Work pension v ISA

lady_joce

My work currently pay in to my pension, with the amount depending on how much I pay.
I'm a bit baffled by all the different options and was considering setting up an ISA as a way of saving for the future. However, would I be better to increase the amount I contribute towards my work pension (thereby increasing the amount my employers pay) or ply more money into the ISA?
I'm not sure how the interest rates compare to how much I could save through work, so any help would be most appreciated.

molerat

With a company pension scheme going up to the max company matching for every £1 you lose from your take home pay you get £2.25 in your pension pot, even more if salary sacrifice is an available option. Does that make it look like a good idea ?

dunstonh

would I be better to increase the amount I contribute towards my work pension (thereby increasing the amount my employers pay) or ply more money into the ISA?

Pensions and ISAs have identical investment options. Provider restrictions may reduce the choice a bit with both but the principles are largely the same.

The pension will double the money overnight and your contribution will have tax relief. The ISA will have no free money added and no tax relief.

To put that in money figures, If you put £80 in the pension, it immediately goes to £200. If you put £80 in the ISA then it will only be £80.

Which sounds better £80 or £200 when they have both cost you £80?

I'm not sure how the interest rates compare to how much I could save through work, so any help would be most appreciated.

Interest rates are mostly irrelevant on investments. Just as using cash for long term planning is usually the wrong thing to do as well.

jamesd

lady_joce, if you were 30 today and retiring at 68 the gain from a 100% employer match and tax relief would be equivalent to 2.2% a year even before you get any gains from the investments you make inside the pension. For investments, the UK stock market can be expected to produce returns of something like 10% plus inflation long term and there are a wide range of other options available, including some that don't go up and down so much but which pay around 5% interest.

Cautious_Investor_3

jamesd wrote: »

For investments, the UK stock market can be expected to produce returns of something like 10% plus inflation long term and there are a wide range of other options available, including some that don't go up and down so much but which pay around 5% interest.

Hi

I have to take issue with this, 10% plus inflation of say 3%, plus charges of say 1.5% making a total gross return over the long term from the UK stock marjet of around 14 - 15% per annum? I really don't think so!

With regard to investments that don't go up or don't go down that pay 5% interest a year, in the current environment I'd love to see what these are!

Am I missing something here?

The Cautious Investor

Cautious_Investor_3

lady_joce wrote: »

My work currently pay in to my pension, with the amount depending on how much I pay.
I'm a bit baffled by all the different options and was considering setting up an ISA as a way of saving for the future. However, would I be better to increase the amount I contribute towards my work pension (thereby increasing the amount my employers pay) or ply more money into the ISA?
I'm not sure how the interest rates compare to how much I could save through work, so any help would be most appreciated.

Hi

On the basis that very few of us are saving sufficiently for your retirement I'd take every penny that your employer will throw at you. Just make sure that you have some emergency savings put aside and maybe something for the medium term too as your pension money obviously has restrictions re when it can be accessed.

The Cautious Investor

nearlyrich

Employer contribution is free money into a pension scheme more free money in the form of tax relief..if your pension is set up as salary sacrifice even more free money. It's a no brainer really but sadly people think there will be plenty of time to save for retirement and pensions are bad becuse of adverse publicity over the years. Glad I have mine though it doesn't seem 20 years since I started putting a small contribution in

dunstonh

sadly people think there will be plenty of time to save for retirement

Yep. There is always an excuse to put it off. However, time speeds up as you get older and before you realise it, you are running out of time.

people think <snip>... pensions are bad becuse of adverse publicity over the years.

Yet many of the events that occurred cannot happen again or are not relevant to the types of pensions you get today. Often people read the headlines rather than the content or the media fail to point out the differences.

jamesd

Cautious_Investor wrote: »

I have to take issue with this, 10% plus inflation of say 3%, plus charges of say 1.5% making a total gross return over the long term from the UK stock marjet of around 14 - 15% per annum? I really don't think so!

See figure C.9 of Appendix C of the First Report of the Pensions Commission. That gives the mean real (after inflation) return of UK equities for five year periods as 10.4% between 1977 and 2003, with 11.5% as the median. If you'd like to be more cautions you could use the figure for all five year periods from 1899, which they report as a mean of 5.7% and median of 6.5%. For a UK tracker I sincerely hope that you wouldn't be interested in paying fees of 1.5% when a TER of 0.27% or less is obtainable even by individual retail investors.

Cautious_Investor wrote: »

With regard to investments that don't go up or don't go down that pay 5% interest a year, in the current environment I'd love to see what these are!

I actually wrote about going up and down less, not not going up and down at all. Bonds of various types are one of the options here. You might want to look at Figure C.2 of the First Report of the Pensions Commission to see the past real return of UK Gilts for five year periods, which was a mean of 7.0 and median of 7.2% for the period from 1977. Again, that's real, after inflation, returns but before fees.

Though gilts aren't where I'd choose to put a lot of money today, a mixture of equity income and strategic bond sectors plus some gilts seems like a better idea, depending on how close to the idea of a bubble in the gilt and high grade corporate bond market theory your views are.

Cautious_Investor wrote: »

Am I missing something here?

The Cautious Investor

It depends to some extent how cautious you want to be when comparing the past to the possible future outcomes. I'm content using the last 40 years for my central case planning and worse outcomes for contingency and safety margin planning.

The Pensions Commission and many others have commented on possible threats to those past returns, like disinvesting by retirees, which may have been playing a significant role in Japan, say. But since those investing for retirement aren't constrained to use markets where retiree percentages are increasing but could instead use those with very young populations there's ample opportunity, at least in my opinion, to void those effects. But what I'll write to you is a little different to what I might write to someone who I'm trying to keep things simple for, lest I over-complicate things and cause paralysis due to excessive information.