Pensions vs. Isa - HR Taxpayer

wotsthat

For a higher rate taxpayer with a plan to be a lower rate taxpayer in retirement it seems that there is a clear advantage (in terms of retirement income) in choosing a pension over an ISA. i.e. invest with a 40% tax rebate and pay standard rate tax on the income as well as being able to access a tax free lump sum.

The ISA alternative for the same person is much less attractive i.e. invest contributions on which 40% tax has been paid but avoid standard rate tax on the income.

A couple of questions…

- just in terms of income is the higher rate employee/ standard rate retiree better off using a pension as the tax wrapper of choice as per the examples above?

- if it’s the case that the pension is the better option does there come a point at when tax treatment makes it more worthwhile to switch to ISA’s? In this case I’m thinking about taper relief and reaching the 40% threshold in retirement.

I understand that there are arguments for and against pensions and ISA's. What I'm trying to do is minimise tax paid in retirement but not letting this get in the way of total net income.

yelf

wotsthat wrote: »

A couple of questions…

- just in terms of income is the higher rate employee/ standard rate retiree better off using a pension as the tax wrapper of choice as per the examples above?

- if it’s the case that the pension is the better option does there come a point at when tax treatment makes it more worthwhile to switch to ISA’s? In this case I’m thinking about taper relief and reaching the 40% threshold in retirement.

I understand that there are arguments for and against pensions and ISA's. What I'm trying to do is minimise tax paid in retirement but not letting this get in the way of total net income.

1) yes

2) if you have no intention of accessing the funds before retirement then no.

Loughton_Monkey

If you are a higher rate taxpayer, you should be 'filling' your ISA'a and contributing heavily to a pension. If, in any year, one of them had to give, I would personally choose to keep the pension up.

Take it from someone who has early retired with sufficient pensions and ISA's/cash etc. Yes, you need to have a bit of cash around you, but if you have too much, you will be saying "Oh dear. I have this cash. I don't know how long I am going to live. At what rate should I draw it down?......". In other words, you will appreciate the steady income for as long as you live, when you retire. Cash is nice too, but you can get 25% tax free anyway.

Don't forget (if you are married) to engineer your wife's retirement income as well. Between you, if planned correctly, you can get £90K without paying higher rate tax.