Pension or ISA..?

dunstonh

THe "tax relief" is of course only tax deferred - as you pay tax on the income when you get it as a pension after retirement (apart from the 25% tax free cash.)

No it isnt. As per usual, you forget the personal allowance. A couple can earn over £14,000 a year in retirement tax free. Make the pension contributions between you to utilise the personal allowances and the income will be tax free. Its the amount above that personal allowance that would be best planned with an ISA, subject to higher rate tax relief or childrens/working tax credits coming into play.

EdInvestor

A couple can earn over £14,000 a year in retirement tax free. Make the pension contributions

Most, possibly all, of this allowance will be used up by the state pensions for many people of course and this will increase in future as more people get the full S2P(SERPS) top up.

dunstonh

EdInvestor wrote:

Most, possibly all, of this allowance will be used up by the state pensions for many people of course and this will increase in future as more people get the full S2P(SERPS) top up.

I havent got a clue on the official stats but i find most couples dont qualify for a pension each in their own right. The husband gets the married mans pension. This leaves the wife with a full £7k income to use up tax free.

michaels

SO what arethe numbers?

Assuming in the year of retirement you have enough pension that your state pension/annuity will use up your personal allowance and then a large sum in an ISA. (and tax rules have not changed from now)

Option 1 is to transfer the isa money into a pension and gain potentially 40% tax relief on all of it and then take 25% tax free and put 75% into an annuity.

Option 2 is to keep the ISA.

Now it is a matter of comparing returns. The isa could probably pay an index linked tax free real return of 2% without touching the capital (eg a gross return of about 4% with inflation at 2%)

The pension / lump sum - the lump sum could again pay 2% real return but this would be taxed however this lump sum is obviously more than 25% of the isa amount as it has been increased by the tax relief, thus this taxed 2% will be worth more than the untaxed 2% that will be returned by a quarter of the isa pot (assuming basic rate tax on pension payments, if they qualify for higher rate tax then the retuns will be the same). The annuity will pay an index linked return of possibly 5% (taxed) but this portion of capital will be lost.

It would seem that the return from the pension route will therefore be better but at the cost of the lunp sum - alternatively I wonder whether someone will come up with an ISA annuity style product?

dunstonh

It would seem that the return from the pension route will therefore be better but at the cost of the lunp sum - alternatively I wonder whether someone will come up with an ISA annuity style product?

That is the usual outcome. When looking at the income alone, the pension product ending in an annuity will usually beat the ISA. Certain variables, such as retirement age could influence that though a bit (earlier would reduce the differences in the early years whereas later would increase the differences).

Another way of looking at it, is if you put a lump sum into a pension at age 65 and then took it out straight away with lump sum paid. The equivalent income would be in just about in excess of 10% of your net outlay.