Should I Invest Extra In ISA or Pension for Retirement ?

dunstonh

The ISA vs Pensions sticky is a good read.

You appear to have picked up on most of the key points and your comments seem to be sensible based on your situation.

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..)

The calculations always have to make some assumptions. However, with ISAs and pensions able to both invest in unit trusts, it is often assumed that the growth would be identical, as would the charges. So from then on its just the maturity process and what you do with them in retirement that differs.

That said, from a pure income point of view (and disregarding all other points), the pension would provide the highest income in retirement. In your case, that doesnt seem to be a priority as you are not looking to squeeze the most income from the least amount payable. However, for someone on a limited budget looking to get the most income from their contributions, the pension is best.

M271

dunstonh wrote: »

That said, from a pure income point of view (and disregarding all other points), the pension would provide the highest income in retirement. In your case, that doesnt seem to be a priority as you are not looking to squeeze the most income from the least amount payable. However, for someone on a limited budget looking to get the most income from their contributions, the pension is best.

Have I missed something ? why does the pension give the higher income ?

Is it because the annuity on average has higher % annual returns than other investments or that the fund accumulated at the point of retirement is higher ?

EdInvestor

M271 wrote: »

Have I missed something ? why does the pension give the higher income ?

Is it because the annuity on average has higher % annual returns than other investments or that the fund accumulated at the point of retirement is higher ?

No, it's because you don't pay tax on the income from the 25% lump sum. Of course in return for that small advantage (around 7% for a basic rate taxpayer) , you lose the capital and are severely restricted on the amount of income you can take from the notional fund. Also, if your overall tax position is not optimally arranged, you can lose that small advantage quite easily (eg via the clawback). For those who, unaware of the advantage, don't take the tax free cash, the advantage is also lost.

dunstonh

Have I missed something ? why does the pension give the higher income ?

Is it because the annuity on average has higher % annual returns than other investments or that the fund accumulated at the point of retirement is higher ?

Annuity rates are typically higher than guaranteed rates you can get on income in retirement. Plus, the tax relief gives you a higher fund value. So, even if you pay tax on the income, the net figure is higher.

EdInvestor

dunstonh wrote: »

Annuity rates are typically higher than guaranteed rates you can get on income in retirement.

Of course annuity rates also include an additional amount over and above the return on the capital invested representing your capital being paid back to you over the period of your assumed life expectancy..Whereas income on investments will generally assume that you retain access and control of the the capital yourself.You can replicate the annuity rate by paying yoursewlf extra out of the capital if you want. The 'selling point' of the annuity is the guarantee that even if you live a very long time they will keep paying the agreed rate - ie you will never run out of money.

The advantage of remaining invested is that the fund can increase in value over your remaining lifetime, as well as paying you out an income, thus potentially paying you a much higher income in later years while still retaining the capital.