ISAs v Pensions: The Official Retirement Debate

MSE_Martin · 12 February 2007 at 10:28PM

Both ISAs and Pensions are tax-free wrappers you can use to invest or save money in to provide a return for your old age.

ISAs In a nutshell you put money in ISAs from your after tax salary, and the returns aren't taxed (very much in a nutshell, its more complex than that, see the ISA guide)
Pensions. In a nutshell the benefit it you get to put your money in a pension from your before tax salary, but the returns once you retire are taxed (again read the pensions guide for more on this)

It's important to remember both these are just wrappers, in other words you can choose what you put in them. In both you can have a savings product or a range of investments.

So which is better for retirement?

Now I'm opening the debate up. There's no strict right or wrong answer only views. I thought it would be interesting to canvas opinions, there are many qualified (and unqualified) money nerds on these boards. Now its time to have your say.

Martin

Paul_Varjak · 12 February 2007 at 11:00PM

The problem with ISAs is the temptation to dip into them before retirement, so I follow the rule - put money into a pension first and then put money into an ISA.

Ian_W · 12 February 2007 at 11:10PM

I just posted this
http://forums.moneysavingexpert.com/showthread.html?t=374730&page=2
in reply to someone who was struggling to pay towards either a pension or ISA but was being persuaded towards the ISA route.

It seems to me that if you can afford to pay the "right" amount now towards retirement savings then ISA's offer much more flexibility - as Paul says, for some maybe too much - but if you're struggling to pay enough then use the tax perk now to ensure more goes in your funds.

If you do go the pension route initially you can always supplement it with ISAs later instead of increased pension contributions.

Also where co's offer pensions they often make a significant contribution - and free money is the best there is.

Ewymac · 12 February 2007 at 11:19PM

Does my employer contribute to my avc contributions? I think not? Therefore am I better off going down the ISA route. I pay 9% into the teachers avc with the PRU (apparently not doing too well)

I have £30K in the fund!!!

Anyone got a view?

Thanks in advance.

jem16 · 12 February 2007 at 11:25PM

Ewymac wrote:

Does my employer contribute to my avc contributions? I think not?

No your employer does not contribute to your AVCs. The employer contribution goes to your main teacher's pension which is obviously final salary - don't let this part go!

peterg1965 · 12 February 2007 at 11:27PM

You have to be very disciplined not to take money from ISAs before retirement, the temptation is always there. With a pension as an investment wrapper you can claim tax relief on the amount you pay in (within certain limits) and this surely makes it ideal for a higher rate tax payer. The tax relief, in a way, cancels out the tax which you will pay when you take the pension as income in retirement. There are also various options, like lump sum tax free withdrawals, which make the pension investment better. Also if an employer contributes this allows even more money to be invested, which you dont get with a traditional ISA product. However, as always I would assume that a balanced portfolio of investments is the best way to go.

jem16 · 12 February 2007 at 11:36PM

peterg1965 wrote:

You have to be very disciplined not to take money from ISAs before retirement, the temptation is always there. With a pension as an investment wrapper you can claim tax relief on the amount you pay in (within certain limits) and this surely makes it ideal for a higher rate tax payer. The tax relief, in a way, cancels out the tax which you will pay when you take the pension as income in retirement.

The pension wrapper can be ideal for the higher rate taxpayer who will be a basic rate taxpayer in retirement. 40% relief going in and 22% coming out.

Best bet is probably a mixture. Up to £10,000 of pension income followed by ISA income.

whiteflag_3 · 12 February 2007 at 11:54PM

Ewymac wrote:

Does my employer contribute to my avc contributions? I think not? Therefore am I better off going down the ISA route. I pay 9% into the teachers avc with the PRU (apparently not doing too well)

I have £30K in the fund!!!

Anyone got a view?

Thanks in advance.

Yes its only the 4th thread and already in danger of going off topic!

Back to Op

IMHO

Low income - ISAs best
Middle Income - Use both
High Income - Pensions then ISAs

nrsql · 13 February 2007 at 12:39AM

I would go for an isa because I don't trust pensions.
That' not a view due to the recent troubles but because money is locked in and there's not a lot you can do if the rules change.
At least currently with an isa you can take the money out so I feel there's less chance of an unavoidable loss.
But then I wouldn't keep everything in an isa wrapper either, just in case.

Ian_W · 13 February 2007 at 12:55AM

whiteflag wrote:

IMHO
Low income - ISAs best
Middle Income - Use both
High Income - Pensions then ISAs

Interesting - but not overly informative! :rolleyes:

If someone is on a low income starting retirement saving but can put, say, £1K pa into either an ISA or Pension the tax top up of £220 in the pension would equate to about 3yrs earnings [using the FSA's mid-point 7% illustration and ignoring compounding] on the £1K in an ISA. As we know that the money that's in longest works hardest for you - wouldn't the pension be better?

nrsql · 13 February 2007 at 1:04AM

Ian_W wrote:

Interesting - but not overly informative! :rolleyes:

If someone is on a low income starting retirement saving but can put, say, £1K pa into either an ISA or Pension the tax top up of £220 in the pension would equate to about 3yrs earnings [using the FSA's mid-point 7% illustration and ignoring compounding] on the £1K in an ISA. As we know that the money that's in longest works hardest for you - wouldn't the pension be better?

Nope because a pension is taxed as a percentage when you take it out. The more it grows the more you lose in tax.
So put in 1000 add 220 it doubles and you get taxed 440 leaving 2000
ISA put in 1000 doubles get 2000 so works out the same.

There might be a difference due to lower income in retirement so less tax liability though.

ISAs v Pensions: The Official Retirement Debate

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