Pension: can the capital be ever withdrawn?

dunstonh

But isn't the personal tax allowance usually swallowed up by the state pension(s)?

If you qualify for state pension, then a chunk of it would be. I took that into account as you can see in my post.

And of course to get this taxable income via the annuity, you have to give up all the capital to the insurance company.

So? You are saving for a retirement income. That is what the pension does better than the ISA.

How do you value the fact that your capital is still in the ISA?I don't really think you can leave it out of the equation completely, just comparing the income.

If you eat the capital in the ISA, it reduces the possible income that can safely be taken and you start a spiral downwards of reducing income over time.

After all, you can invest the capital and it can grow, while still providing a tax free income.

And can you guarantee growth above withdrawals for the whole of your retirement life? Could you afford a stockmarket crash that can force you to halve the income you take because otherwise you will be drawing into the capital? Do you really want that sort of worry in your 70s?

Not so with the annuity which will be halved in value after 20 years because of inflation, even at current low rates.

I can see why whiteflag responded as he did. If inflation is a concern, then buy an increasing annuity. In fact, please do. That would make the pension annuity income even better than the ISA as it would increase annually whereas you couldnt afford to do that an ISA.

exil

Unless you're lucky enough to have enough capital when you retire to (a) live comfortably on your investment income and (b) be able to keep enough in addition to invest for growth then an annuity isn't for you. The other 99% of us will probably go for an annuity.

ManAtHome

Or you could live off the 25% tax-free pension withdrawal for 8 or 9 years leaving the fund (still more than the ISA at that point) to continue growing..?

money_saver_4

Thank you everyone for your suggestions. I am going to consider all the points carefully. It would seem that both pension and ISAs have their own advantages and disadvantages. Its a shame that the pension rules are so inflexible when it comes to withdrawing the capital. But ISA's flexibility seems to come at a cost.

EdInvestor

Bear in mind two other points: the age at which you retire and your gender.

http://www.annuity-bureau.co.uk/tab/rates_current.aspx

For a pension fund of 100k, a woman of 55 buying a single life inflation-protected annuity would get an income of 3,180 pa.

The same fund would buy a man of 70 a single life flat annuity of 8,412 pa.

Big difference.And that's before tax.

And these rates are on a continuing downhill path.

Whereas a properly invested ISA ought to be able to produce an income of 5-6% with reasonable safety, regardless of age or gender, and that would be tax free. The income would also have a chance of rising as you got older.

Yes, there is some risk. You have to set that against the certainty that any half-way decent income from an annuity will halve in value over 20 years and the uncertainty of what tax rates you might be required to pay when you retire.

Start off by making sure your inflation-adjusted state pension(s) are fully funded and up to date and kept that way.These pensions are not only a bargain (100k to buy the BSP alone on the open market), they provide you with the basic index linked income, and give you access to other benefits like council tax and housing benefit.So you know you won't be out on the street.

As long as these are covered, a bit more risk can be contemplated for some of your other money so as you can get a growing income long term.

As a basic, IMHO people should also buy their own home, as this can provide an income and/or access to more capital when you retire - and you have to live somewhere, after all....

Pensions may be good if there is a contribution of free money from your company or you're a higher rate taxpayper.Otherwise a house and an ISA are more important for young people IMHO, pensions can be looked at later.

Pal

money_saver wrote:

Thank you everyone for your suggestions. I am going to consider all the points carefully. It would seem that both pension and ISAs have their own advantages and disadvantages. Its a shame that the pension rules are so inflexible when it comes to withdrawing the capital. But ISA's flexibility seems to come at a cost.

That is the best summary of the position I have ever seen on these boards.

dunstonh

For a pension fund of 100k, a woman of 55 buying a single life inflation-protected annuity would get an income of 3,180 pa.

The same fund would buy a man of 70 a single life flat annuity of 8,412 pa.

Big difference.And that's before tax.

UK average retirement age is 63. That annuity rate at 55 is still good value as they are getting 10 years extra income in their lifetime. However, anyone budgeting for such as early retirement age really ought to be looking more towards ISAs than pensions. They could always start funding some pension, some ISA and take the ISA early but leave the pension until later. A sort of phased retirement.

And these rates are on a continuing downhill path.

There are influences which could see them rise again in the future. Although these will probably offset longer living meaning that they stay around the current level, give a take period small increases/decreases.

Whereas a properly invested ISA ought to be able to produce an income of 5-6% with reasonable safety, regardless of age or gender, and that would be tax free. The income would also have a chance of rising as you got older.

An income steam of 5-6% which includes eating of capital is possible. What happens when then the capital runs out? It is impossible to say you can get a pure income stream of 5 to 6% with reasonable safety as you cannot. There is still some risk involved. Everything with investments changes. What was good 5 years ago is often poor now. Do you want to bank your only source of non state income in retirement on that?

Yes, there is some risk. You have to set that against the certainty that any half-way decent income from an annuity will halve in value over 20 years and the uncertainty of what tax rates you might be required to pay when you retire.

Why would an index linked annuity halve in value over 20 years?

What about the uncertaintly of the tax position of ISAs?

Pensions may be good if there is a contribution of free money from your company or you're a higher rate taxpayper.Otherwise a house and an ISA are more important for young people IMHO, pensions can be looked at later.

I would disagree on the following points.

1 - a young person starting a pension early builds discipline in saving for retirement and can start with a much smaller contribution than someone older.
2 - If you put off retirement planning when you are young because you have something else to save for, you will do that through your life. First its the car, then its the house, then its the marriage, then its the children, then you are in your 50s and have 10-15 years to save half a million pound.
3 - Some need to pay into a pension rather than ISA because they know that they would access the ISA when they want to. The pension stops that and they need that to be the case.
4 - working/childrens tax credits can be increased with pension contributions.
5 - 1 in 5 men will die before retirement. Any money in a pension is not liable for IHT and the whole fund value is paid out (including tax relief). The ISA is liable to IHT and looses its tax free status on death. You cannot transfer an ISA between people.
6 - Personal allowances in retirement should be used up with pensions. This way you get tax relief on the contributions but do not pay any tax at the other end. Far more efficient than using an ISA.

EdInvestor

An income steam of 5-6% which includes eating of capital is possible. What happens when then the capital runs out? It is impossible to say you can get a pure income stream of 5 to 6% with reasonable safety as you cannot. There is still some risk involved..

You really will have to stop mentally deducting charges before you post DH ;)A return of 5-6%is quite possible with a reasonably conservatively invested fund, without accessing the capital, as long as charges are very low.Nor should you automatically assume capital is static and thus subject to being "eaten away", as happens with cash. The idea is that it's rising, remember ?

I did not say there was no risk. There is no way you can get growth without taking some risk, but this risk can be reduced by following some basic investment principles such as asset allocation and diversification, and by cutting charges to the bone (sorry!)

whiteflag_3

ReportInvestor wrote:

It could all be new to Moneysaver, wf:). Spare a thought for the newbies.

Granted, but spare a thought for the regulars as well!

As I suspected, despite the fact the OP has thanked everyone and posted a well thought out reply, were now off down the same well worn path with ED and DH going over the same old ground.

cheerfulcat

Whiteflag, you do have a point. But I would have liked to see some discussion of the effect of the difference in ages ( money_saver, you will recall, is 15 years younger than her husband ) on an eventual pension. Even if ms's husband doesn't retire until he's 75, providing a widow's pension will surely work out very dear? Perhaps, money_saver, you should look into some separate provision for your old age?