Pension or ISA..?

michaels

ReportInvestor wrote:

That is wrong. Test it on a spreadsheet like this.

Put in 7% growth on £78 invested pa over five years v 7% growth on £100 pa over five years. There is still 22% difference between the original investment and the final total. That disappears when you transfer it into a pension getting 22% basic tax relief.


This is dh's statement with which I am agreeing.

AND the investment growth on the total amount invested is also the same, all other things (growth rate, charges, tax regime etc.) being equal.

I think the difference between the intuitive compounding on a largeer sum is going to give more and the actula - it is the same if you then transfer it into a pension is the impact of transfering the money into the pension at the end - and I am not sure this is a step that necessarily makes sense for the reasons presented in this thread, thus it may not be a relevant comparison.

However following this strategy of saving in an isa and then putting it all into a pension might make sense if during the early saving period the saver is a basic rate tax payer but when they transfer they are a higher rate payer (apologies if I am restating what has been said earlier in the thread) however there are of course limits to the amount that can be paid into a pension in any one year.

EdInvestor

there are of course limits to the amount that can be paid into a pension in any one year.

After next April there is a radical change to these limits so as to effectively remove them for most people which is why we are discussing the subject

dunstonh

Annuity is seen as a disadvantage by some but it is also a benefit for some. After all, its a guaranteed income for life. The annuity rates are currently higher than savings rates. Even if you take an RPI increasing pension, you can get better than savings rates.

Remember, a pension plan is there to provide an income in retirement. Its not to provide a capital lump sum. In reality people really should be looking at both pensions and ISAs as they both have different benefits to suit different goals.

cheerfulcat

dunstonh wrote:

Remember, a pension plan is there to provide an income in retirement. Its not to provide a capital lump sum. In reality people really should be looking at both pensions and ISAs as they both have different benefits to suit different goals.

Yes. And even if the money for retirement is saved outside of a tax wrapper, it is not the capital itself which should be used when the time comes but the income which it generates.

michaels

cheerfulcat wrote:

Yes. And even if the money for retirement is saved outside of a tax wrapper, it is not the capital itself which should be used when the time comes but the income which it generates.

But with an annuity I thought the whole point was that you are in effect living of the capital plus income so that on average there is no capital left when you pass away?

cheerfulcat

Sort of, except that you buy an annuity with your capital; that is, you exchange your capital for an assured income. What I meant was, it is inadvisable to live off the capital; better to take the interest/dividends it generates.

ReportInvestor

michaels wrote:

I think the difference between the intuitive compounding on a larger sum is going to give more.

Most people's initial / first instinct is to say yes, but the facts expounded above say a resounding NO.

If this thread has a purpose it is do deny the quoted statement above which is still circulating in influential circles, maybe including some IFAs, and is just plain wrong.

If michaels can refute that denial, he should post the proof or PM me with it.

Whatever the outcome, I think this is a very worthwhile collective excercise in testing out ideas.

And admitting that we are sometimes wrong :rotfl:

ReportInvestor

michaels wrote:

I am not sure this is a step that necessarily makes sense for the reasons presented in this thread

You mean like it might make sense because it would benefit a basic rate taxpayer who is going to become a higher rate taxpayer?

But I "presented" that reason above in "this thread": :rolleyes:.

michaels wrote:

apologies if I am restating what has been said earlier in the thread)

You are. It's best to read the thread before replying.

michaels wrote:

however there are of course limits to the amount that can be paid into a pension in any one year.

Not significant limits for most people after April 2006.

isasmurf

It looks like there are going to be a few companies offering a combined Pension and ISA from April 6th. Your contributions go into the ISA, your employer's contributions go into the pension and when you become higher rate, your ISA goes into your pension.

Although these look good on the face of it, I wonder how good they will really be? Will you be able to get better returns bey investing in an ISA separately and transferring it yourself to a pension when you become higher rate.

This save into an ISA and transfer to a pension at a later date is missing one obvious point. Governments can change the tax rules at any time.

ReportInvestor

isasmurf wrote:

This save into an ISA and transfer to a pension at a later date is missing one obvious point. Governments can change the tax rules at any time.

True. But.....

....are government's more likely to get rid of ISAs or get rid of pension tax relief? Surely ISAs would go first. How could MPs on the 3rd best pension scheme in the country get rid of tax relief on pensions for us voting plebs :eek: ?

I have been giving this some thought over Christmas. My personal pension solution would be to improve the pension tax relief for everyone in a tax neutral way e.g. removing 40% tax relief and using the tax saved to up the basic rate of penson tax relief to, say, 25%.

BUT they won't do this because it would mean that most people would have to submit tax returns - an election loser & an nightmare for the overpressed Revenue.

That leaves the only change possible is to abolish higher rate tax relief for pensions.

Is New Labour going to do this as record numbers of Middle England enter the higher rate tax bracket? I think not for electoral reasons. (And also because of the tax position of New Labour ministers and many of their partners .)

Abolishing basic rate pension tax relief would be an even quicker path to government hari kiri.

So I think the status quo on pension tax relief has attractions for both government and opposition in the medium term.