution schemes, and should not be undertaken lightly. Some defined benefit schemes are very generous and include benefits that would disappear if you were to transfer the pension to a different provider. For this reason, seeking financial advice is mandated when attempting to transfer out of a defined benefit scheme.
4. Convert your savings from non-ISA to ISA
When you move into retirement, you would expect that your tax situation would become simpler, but often it’s quite the opposite.
Many pension schemes allow drawdowns that aren’t taxed at source, which means you may have to complete a tax return for the first time to ensure you’re paying the correct amount of income tax on your income.
If you’re not a tax professional and don’t have tax books to hand, you’ll probably need expensive assistance in preparing your tax return.
Keep your life as simple as possible by ensuring that you’re utilising the full ISA allowance of £20,000 every year, to transfer savings & investments from non-ISA accounts into their ISA variant.
If you have a £100,000 general investment account, you could open an ISA with the same provider, and transfer £20,000 of cash from the GIA to the ISA each year, such that after 5 years you’d have all of your funds within an ISA.
The beauty of the Stocks & Shares ISA is that you don’t have to report any gains or income arising from it on your tax return. This will help to keep your tax affairs as straightforward as possible.