ISA's versus Personal Pension

gadgetmind

Yes, if -
1) A pension and ISA invest in exactly the same underlying assets, AND
2) You pay exactly the same tax on money drawn from a pension as you'd pay drawing money to put into an ISA, AND
3) Your employer doesn't contribute to your pension, AND
4) Your employer doesn't boost your pension by paying in some or all of the employer's NI avoided by sal sac, AND
5) You don't make use of your 25% pension commencement lump sum, AND
6) The fees are the same, THEN

ISAs can compete with a pension, BUT

In the real world, pensions benefit from some of all of my numbered advantages, but yes, some money in an ISA in addition to pension makes a lot of sense as rainy day money.

My projections show my/our personal situation being at 50% pensions, 25% ISAs, and 25% unwrapped investments at age 55, but the pension and ISA figures would be MUCH higher if the annual limits weren't as strict.

atush

I think you misunderstood me. I said to save in both ways as I too want to be able to look after myself rather than take benefits. No one wants to take benefits, well no one here I think.

But, if you had all your savings in ISAs and not any in a pension I was just pointing out you could lose it ALL if you were made to live on it instead of benefits, or that it could be seized by courts in certain circumstances such as insolvancy. My point is that ISA savers should know this small but perhaps insignicficant piece of information.

If you had some ISa savings, and some pension, then only the ISA ones would be at risk.

dunstonh

DH for once I must take issue. Why would growth be identical? If your 100% growth was over 20 years at 5% per annum. The compound effect would result in pots of :

Pension £9552 @ 5% = £478
ISA £7642 @ 5% = £382

If you put the same investments in both, then the growth will be identical. The only difference will be the tax relief. The ISA value will always be 80% of the pension value.

Thrugelmir

dunstonh wrote: »

If you put the same investments in both, then the growth will be identical. The only difference will be the tax relief. The ISA value will always be 80% of the pension value.

If the growth is in the form of reinvested income (which is where the majority is derived from) then you need to factor in the effects of compounding.

jem16

Thrugelmir wrote: »

If the growth is in the form of reinvested income (which is where the majority is derived from) then you need to factor in the effects of compounding.

How will that make a difference?

Thrugelmir

jem16 wrote: »

How will that make a difference?

Pension £125
Non pension £100

Year 1 income at 5% - on £125 - £6.25 / on £100 - £5.00

Year 2 income at 5% - on £131.25- £6.56 / on £105 - £5.25

Year 2 income at 5% - on £137.81- £6.89 / on £110.25 - £5.51

and so on.

Every year the investment is held the gap will widen.

Sometimes called Einsteins eighth wonder of the world - compound interest.

"He who understands it earns it, he who doesn't pays it"

jem16

Thrugelmir wrote: »

Pension £125
Non pension £100

Year 1 income at 5% - on £125 - £6.25 / on £100 - £5.00

Year 2 income at 5% - on £131.25- £6.56 / on £105 - £5.25

Year 2 income at 5% - on £137.81- £6.89 / on £110.25 - £5.51

and so on.

Every year the investment is held the gap will widen.

Sometimes called Einsteins eighth wonder of the world - compound interest.

"He who understands it earns it, he who doesn't pays it"

Makes no difference in the end though, does it.

From your example figures;

At the end of Year 1 - pension is £131.25 which after 20% tax is £105 which is the amount in the ISA.

At the end of Year 2 - pension is £137.81 which after 20% tax is £110.25 which is the amount in the ISA.

Keep going and it will still work out the same difference of 20% tax.

Thrugelmir

jem16 wrote: »

Makes no difference in the end though, does it.

(a) Except 25% of pension fund can be taken as tax free lump sum. This can then be reinvested into ISA. So not all income is taxable

(b) The aim of current government appears to be to raise the threshold of personal tax allowances to at least £10k. So again not all income is taxable. As state pension in a few years time is only going to be £7,280 pa for the majority.

jem16

Thrugelmir wrote: »

(a) Except 25% of pension fund can be taken as tax free lump sum. This can then be reinvested into ISA. So not all income is taxable

(b) The aim of current government appears to be to raise the threshold of personal tax allowances to at least £10k. So again not all income is taxable. As state pension in a few years time is only going to be £7,280 pa for the majority.

Nobody is denying that - in fact Dunstonh's Post 6 shows the difference that takes the personal allowance into account.

However the main point is that no matter what the growth, the only difference between ISA and pension is the tax relief. This is the part you seemed to be questioning and saying that reinvested income would make a difference.

gadgetmind

jem16 wrote: »

the only difference between ISA and pension is the tax relief.

The other big different is that the !!!!less can't blow them on gin and ciggies before 55, and the rate they can fritter away their money after 55 is also limited.