Equity ISA or Stakeholder pension

masco1

My 18 yr old has just started work and will be joining his company's pension scheme where he and his employers will contribute 3% each. I think he needs to have an additional scheme and thought an additional 7-9% of his salary should go into a stakeholder pension as the government contributes 20% on top of his contribution (hope I'm correct). He has spoken with an IFA who says an equity ISA would be better. I'm thinking that an ISA would have to make 20% just to equal a pension plan - assuming it doesn't lose money. Am I being naive or missing something?

If a stakeholder pension is best, any suggestions? I looked at Hargreaves Lansdown but their Aviva and Standard Life policies don't look very exciting.

Thanks in advance for any replies.

hugheskevi

There is a thread here which discusses some of the issues.

I think he needs to have an additional scheme

6% contribution isn't much, so I agree more pension saving would be desirable at some point (which may or may not be now).

as the government contributes 20% on top of his contribution (hope I'm correct).

To be precise, he does not pay income tax on the contribution. That means for every 80p put into a pension from net income, the pension receives £1. Income tax will be payable on the pension income received in the future.

He has spoken with an IFA who says an equity ISA would be better. I'm thinking that an ISA would have to make 20% just to equal a pension plan - assuming it doesn't lose money. Am I being naive or missing something?

A pension cannot be touched once the contribution is put in until at least the age of 55. For an 18 year old, there will presumably be a number of large expenses over the next decade or so - wedding, car, house, etc. A pension will be useless to meet those demands, whereas an equity ISA could be accessed. If the money isn't needed after all, then it can always go into a pension at a later date and get the 20% tax relief.

If a stakeholder pension is best, any suggestions?

You shouldn't limit yourself to Stakeholders - personal pensions may well offer a better choice. In any event, I think you should be asking your IFA to arrange it.

I'd also speak more to your IFA about plans - what he has advised should be based on a good investigation of circumstances, so you should be placing a decent amount of weight on the advice.

masco1

Thanks for your prompt reply.
Regarding the ISA v pension question, if the money was saved in an ISA for say 10 yrs and then put into a pension plan, would the relative value of this sum be less when compared with the value of the pension fund which would be 10 yrs old?

hugheskevi

Regarding the ISA v pension question, if the money was saved in an ISA for say 10 yrs and then put into a pension plan, would the relative value of this sum be less when compared with the value of the pension fund which would be 10 yrs old?

No, assuming the same charges and investment growth within the S+S ISA and the pension, which is reasonable given charging structures and investments available in both products these days. Also assumes same rate of tax now and in 10 years and that there is no access to salary sacrifice arrangement or receipt of means-tested benefits

If you put £80 into a pension, that would be made up to £100 with basic rate tax relief. Assume 5% return net of charges. After ten years that £100 is worth £163.

If you put £80 into an ISA, after 10 years at 5% it would be worth £130. Put that £130 into a pension and get tax relief and it becomes £163 for the same overall position.

Loughton_Monkey

I personally would go for the pension, basically because it generally cannot be touched. If in an ISA, there will be times when the temptation is too great...

From what you say, he will be having up to 15% put away. For an 18 year old, that's a very reasonable start, but to ensure a decent living standard in retirement, around 20%/25% is necessary (sadly) throughout the working life.

However, he has a long haul ahead of him. Difficult to advise without knowing what he earns/spends, and what his career path is likely to be. But ideally, if he can, he should perhaps be putting this 15% away for pension purposes and also salting some extra away for a deposit on a house. For myself, pension contributions, plus own-home investment have by far been the biggest priorities, and the biggest 'earners'.