ISA or Pension

michaels

Can anyone point me to any information on the relative benefits of these two savings methods?

I am currently a higher rate tax payer but would expect to be on the threshold on retirement in 30(?) years time.

The issues that worry me the most are the uncertainties over the taxation / regulation framework.

Given current demographic trends it is probably safe to assume:
That state pensions including s2p with be worth in real terms less than they are now, probably with later entitlement as well
That taxation as a share of total income will increase.
That private pension entitlement may be later and endowment rules more restrictive (eg the 25% lump sum and endowment purchasing windows may well be reduced.
That taxation of private pensions may be increased (by for example reduced maximum contributions, reduced tax releif etc)

Given all this uncertainty is the current relief on pension contributions actually worth having or would maxmising ISA investment be a lower risk option (especially given that any pension income might be taxed more highly by the time it is actually received) What is the risk of / impact of ISA benefits being removed at some future time on existing as well as new isa savings?

Any comments / can anyone point me to any research that has been carried out in this area?

Thanks

Quasar

michaels, not that I have an answer for you, quite the opposite: I have been wondering the same thing for months!

Although I am not in the higher income tax bracket, I have quite a bit in a Maxi Isa to date, and just about as much in a Prudential Bond (£200 going in every month). When the day comes, I shall have only state pension as I have decided not to invest in one privately, what with all the bad publicity in the last few years.

Hopefully one or two of the many experts on this forum will come to our aid and comfort...

deemy2004

Maximise ISA's !

Though I think the state pension will keep growing inline with inflation so hold current value.. this assumption is due to the fact that the more old people there are the more political clout they will have to force home pensioner friendly policies.

For me, the ISA allowances come first and I leave the employer to fund my SIPP with their contribution.

Don't forget to top up your partners annual ISA allowance also if they are non working.

At least with an ISA - you always have 100% controll over it and theres no chance that your going to retire and find out all the friendly projections from your pensions advisor were complete BS, to rake home of the commission year on year...

cheerfulcat

Given all this uncertainty is the current relief on pension contributions actually worth having or would maxmising ISA investment be a lower risk option (especially given that any pension income might be taxed more highly by the time it is actually received) What is the risk of / impact of ISA benefits being removed at some future time on existing as well as new isa savings?

I suspect that all of your assumptions are correct. Unfortunately there is absolutely no way of knowing what the future of ISAs and pensions will be. Given this government's track record, and their stated aim of "redistribution", I would not be surprised if the tax benefits of ISAs were restricted once they come to an end ( they are only guaranteed until, IIRC, 2009 ).


As far as pensions are concerned - there is talk of compulsory pension contributions; should this come about, there would be no requirement for tax incentives. But compulsion could be tricky :-)

I too have given this an awful lot of thought and come to the conclusion that it is best to take tax incentives where they are offered. On the ISA vs pension front I suppose it could be argued that since money goes into the pension before tax and into the ISA after tax, you are gaining an immediate advantage with the pension contribution, regardless of the tax situation when you retire, whereas with the ISA you are counting on the tax-free status of ISA income still applying 30 years down the line.

You might find the discussions here of interest -

http://boards.fool.co.uk/messages.asp?mid=9608447&bid=51540

dunstonh

A higher rate tax payer may consider paying into a pension now rather than an ISA whilst higher rate tax relief still exists. A basic rate taxpayer may consider paying into an ISA rather than a pension and wait until such time that they are a higher rate tax payer and then move it over at that time.

EdInvestor

Nice to see we agree on something now and again, dunstonh.

dunstonh

Ed, as i have said before, you are often right. However, you just tend to push it as the 100% answer for everyone and there is hardly ever a 100% answer for everyone. Thats when you get us having to balance it up which then gives the impression that we are negative towards your views.

There are also times when the best financial option is not the best recommended option because of the personality and nature of the person. Someone that cannot be trusted with the potential easy access of the ISA should use a pension to protect them from drawing the money out on a whim. They need the tie in of a pension to ensure that the goal is met.

paul666

I think dunstonh works extremely hard to be appropriate, careful but still helpful on this forum and while I don't always agree with him I have a great deal of respect for him.

It's one thing to have your own opinion, get it wrong and loose your own money but as an IFA dunstonh has to take *far* more care than that and I value his contributions to this board.

EdInvestor

The only problem with dunstonh is that he sometimes seems to confuse giving information and opinion with giving "advice" in the regulated sense, where very considerable care is required by whoever's giving it, lest the person later make a complaint he was mis-sold.

I guess this is understandable since it's his day job.

But this is not a regulated forum, we are not selling any financial products here and none of us is giving "advice" in it's regulated sense..It's thus not necessary to hedge every single remark with back protection comments in compliance with regulatory rules, such that ordinary people can't understand what the hell you're talking about.

If you do this, it defeats the whole purpose of the discussion.

I understand that what I say may appear "blunt" to him, because he is used to having to make all these professional caveats in the course of giving "advice".

But I advise him not to worry about this, because he is not "at work" when he is posting on this website.

NeilW

But I advise him not to worry about this, because he is not "at work" when he is posting on this website.

I'm not entirely sure that English Law, and in particular the FSA, would regard any professional as ever being off duty. Certainly the indemnity insurers who have to fund the court cases think that way.

Regrettably you do have to be careful in all areas where you comment, just in case. And yes that means that clarity suffers and everybody gets confused. That's the price of regulation and the ligitigation culture I'm afraid.

NeilW

oceanblue_3

EdInvestor wrote:

..It's thus not necessary to hedge every single remark with back protection comments in compliance with regulatory rules, such that ordinary people can't understand what the hell you're talking about.

If you do this, it defeats the whole purpose of the discussion.

I understand that what I say may appear "blunt" to him, because he is used to having to make all these professional caveats in the course of giving "advice".

Edinvestor - don't delude yourself! Although you are probably right to suggest that dunstonh and other qualified advisers tend to err on the side of caution, the fact is that, on many occasions, the information you present is just plain wrong: that is why I often feel it necessary to challenge your posts. In addition, not only is the information you present often wrong, but your understanding of how SIPP's and Pension Fund Withdrawal work is extremely sketchy - yet you continue to pose as the "expert".

You are also wrong to suggest that discussion is stifled by the cautious approach adopted by dunstonh and other advisers; it is generally your unqualified and wildly irresponsible "advice", and your unwarranted criticism of all IFA's that leads to all this useless bickering.

Neilw's post alludes to the standards that professional advisers try to live up to: he's right. I wish you, too, would think more carefully about how your "advice" could affect somebody's life......