ISAs v Pensions: The Official Retirement Debate

jamesd

Foxy1075, the 2006 pre-budget report announcement contains the following: "25. we will make the ISA a permanent feature of the savings landscape. This will provide stability for savers, certainty for the industry and a firm platform on which to promote saving in the future".

It seems likely that the Budget will formalise this. More details are in the ISAs here to stay discussion.

stphnstevey

Seems like the main advice is to aim for a 10K pension income in retirement to maximise the 0% and 10% taxation. This 10k made up of your estimated State Pension and what ever other pension contributions to make up to the 10k.

a) What about the 25% tax free amount?
Would you not need to put this into the calculation? Presuming that you would take this amount as soon as you retire, would you THEN need to ensure you have a pot left that would generate an income of around 10K?

b) Is 10K enough during retirement? (just asking the question!) If you could afford to contribute more, then would you use an ISA or pension?

c) I too get risk adverse when it comes to S&S investment. But I would just like to point out that it's odd millions of us seem quite happy to contribute to a pension that invest in the stock market, but would prefer a cash ISA to a S&S ISA.

d) Just thought I would add another thought the melting pot! Nearly everyone plans to be 'poorer' than when they were working in retirement (ie earning less than when they were working). However, if you build up a passive income that increases over time, you could look to become richer in your retirment.

Here I am talking about building a portfolio of assets, specifically property and building businesses. This is by far not for everyone (and I wouldn't recommend the returns on property at the moment), but just a different way of looking at your retirement.

EdInvestor

stphnstevey wrote:

a) What about the 25% tax free amount?
Would you not need to put this into the calculation? Presuming that you would take this amount as soon as you retire, would you THEN need to ensure you have a pot left that would generate an income of around 10K?

Yes the 10k pension income would be net of any TFC.TFC counts in the balancing ISA income.

b) Is 10K enough during retirement?

Err, no.The idea is that you aim for a 20k income, half in pensions and half in ISAs or invested direct (which includes any TFC from the pensions)

c) I too get risk adverse when it comes to S&S investment. But I would just like to point out that it's odd millions of us seem quite happy to contribute to a pension that invest in the stock market, but would prefer a cash ISA to a S&S ISA.

Perhaps people don't know their pensions (and endowments) are in the stock market? Many seem very confused about equity ISAs and what you can put in them.

Paul_Herring

stphnstevey wrote:

a) What about the 25% tax free amount?
Would you not need to put this into the calculation? Presuming that you would take this amount as soon as you retire, would you THEN need to ensure you have a pot left that would generate an income of around 10K?

Please remember that this 25% TFC is not guaranteed to remain in place - indeed, the words "tax free" have been removed from what they're calling it these days - "pension commencement lump sum" - so the tax free aspect certainly isnt guaranteed.

jamesd

The recent pensions report did use the tax free lump sum terminology. That just reflects the uncertainty, though it is a key part of the picture that can make a pension a better option than an ISA for those willing to accept the pension restrictions.

10k isn't really enough, though I could certainly live on that and do, if rent but not associated bills is excluded. 10k per person is definitely enough for a decent to good lifestyle. More is better, of course.

nifta

this is a somewhat related question..

our situation is that we've lived in the UK for a year or so, and will remain here for another couple of years - up to maybe 5.

currently my company does not offer a pension, but they're planning to start one soon.

is it worth me joining the plan? even if the company doesn't make any contributions? (i'm sure they will) note i have a cash isa, and will soon start a s&s isa - if i don't have the pension then i will put more money towards the s&s isa.

if i do have a pension, what happens when i leave the country? can i just leave it and access it when i'm at retirement age?

sorry if these are silly questions - i've looked around for information, but our situation is never really talked about.

dunstonh

Nifta, can you ask that question on your own thread. This is a discussion about pensions and ISAs and not specific. It will get messy if we start discussing a load of different things on one thread.

Paul_Varjak

There is one type of annuity you cannot purchase with your pension money: A CARE FEES ANNUITY. So, if you retire on ill health grounds and need to use your pension money for immediate care you either go into drawdown or purchase an enhanced or impaired-life annuity.

But these options may not give you the income you need. In general, if you need care, then a CARE FEES ANNUITY will provide the highest annuity rate of all but you cannot use your pension money to buy one! Not only that but most annuites are taxable but a CARE FEES ANNUITY paid direct to the care provider is free on any Income Tax! So, you miss out of the tax breaks too!

I think this is another reason for using ISAs when saving for retirement. Use your ordinary pension pot for your retirement but use your ISA money to purchase a CARE FEES annuity should you need any care!

The fact that a CARE FEES ANNUITY cannot be bought with a pension is something I have not seen discussed on MSE or any other forum! I think because the average IFA knows nothing about CARE FEES ANNUITIES as they are highly regulated and outside of their remit. Also, there are just three CARE FEES ANNUITES providers.

I was speaking with Owain Wright (head of annuities at SAGA). He told me recently of someone who was advised by Halifax to get an impaired life annuity. For the money the person had available, this was just £8,000 per year, but the person then heard of Care Fees annuities from SAGA and got £33,000 per year!

Please, experts, can we have your views?

EdInvestor

Paul_Varjak wrote:

There is one type of annuity you cannot purchase with your pension money: A CARE FEES ANNUITY. In general, if you need care, then a CARE FEES ANNUITY will provide the highest annuity rate of all but you cannot use your pension money to buy one! Not only that but most annuites are taxable but a CARE FEES ANNUITY paid direct to the care provider is free on any Income Tax! So, you miss out of the tax breaks too!

Absolutely agree, Paul. :T

Wouldn't it be much better to put your pension pot(s) into income drawdown and take an income, and then, if you need care, convert them to a much better value "immediate needs" care annuity ( payable tax free) at the time?

At the moment the Government's rules force less well off people to give their entire pension fund to an insurance company in return for a (low) income for life and then sell their house if they need to pay for care.

But if the money taken by the insurance companies was instead kept by the investor, then it could provide both an income now, and a fund to pay a lot of the care cost later.The income for the pensioner might be a bit lower - but the peace of mind in knowing the care cost was mainly covere3d would mean a lot to many people.

This arrangment would lighten the load on taxpayers as well.ITr's well worth considering IMH0.

goatgirl_3

dunstonh wrote:

When we talk about ISAs on the pensions front we refer to stocks and shares ISAs.

Cash ISAs are not suitable retirement planning vehicles as they are no good for long term planning.

My husband and I are in our late 50's. We have approx £11,000 left to pay on our mortgage. We also have approx £10,000 each in pensions. Would we be better off stopping payments into pension and using the money to pay off the mortgate or invest in stocks and shares ISA. If ISA how do we go about choosing the right one and what percentage should we expect to receive? Our mortgage rate is 6.35%.