Something that doesn't seem to get mentioned

RenovationMan

chewmylegoff wrote: »

not necessarily. as if you receive £100 and pay £50 tax on it, it's better than receiving £49. of course millionaires employ tax avoidance strategies, but anyone with sense would always take the option of paying tax if it meant the total amount they receive is higher. .

You miss the point. In order to receive pension income, a person first has to have invested it. I'm talking about investing that amount in the most tax efficient manner. If you receive £6k a year from a private pension on top of a £8k state pension then you will pay tax on £4k of that income. If instead you receive £2k a year from a private pension and £4k a year from ISAs then you will pay no tax at all on the full £14k pension.

The tax strategy is employed during the investment state of retirement planning, not during the receipt stage.

chewmylegoff wrote: »

you miss the point which is not about managing the limits. if you avoid 20% tax now, and you can withdraw 25% tax free as a lump sum, your effective rate when drawing down from the pension in the future is not 20%.

thus you avoid tax at 20% now on 100% of your money and pay tax at 20% on 75% of your money in the future, with an ISA you pay tax at 20% now on 100% of your money in order to avoid tax at 20% in the future...

there is also the point about the fact that trying to plan your decisions now in an ultra-precise manner based on a what the tax system (and the state pension provision) might be in 30 years is probably not going to work out in the way that you plan it - although obviously the rules on pension draw down could change significantly. it's also all based on your prediction of growth rates which of course won't be accurate.

You are getting yourself confused now. As I keep saying, we're not talking here about pensions vs ISA, we're talking about pension vs pension & ISA. Both your model (of having all your money in a pension plan) and my model (of having enough in it to fill your age related tax-free limit) allow the withdrawal of 25% tax free. In your model the remainder of the pension is then taxed at 20%, in my model the remainder of the pension (in an ISA) is tax free.

The ISA is taxed on the way in via contributions, but the investment returns are free of tax. That's the difference between the two strategies.

p.s. as far as your ultra-precise argument is concerned. You don't have to be ultra-precise. If you 'over shoot' a bit on your investment and your returns are better than you expect then you will pay a bit of tax on the part of the pension that is over the £10k age related threshold, but you will still be tax free on the money in the ISA. If you undershoot then you will know this before retirement and will have the option to top up the pension plan.

Really2

My planed pot to retire (without a pension) is around £350K (today's terms)

To get that fund in a pension I would need to put in around £800pm (online calculator).

I know many on here think I am mad, but I am going for a cash retirement.

Down size will be 1/3 of my pot, the rest will be 15-20 years of saving after becoming mortgage free (No income from interest is included as I believe it we be virtually nothing in real terms).

Who knows after mortgage free I may look again, but at the moment I see being debt free sooner rather than later as a priority.

So I don't have a current pension (I have a couple of frozen ones) but I do have a plan for retirement, that is fairly flexible.

pqrdef

Percy1983 wrote: »

My dad was a security guard and my mum was a part time checkout operator.

They couldn't buy their house with those jobs now.

But if people could live so well on low-paid jobs, who were all the people who were living less well? All the people in all the less nice houses, for instance?

Thrugelmir

pqrdef wrote: »

who were all the people who were living less well? All the people in all the less nice houses, for instance?

Many became £10 Poms......

StevieJ

RenovationMan wrote: »

And without having to worry about stockmarket crashes!

My SIPP took a £15k hit when the FTSE100 dropped from 6000 to 5000, but the impact was softened somewhat by the knowledge that my FS pension was unharmed.

How long have you been in your FS pension?

StevieJ

Percy1983 wrote: »

My dad was a security guard and my mum was a part time checkout operator.

They couldn't buy their house with those jobs now.

I thought they lived in Oldham

Thrugelmir

RenovationMan wrote: »

You miss the point. In order to receive pension income, a person first has to have invested it. I'm talking about investing that amount in the most tax efficient manner. If you receive £6k a year from a private pension on top of a £8k state pension then you will pay tax on £4k of that income. If instead you receive £2k a year from a private pension and £4k a year from ISAs then you will pay no tax at all on the full £14k pension.

What investments would you hold in an ISA to generate the same income as that of a pension annuity?

RenovationMan

Thrugelmir wrote: »

What investments would you hold in an ISA to generate the same income as that of a pension annuity?

You can have exactly the same mix of funds, shares, gilts, bonds, etc. etc. in a pension as you can in an ISA. A 'pension' is just a tax wrapper.

Percy1983

StevieJ wrote: »

I thought they lived in Oldham

Yes there is £40k houses in Oldham, no they aren't all worth that much.

The current house would be around £115k now.

chewmylegoff

RenovationMan wrote: »

You miss the point. In order to receive pension income, a person first has to have invested it. I'm talking about investing that amount in the most tax efficient manner. If you receive £6k a year from a private pension on top of a £8k state pension then you will pay tax on £4k of that income. If instead you receive £2k a year from a private pension and £4k a year from ISAs then you will pay no tax at all on the full £14k pension.

The tax strategy is employed during the investment state of retirement planning, not during the receipt stage.

you can't really ignore the receipt stage though can you. if you want to pay into an ISA, you have to pay 20% tax first. you don't to pay into a pension.

say you put £80 into an ISA. it then doubles in value so it's worth £160. you then get 10% income from it, £16/year tax free.

you put the same £80 into a pension and get your tax back, so £100. it doubles in value, so £200, you get 10% income from it, but pay 20% tax. you get £16/year after tax.

[OR/ you have your £200, you receive 25% tax free. you invest that £50 receiving 10% dividend income, £5, which you pay no tax on, you receive 10% income on the remaining £150 - £15/year which you pay 20% tax on - £3. Total income £17.]

so basically, even if you ignore the 25% tax free lump sum, all you have done by paying into an ISA is gain the certainty of paying the tax now. this protects you if the tax system becomes more punitive in the future, but if you get your sums wrong then you might be wasting some of your tax free allowance.

You are getting yourself confused now. As I keep saying, we're not talking here about pensions vs ISA, we're talking about pension vs pension & ISA. Both your model (of having all your money in a pension plan) and my model (of having enough in it to fill your age related tax-free limit) allow the withdrawal of 25% tax free. In your model the remainder of the pension is then taxed at 20%, in my model the remainder of the pension (in an ISA) is tax free.

but the absolute amount received 25% tax free is not the same in both routes, hence the effective rate of tax on the remainder of the pension in "my model" is not 20%. (see above - it's 15%).

The ISA is taxed on the way in via contributions, but the investment returns are free of tax. That's the difference between the two strategies.

as stated above, this makes no difference, assuming the income from both is at the same %.

the only reason it's better to put it into an ISA is that you don't get forced to buy an annuity with it and you can draw down whatever you like. it definitely gives your more flexibility, but it doesn't result in you paying less tax, assuming equal returns from both.