Should I Invest Extra In ISA or Pension for Retirement ?

M271

I am trying to make up my mind where to invest extra for the next 10 years up to retirement, ISA or Pension.

My current situation:

Pension
I am a member of a Final Salary scheme that will pay me about 50% (currently £19,000) of my final pay when I plan to retire in 10 years time aged 55, I also have FSAVC fund of £20000 that I'm paying into at a gross £100/month. I am a basic rate tax payer.

ISA

I have £10,000 invested in Stocks and Shares Index tracking funds and contributing £100 per month. I also have £8000 in cash ISAs as my 'emergency' fund.

I want to invest an extra £100 / month and my question to you experts out there is, would it be better for me to invest the extra into the Pension FSAVC or the stocks and shares ISAs ? In reality I want to invest either Pension or ISA for the next 5 to 6 years in higher risk Emerging Market funds before being more 'defensive' for the remaining 4 years.

Any advice would be appreciated.

jem16

Once you get to age 65 you get a higher personal allowance of £9030. Unfortunately this extra allowance starts to decrease once you get to £21,800. It decreases by £1 for every £2 above the limit.

With your final salary pension of £19k you are already close to that limit and if you go over it you will end up paying more tax. With that in mind I would say to use the extra £100pm in a S&S ISA.

McKneff

hi, sorry to hijack but, Jem, my husband is disabled, 65 next may. When he will get his OAP
i will be still working full time, as his personal allowance goes up can i take any of his extra allowance, he will be receiving only about 6k per year.
If so how do i go about it. Thanks

jem16

anniehanlon wrote: »

as his personal allowance goes up can i take any of his extra allowance,

No sorry you can't. The personal allowance is just that - personal.

Bernie

I'm in a similar situation, retired from the military at 55 on Early Departure Payment (75% of full pension, goes to 100% wef age 65). As I still work, I get hammered for tax and when I do stop work - I'll still be well taxed on my combined pension and savings.

To avoid as much tax as possible, now and in the future, the wife and I have been pushing surplus cash into a brace of Cash ISA since they kicked off to save the 20% tax that would be taken out of the interest each and every year of our remaining days. By pushing our savings into ISA, we look forward to a long and tax-minimal retirement...

Biggles

jem16 wrote: »

With your final salary pension of £19k you are already close to that limit and if you go over it you will end up paying more tax. With that in mind I would say to use the extra £100pm in a S&S ISA.

Bearing in mind he'll be drawing the State Pension of >£5k as well, he'll already be way over that limit anyway, so probably not a factor.

margaretclare

Once you get to age 65 you get a higher personal allowance of £9030. Unfortunately this extra allowance starts to decrease once you get to £21,800. It decreases by £1 for every £2 above the limit.

hi, sorry to hijack but, Jem, my husband is disabled, 65 next may. When he will get his OAP i will be still working full time, as his personal allowance goes up can i take any of his extra allowance, he will be receiving only about 6k per year.

Given that the personal tax allowance is, as jem says, just that, personal, it is perhaps worth remembering that the £21,800 applies to each separately. So for those people who still think in terms of a married couple having a 'joint' retirement income, that income between you could be up to £43,600 p.a. and you'd still each benefit from the higher personal tax allowance.

I know this because it applies to DH and me. Although our income between us is nowhere near £43K (we should only be so lucky!!) if we added it together it would be quite a bit above the £21,800 quoted, and we're not penalised because we get all our income separately.

M271

M271 wrote: »

I am trying to make up my mind where to invest extra for the next 10 years up to retirement, ISA or Pension.

My current situation:

Pension
I am a member of a Final Salary scheme that will pay me about 50% (currently £19,000) of my final pay when I plan to retire in 10 years time aged 55, I also have FSAVC fund of £20000 that I'm paying into at a gross £100/month. I am a basic rate tax payer.

ISA

I have £10,000 invested in Stocks and Shares Index tracking funds and contributing £100 per month. I also have £8000 in cash ISAs as my 'emergency' fund.

I want to invest an extra £100 / month and my question to you experts out there is, would it be better for me to invest the extra into the Pension FSAVC or the stocks and shares ISAs ? In reality I want to invest either Pension or ISA for the next 5 to 6 years in higher risk Emerging Market funds before being more 'defensive' for the remaining 4 years.

Any advice would be appreciated.

See my original post above, any other suggestions ref ISA v Pension advice ?

dunstonh

any other suggestions ref ISA v Pension advice ?

Nothing that is not already covered in the ISA vs pension sticky thread.

jamesd

M271, if you have a partner, what is their retirement income situation? Paying into a pension for them to exploit their personal allowance may be better than either pension or ISA in your own name. They will get basic rate tax relief on contributions up to 3600 gross even if they aren't working at all.

You should get a state pension forecast to find out what you can expect from the state pensions. It seems likely that you will be having a high enough income fro these pensions plus the work pension that you'll lose the whole of the extra personal allowance for those over 65. That and the 12 years until you can get the state pension (assuming you're 45 now) means that it may well be more tax efficient for you to make pension contributions than ISA contributions if you're just after increased income.

You're fairly close to the higher rate tax band. Do you see any real prospect of moving into it in the years before retirement? If yes, using ISA now and then moving money into the pension when you can get higher rate tax relief may be beneficial.

M271

dunstonh wrote: »

Nothing that is not already covered in the ISA vs pension sticky thread.

I have now read through all of the posts on the sticky thread and this thread, and have come to the decision (I think !!) to put my £100/month into S&S ISAs rather then extra pension. For the following reasons:-

a) I already have quite good pension provision and will be close to the current £21,000 ish tax limit. Although at the time of retirement I could take the tax free lump sum to reduce the income below the limit.

b) I am not maximising my S&S ISA allowance.

c) The ISAs are more 'adaptable' for future changes in legislation or personal circumstances. I could if circumstances change move my pot of money to a pension or other tax efficient investment, a pension has to stay put or if moved the tax advantages are lost.

d) As a basic rate rather than a high rate tax payer I do not get such a good tax benefit from Pension contributions, to offset the tax disadvantages of the taxed contributions into an ISA.

e) Most of the calculations on the sticky tread seem to be contradictory or not a lot in the cost v benefits differences, as it seems so 'swings and roundabouts' I prefer to have the ISA's more accessible and adaptable advantages (after retirement they seem more under my control not restricted to annuity, drawdowns etc..)

If i have missed something or you have any other opinions please post back.