Cash vs investments: the basics every retiree should know

Money in a bank account behaves very differently from money in the stock market, and the difference can have a big impact on how long your savings last. Getting the balance right is one of the most valuable things you can settle before you start drawing on your pot.

Cash: safe, but with a catch

Money in current accounts, savings accounts and cash ISAs is secure and usually instantly accessible. Since 1 December 2025, cash deposits are protected up to £120,000 per person, per authorised firm under the FSCS (up from the long-standing £85,000) — though beware that banks sharing a banking licence count as one firm, so spread very large balances around. Cash also isn't a single thing: instant-access, notice accounts, fixed-term bonds, cash ISAs and Premium Bonds all count, and higher rates usually mean giving up some access.

The trade-off with cash overall is growth. If the interest rate is below inflation, your money loses spending power even though the balance on the statement keeps going up. Cash has spent much of the last decade doing exactly that.

Don't forget the tax on cash

Interest on ordinary (non-ISA) savings is taxable, and higher rates have gradually pulled more people into paying it. Your Personal Savings Allowance lets a basic-rate taxpayer earn £1,000 of interest tax-free a year, a higher-rate taxpayer £500, and an additional-rate taxpayer nothing. At around 4%, it only takes about £25,000 of savings to use up a basic-rate allowance — and half that for a higher-rate taxpayer. Beyond it, interest is taxed at your normal rate. That's exactly why a cash ISA, where the interest is always tax-free, has become more valuable as rates have risen.

If your other taxable income is modest — a common position for someone drawing pension income close to the Personal Allowance — you may also benefit from the starting rate for savings, which can let you receive up to £5,000 of interest at 0%. It tapers away as your non-savings income rises above £12,570, and disappears entirely by £17,570, so the calculation is fiddly if you have other income. But it's worth checking rather than assuming all your savings interest is taxable.

One other practical point on FSCS: if a large sum lands in your account temporarily — the proceeds of your main home's sale, for example, or an inheritance — you may be covered by enhanced protection of up to £1.4 million for six months under the "temporary high balance" rules. If you're briefly holding more than the £120,000 limit after a big life event, it's worth checking whether this applies before shuffling money around in a hurry.

The ISA position — and two changes worth noting

Your ISA allowance for 2026/27 is £20,000, which you can hold as cash, as stocks and shares, or a mix. Two changes are coming from 6 April 2027. First, the amount under-65s can put into a cash ISA each year will be capped at £12,000 (the overall £20,000 stays, with the rest going into investment ISAs) — anyone aged 65 or over keeps the full £20,000 cash ISA allowance, so this part doesn't affect most readers here.

Second, and this one applies at any age: interest earned on cash sitting inside a stocks & shares ISA will face a 22% charge, closing what's currently a tax-free parking spot for uninvested cash. If you're holding meaningful cash inside your investment ISA rather than a cash ISA or savings account, it's worth knowing this stops being tax-efficient from April 2027 — your ISA provider handles the charge automatically, but the effective return on that cash will drop. Actual investments held in the ISA — shares, funds, bonds — aren't affected at all.

Tax outside an ISA

An ISA shelters interest, dividends and capital gains from tax completely — inside the wrapper, none of it counts. Outside an ISA, three separate things can each become taxable: interest on savings (as above), dividends from shares and funds, and capital gains when you sell investments for more than you paid.

For most retirees the practical takeaway is: use ISA allowances whenever you have room for them, particularly for investments — dividends and gains outside the wrapper can compound into a real tax bill over years or decades.

Investments: more growth, more turbulence

Money in shares, funds and stocks & shares ISAs has historically grown faster than cash over long periods. The catch is volatility: the value can fall sharply in any given year, sometimes 20% or more, with no guarantee of any particular future return. A £100,000 invested pot that falls to £70,000 is worth £30,000 less, however you frame it — but for someone with a long horizon, that fall only becomes a permanent loss if you sell during the dip. Historically, markets have recovered from falls and gone on to grow further. Over a short horizon, they can be anywhere. Time is what turns volatility from a danger into a feature — provided you have time.

Between cash and shares are bonds, which sit somewhere in between on both return and risk. Their role in a portfolio is more nuanced than cash's, and they can lose value too, but it's worth knowing they exist — "investments" isn't just shares. (Note that the FSCS limit for investments, if an investment firm fails, is £85,000 rather than the £120,000 for cash — though that protects against firm failure, not against markets falling.)

Where your income comes from matters

Two people with the same-sized pot can reasonably hold very different mixes of cash and investments, and the reason is usually where their income actually comes from. Consider two examples.

Person A has the full State Pension, a defined-benefit pension paying £14,000 a year, and £100,000 of investments alongside. Their essential monthly bills are more or less covered by guaranteed income. Their investments are for extras, larger one-off costs, and eventually to pass on — meaning they can genuinely afford to think long-term and ride out market falls without needing to sell at the bottom.

Person B has the full State Pension but no defined-benefit pension — and a £300,000 invested pot that has to fund most of their monthly income for the next 20-plus years. Every market fall potentially forces them to sell after a drop, which is exactly the pressure that damages long-term outcomes the most.

The more of your essential spending is covered by secure income — State Pension, defined-benefit pensions, annuities — the more flexibility you have with the rest of your money. If your investments have to fund essential spending, an appropriate cash reserve becomes much more important.

Why market falls matter more after retirement

Imagine two people who experience exactly the same investment returns over 20 years — the same market crashes, the same recoveries, in a different order. If one experiences the worst returns at the start of their retirement, while they're already drawing money out, they can end up with substantially less at the end than someone who happened to hit those bad years later.

This is called sequence-of-returns risk, and it's one of the central problems in retirement finance. The aim isn't to predict when crashes will happen (nobody can). It's to reduce the chance you're forced to sell a lot of investments after a substantial fall just to pay the bills — because that's the specific situation from which portfolios struggle most to recover.

How much cash should you hold?

One commonly used approach — the "two-pot" idea — is to keep perhaps one to three years of essential spending in relatively secure, accessible assets (cash, cash ISAs, short-dated deposits), so you're never forced to sell investments at the bottom, and invest the rest for the long-term growth that keeps you ahead of inflation. You spend from the cash in bad years and top it up in good ones.

There's no universally correct number, though. Someone with substantial guaranteed income (like Person A above) may need a much smaller cash reserve than someone drawing most of their income from investments (Person B). Your appetite for market volatility matters too. It's a decision worth talking through with a good regulated financial adviser, because getting it wrong in either direction — too little cash, or too much — has real long-term costs.

Diversification

Within the investment side, a common way to spread risk is through a single low-cost global fund or ETF (Exchange-Traded Fund) rather than a handful of individual shares. Diversification softens the blow when any one company or sector does badly — but it's important to understand what it can and can't do. It reduces the risk of concentrated losses, but it can't prevent losses when markets fall generally. There are many ways to invest through diversified funds: mobile phone apps, online brokers, traditional banks, and through regulated financial advisers.

Which money should be cash?

If there's a single practical takeaway from this guide, it's this: the decision isn't really "cash vs investments" as a whole-pot question. It's "when will I need this money, and how much loss can I tolerate before then?" Different pots of money reasonably belong in different places.

Cash is generally more appropriate for:

• emergency savings
• money needed within the next couple of years
• known large purchases (a new car, a big trip, home repairs)
• money you're not willing to see fall in value
• near-term retirement spending

Investments may be more appropriate for:

• money you won't need for several years
• longer-term retirement spending
• money intended to keep its purchasing power over decades
• money you can tolerate fluctuating in value along the way

How much of each is right for you depends on your other income, how long the money needs to last, and how comfortably you sleep when markets fall. You can test different growth and inflation assumptions against your own figures in the Drawdown Tool — and if you're weighing a real shift from cash into investments, that's a decision a regulated adviser can help you get right.