Pension contributions rather than ISA?

savingforoz

I doubt if I'll take a level annuity, given that there's longevity on both sides of my family and I'm very health conscious - it may be a way off, but I was thinking of an index linked annuity, which I know will be lower to start with. Does that swing it towards ISAs as I can access that income more easily?

dunstonh

Does that swing it towards ISAs as I can access that income more easily?

Income is income. Its the capital where it differs. The ISA gives you full access to your capital. Although if you spend it, the value goes down and your income with it. The pension does not give you any capital access.

An increasing annuity would start around 4.5% as a rough yardstick. Only just below an ISA at 5%.

cheerfulcat

savingforoz wrote:

Just wondered if you fine people could clarify something for me. I realise that ISAs have the advantage of accessibility over pension funds, but for me that's not an issue as (excepting any unforeseen disasters) I don't intend to raid any funds that I build up in an ISA, as I'm now saving long term for retirement. Given that's the case, am I right in thinking that pension plans are preferable to ISAs due to the government adding in the tax element, so boosting any contribututions that I make?

I realise that I can build up funds in an ISA then transfer those later on to a pension, but I can't see the virtue in that for me. My understanding is that from A day you can only transfer an amount equal to your annual salary each year, and as my salary is peanuts (I take a low salary and the balance of my income is a monthly dividend on a non voting share that I hold in my employer) I'd have to dribble the money in over several years.

All help gratefully received!

Hi, savingforoz,

You have to balance the risks against the rewards in using tax shelters and decide whether the risks are worth taking.The reward in the case of pensions is the extra capital accrued by investing the tax relief, tax free, up front; the risk is in government interference both in how you invest and in how you use the capital in the end. With ISAs the risk is that tax reliefs will end in 2010 ( unlikely to be popular but quite consistent with the current attitude towards savers, including the removal of the tax credit reclaim in both pensions and ISAs ), the reward being returns free of CGT ( and dividends free of further tax for a higher rate taxpayer). There is an extra riskiness built into the ISA in the form of what you are allowed to invest in; unlike pension wrappers, S&S ISAs are not allowed to invest in cash or near cash, such as short gilts.

Bear in mind that you also have a CGT allowance of £8500 so investing tax free outside of ISAs is also possible, it just takes a bit of planning.

HTH

Cheerfulcat

pjala

dunstonh wrote:

Income is income. Its the capital where it differs. The ISA gives you full access to your capital. Although if you spend it, the value goes down and your income with it. The pension does not give you any capital access.

An increasing annuity would start around 4.5% as a rough yardstick. Only just below an ISA at 5%.

Does that mean that you would have to have an annuity lump sum of 200,000 to get 10000 per annum back?

dunstonh

You would need to have £200k to get 10k and its best to work on that whether its ISA or pension.