AVC advice please

EdInvestor

The typical ISA investment option should be compared with a pension in drawdown.An ISA invested in gilts would be comparable to an annuity (though how do you account for the ability to withdraw the capital, must be worth something surely, quite a lot I'd have thought?)

The basic difference is the tax treatment (the 25% tax free cash from the pension is negated IMHo by the onerous restrictions on extraction of capital and income from the pension/AVC).

Check your projected income and tax situation after you retire and that of your spouse, taking into account all taxable an non-taxable income.Are you using both people's allowances to the full or do you have an imbalance?

Do you have too much taxable income so that your age allowance is being affected (starts being cut back at 20k)?

Most people have too much taxable pension income and no enough untaxed ISA income.If you were really doing it properly you would restrict total pension income to around 9k max each ( personal/age allowance plus 10% band) and the rest would all be in ISAs or held directly in shares.Dividend income is tax free to basic rate and lesser taxpayers).

ChrissyR_2

Sorry to butt in but I still don't understand this deferred tax. If you are on 40% tax in pay and defer this to you your pension payments at 22% aren't you still winning (assuming pensions are usually a % of your finishing pay so lower tax)?

dunstonh

Sorry to butt in but I still don't understand this deferred tax. If you are on 40% tax in pay and defer this to you your pension payments at 22% aren't you still winning (assuming pensions are usually a % of your finishing pay so lower tax)?

You gain 40% up front but pay 22% at the other end (and possibly a bit more if you earn above £20,100). An 18% difference.

A better option can be to fund a non working spouse who is a non taxpayer now and will earn nothing in retirement. That will be 22% relief now and no tax later. A 22% difference.

Issues with pensions are often on death and capital retention. If main earner is higher rate taxpayer and all pension planning is in their name and upon retirement, they commence a single life annuity (as too many do) then the annuity dies with them and the spouse ends up with nothing. You could find a fund of £300,000 is completely wasted. The ISAs would be retained and not lost. If you take on a joint annuity or include some spouse benefit, you get a lower annuity rate and the income could be lower than that generated by the ISA.

If you look at the example higher up, you will see that the annuity would pay 2.34% but the ISA could pay 5%. Mainly as it is being taken so early. That difference is greater than the tax relief.

ChrissyR_2

But if your:
partner is working and will get a pension
your work pension is also spouse
you are only 40% until you pay the pension contribution ie around the £50k

is this the best (and easiest) option? Is paying the 40% and ISAing it really going to make that big a difference?

You may lose the state pension (assume this is the £20k you mention above) but you get a secure income?

dunstonh

You may lose the state pension (assume this is the £20k you mention above) but you get a secure income?

You dont lose the state pension. You lose the age allowance.

It isnt the only way to get a secure income. There are investment products that pay 5% net guaranteed for life and the money is invested with the aim to beat 5%. If you die, the value of the investment is paid out. Thats just one example.

Pay money into the ISA now and if the pensions improve later on, then you can move the money into the pension at that point. Pay the money into the pension now and if pensions get worse, you cant take the money out.

Higher rate is still an advantage and if you are going to retire in your 60s the annuity rate is not too bad. In its going to be in your 50s though its awful. Annuity rates have been on the decline for the last 20 years. What they going to be like in the next 20. They could improve, they could decline. Whats secure about that?

ChrissyR_2

apologies dunstonh I didn't put that my pension is defined benefits - hence my use of the word secure (but what is really!).
But I also do my works AVCs which probably falls into your descriptions so take your point. In truth I am looking at the AVC as a 25% savings account bonus (which could get taken away!) plus a top up.
My thoughts (and I'm very happy to be educated if it make my retirement better)) is that at the moment to build my 'pot' I am getting 15% on top of £1000 where as if I take the ISA route (sorry I seem to have repeated this in another thread) I need >90% on the £600 to break even.
Or is it the tied in pay out (annuity rates) that are the issue?