Continue Pension or New ISA

MoneyPengiun

The wife contributes approx £100 a month into a private pension. She is 34 and has a retirement age of 60. So over the next 26 years she will contribute £31200.

The recent statement has suggested that the pension would be worth £3200 per year on retirement if contributions are maintained.

If the same money was invested in a ISA and assuming the rate stays the same (a huge assumption and will they continue?) It would be worth £59600.

Am I being thick here but this seems like a better option. What am I missing?

dunstonh

Charges on a modern personal pension are cheaper than a stakeholder. With the same investment funds available in both ISAs and pensions, the actual growth rate gross of charges should be virtually the same. With the pension tax relief on contributions, the pension fund should therefore be around 22% higher than an ISA.

Many pension providers now use SMPI basis illustrations rather than monetary growth basis. This means that they now deduct inflation at 2.5% in the projections to give you a real terms value and not a future value. There are no SMPI illustrations with ISAs.

MoneyPengiun

Thanks for the reply!

The statement did say the £3200 pa pension was in 'todays money'.

I guess this not a fair comparison to the £59600 (I am just calculating the interest possible for each year) the ISA could be worth as it does not account for inflation.

Would the £59600 be in 'todays money' so would be worth 2.5% less each year due to inflation in reality?
If the payments into the ISA were increased by inflation (2.5%) each year would this be a more valid comparison. (It would be worth £59600 in todays money but would have cost £45500 in investments)

This is something I cannot get my head around. Completly confused now

I'm just trying to find the best place for this small retirement investment and wary of pensions since Equitable Life which maybe is unfounded.

Maybe she should carry this on and try to save separately into an ISA as well.

cheerfulcat

Hi, mrfaize,

There is a calculator here which will allow you to compare various scenarios, with and without inflation.

HTH

Cheerfulcat

ReportInvestor

dunstonh wrote:

With the pension tax relief on contributions, the pension fund should therefore be around 22% higher than an ISA.

I think you meant 28% higher, dh.

100p is 28% higher than 78p.

Opinions here are divided, but as a basic rate taxpayer I'd personally go for the ISA over the pension as you keep your hands on the assets at retirement.

MoneyPengiun

_Cheerfulcat wrote:

There is a calculator here which will allow you to compare various scenarios, with and without inflation.

Thanks I'll look at that.

ReportInvestor wrote:

Opinions here are divided, but as a basic rate taxpayer I'd personally go for the ISA over the pension as you keep your hands on the assets at retirement.

That is what I was thinking considering it is only a small fund.


Anyone else have any opions?

margaretclare

mrfaize wrote:

The wife contributes approx £100 a month into a private pension. She is 34 and has a retirement age of 60. So over the next 26 years she will contribute £31200.

Your wife is unlikely to be retiring at 60 in 26 years' time, it's likely to be a few years older than that.

Whatever she chooses, I'm glad to see that she's taking responsibility for her own pension provision. So many women retired and retiring now, are faced with the rest of their lives in poverty, just because they did NOT think about their own pension provision but left it to someone else.

Aunty Margaret

EdInvestor

I would also favour the ISA for a basic rate taxpayer with no employer contribution. The ISA allowance is on an annual "use it or lose it basis".

But after April pensions will move over to a lifetime limit, not an annual basis.Thus you won't lose access to tax relief later if you don't use it now - a large lump sum can be put into a pension close to retirement and get the tax perk.

Most people end up with too much income in taxable pensions when they retire and not enough in non-taxable ISAs. Remember the state pensions will take up much of your personal allowance, so private and company pensions end up being taxed at 22%.

dunstonh

There are pros and cons to the ISAs vs pensions debate. We have a couple threads on this subject and I believe one is stickied at the top.

At the end of the day, the pension will provide a higher guaranteed income compared with the ISA when invested on a like for like basis until retirement.

The ability to go to "100% of salary" contribution into pension after 6th April certainly swing that part to the ISAs. However, there are risks with this approach.

david78

You can think of the stocks and shares ISA allowance (Mini £4000, maxi £7000) as a pension plan with no tax relief but with no restrictions on what can be taken as cash. Later, if you decide you don't need it all as cash, but as an income, you can cash the ISA in, pay the money into a pension plan (assuming its within your annual allowance of 100% pay) and then get the full tax relief.

For an average growth rate of (say) 7% over 5 years, you end up with the same amount whether the tax relief is given initially on the investment, or at the end on the investment plus growth. Very roughly, for 7% annual return:

> £5000 in ISA. Growth over 5 years gives £7012. Move to Pension gives £8990
> £5000 in Pension, tax relief makes this £6410. Growth over 5 years gives £8990.

Thus, the ISA route can offer more flexibility over how much tax-free cash you have at retirement. In fact if you are a higher rate tax payer when you make the transfer to the pension plan, you will get an additional boost in the way of some tax back from the taxman.

Of course, you have to watch the charges and make sure you pick good investments, and not fritter your ISA away on new cars etc...

MoneyPengiun

dunstonh wrote:

The ability to go to "100% of salary" contribution into pension after 6th April certainly swing that part to the ISAs.

dunstonh - I don't understand what your are explaining here - more people would go the ISA route or vice versa?

margaretclare wrote:

Your wife is unlikely to be retiring at 60 in 26 years' time, it's likely to be a few years older than that.

We'll both be retiring before 60 one way or another

david78 wrote:

Of course, you have to watch the charges and make sure you pick good investments, and not fritter your ISA away on new cars etc...

Some intersting ideas and if the investment is needed desparately you can get hold of it.


Many Thanks to all for your comments - some food for thought.