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Millions fall into the emergency savings gap in retirement

Here’s why you should keep an emergency fund of cash, how big it should be and where you should keep it.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Lots of retirees are far more financially vulnerable than they think. Just under half don’t have enough savings set aside for emergencies*. But of these, one in five think they’re pretty secure, and they have plenty of savings, when in fact their cash safety net might not be as big as they think it is.

It’s easy to see why retirees can be more confident about their financial resilience than their working age counterparts. Retirees are more likely to have money set aside for emergencies, and less likely to worry about a lack of savings. Lots have also fared better financially during the crisis, especially those on a guaranteed income.

However, this doesn’t mean they’re in the clear. That’s because many don’t realise quite how much of a safety net is needed at this stage in life. Many fall horribly short, with around one in 12 unable to cover essential expenses for a month from savings, and another one in six unable to cover 3 months’ worth.

*Statistics quoted in this article are from a national representative survey of 10,030 UK adults by Focaldata in June 2021.

How much cash do you need?

Until you get to retirement, we think most people should have 3-6 months’ worth of essential expenses set aside in an easily accessible account. But after retirement, this should be more like 1-3 years’ worth.

This is to reflect the loss of earning potential. One-off costs out of income are harder to meet, so you need to be prepared if the boiler breaks or the clutch goes on the car.

If you’re taking an income from drawing down on your pensions, there’s also the risk that the amount you take will fluctuate. Having cash savings helps you fill any gaps. It means in difficult markets, you can take income from cash to avoid eroding the value of your pension investments. Then when things improve, you could consider switching back to your pension and top up your cash savings again.

According to ONS data on household expenditure the average person living alone in retirement would need between £8,898 and £26,692 in cash to cover 1 – 3 year’s expenditure.

For couples, the figures are between £16,989 and £50,965. It’s worth noting, this is for the average person – you should calculate these figures based on your own circumstances and expenses.

How much cash should you hold?

Where should this cash be?

Unexpected costs don’t always come at the best times. So it’s important to be able to access your money when you need it. We think you should keep your emergency cash in an easily accessible savings account.

When holding large sums of cash, like in retirement, getting a good return can make a big difference to your money. Big banks typically pay a pittance on their instant access savings accounts, but you can get much better rates by looking further afield.

Active Savings can cut out the hassle of searching for better returns. You can choose from a selection of easy access products, from a range of banks and building societies, in one online account. High street banks offer instant access accounts which allow you to withdraw your money instantly. Active Savings offers easy access accounts and withdrawals typically take one working day.

For any savings you have over and above your emergency fund, Active Savings gives you access to a wide range of fixed term products, too. Fixed terms usually pay a better rate than easy access, but you can’t normally access your money until they end. You can fix from just a few months up to five years, and typically the longer you fix for, the better the rate is.

This article isn’t personal advice. Please remember that inflation reduces the future spending power of money.

The best rates on Active Savings

Easy access

Up to
0.50% | 0.50%
(AER | Gross)

1 year

Up to
1.33% | 1.33%
(AER | Gross)

2 years

Up to
1.55% | 1.55%
(AER | Gross)

3 years

Up to
1.65% | 1.65%
(AER | Gross)

Easy access

Up to
0.50% | 0.50%
(AER | Gross)

1 year

Up to
1.33% | 1.33%
(AER | Gross)

3 years

Up to
1.65% | 1.65%
(AER | Gross)

Find out more

Please note the products above are some of our most popular, but more are available. Click the link above to see our full range. Products can be added or withdrawn at any time. Minimum deposit requirements apply to individual products. Easy access products pay a variable rate and fixed term products pay a fixed rate.

AER (Annual Equivalent Rate) shows what the interest rate/expected profit rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products. Once you have opened a fixed term product the rate won't change, but rates on easy access products can vary.

Gross means the rate without any tax removed. Interest/profits are paid gross. You are responsible for paying any tax due on interest/profits that exceed your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

AER (Annual Equivalent Rate) – AER shows what the interest rate/expected profit rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.

Gross – the interest rate without any tax removed. Interest/profits are paid gross. You are responsible for paying any tax due on interest/profits that exceed your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

Expected profit rate (EPR): Islamic banks offer an expected profit rate rather than interest on their savings products in order to comply with Sharia banking principles.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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