Pension versus ISA

exil

There have been a few things said round here about ISAs as against pension plans.

Now if you are under 50, a pension plan has the obvious disadvantage that you can't touch the money. Fair enough.

But surely when you're over 50 (and I'm getting ever closer!) that disadvantage disappears?

So - Pensions versus ISAs. Basically, using the jargon, these are just "wrappers" and you can have similar investments in each.

So - the differences are

Pension

You can contribute up to 100% of income, free of tax. Could even
increase your tax credits.
You can draw out 25% tax free, the rest as an annual amount which forms
part of taxable income.
As long as the money stays in, growth is tax free.

Investing in company scheme could give you life insurance, widow/ers pension, early retirement/redundancy - and employer may put in
a contribution too.

ISA

Money you put in comes out of taxed income. And you can only put in 7k.
You can do more or less what you like with the money.
As long as you leave the money in, interest and capital gains are tax free.
And it might not last past 2009. OK, pension tax perks could also be abolished, but less likely than ISAs.

Is that a fair assessment?

seanko

Good post Exil,

You're right that Pensions & ISAs are basically wrappers.

Pensions have significant tax advantages over ISAs.
For a basic rate tax payer, for every £1 invested you get the quivalent of £1.28 in your pension.

With ISAs you pay the tax 22%/40 on your earnings then you pu the money into the ISA.

With Pensions you put the money staright in without tax deductions (in most circumstances!)

cheers
Sean

dunstonh

There are lots of other advantages to pensions over ISAs. Such as you can borrow on pension to buy a commercial property and still have benefited from the tax relief at your highest rate. Useful for the self employed and Pensions have no IHT liaibility. ISAs do. Also, pension contributions can increase your working/childrens tax credits but ISAs cannot.

There are advantages and disadvantages with both ISAs and pensions.

Debt_Free_Chick

And whilst it may be of only limited use..... pensions are "protected" in bankruptcy - the OR cannot touch them. ISAs can be siezed by the OR and used as an asset to pay off your debts.

Divorce? It matters not. Both ISAs and pensions fall to be included in each party's assets, for the purpose of dividing the "matrimonial estate".

cloud_dog

Seemed to have missed one.

Income from a pension (excluding drawdown up to 5%pa) is taxed, income from an ISA is not.

I have to admit I have a preference for contributing into an ISA than a pension. Personal choice. Having said that the new pension rules make a pension more flexible.

cloud_dog

EdInvestor

After A-day in April there will be a significant change in this area.Currently, both pensions and ISAs are based on annual "use it or lose it" allowances, a percnetage of earnings in the pension case and a 7k p.a maxmimum investment with the ISA.

As of April, the ISA will remain the same.

But the pension tax relief will be be based on a life time allowance stretching right up to retirement.In the last year before you retire you can put an unlimited amount of money in your pension and get tax relief on it. At any time in your working life you can put up to your whole salary in the pension in one year.

Thus, unles you are a higher rate taxpayer or have a company scheme with employer contributions, it would be better to use up your ISA tax allowances first every year, as otherwise you will lose them.

Your pension allowances can be left until later.

As far as the overall picture is concerned, remember you can't ever get the capital out of a pension, except a 25% tax free lump sum after the age of 50, and the income you take from the rest will be taxed.

With an ISA you can access all the money at any time and both capital and income are tax free.

EdInvestor

Hi cloud_dog

cloud_dog wrote:

Income from a pension (excluding drawdown up to 5%pa) is taxed...

Could you expand a bit about this untaxed 5% drawdown income ?

dunstonh

Thus, unles you are a higher rate taxpayer or have a company scheme with employer contributions, it would be better to use up your ISA tax allowances first every year, as otherwise you will lose them.

As well as the other areas where pensions are better than ISAs.

and the income you take from the rest will be taxed.

Not strictly true. Its taxable as income so your personal allowance and lower rate band come into play. Decent retirement planning done equally between husband and wife allows over £14,000 income with no tax to pay. In these cases, the pension would beat the ISA significantly.