ISAs v Pensions: The Official Retirement Debate

EdInvestor

For the first £10k of income where you will be paying 10% and soon to be 0%, the pension will be better as it will have received 22% relief(or more)going in and nothing coming out.

This may technically be true but it is very misleading, because the whole 10k allowance may already be used up by the two state pensions. In the future, little of it will be left for most people.

For many years it has been in the interest of pension salesmen to rubbish the basic state pension and to act as though the second state pension didn't exist: otherwise they would have had real problems flogging the private alternative.

These days, more people have informed themselves of the facts. Particularly when they have figured out how much they would have to save to match the state payouts - as much as 140k for the basic pension alone - then the disadvantages of the non guaranteed, high charge personal versions by comparison are clear.

Private pensions have always been mainly of interest to the well off: with the rule changes at A day,the confirmation of the long term future of ISAs, and the improvements to the state pension eligibility rules recently announced, their attraction to those of lesser means is now virtually nil.

cheerfulcat

I wonder, though, how many are saving for their retirement through shares in a self-select ISA?

I am, for one! I have a small SIPP and add to it in years when I am going to be a higher rate taxpayer but the ISA allowance is used in full every year. There are quite a few posters on TMF who are using the PEP/ISA route, too. But I suspect that the horrible truth is that most people aren't saving for their retirement at all, at least not in any meaningful way.

jem16

EdInvestor wrote: »

This may technically be true but it is very misleading, because the whole 10k allowance may already be used up by the two state pensions.

Very few people receive a full basic pension AND full SP2 so I think it's more misleading to suggest that they do.

In the future, little of it will be left for most people.

This may happen in the future. It could also happen that SP2 will be abolished. Nobody knows.

EdInvestor

As I said before in the immediate future plenty of people are likely to be retiring on 7-8k of BSP+S2P or contracted out equivalent simply because they will have a full record since 1978.

And with the introduction of the 30 year rule for the basic pension, there will be a major rise in the number of people getting the full BSP. So the idea that 10k of tax allowance may be going spare for a private pension is going to be very wide of the mark from 2010.


Individuals should check their entitlement to the two state pensions here:

https://www.thepensionservice.gov.uk

jem16

EdInvestor wrote: »

As I said before in the immediate future plenty of people are likely to be retiring on 7-8k of BSP+S2P or contracted out equivalent simply because they will have a full record since 1978.

Self employed have no S2P, so only have BSP.

Those contracted out will only have the BSP.

And with the introduction of the 30 year rule for the basic pension, there will be a major rise in the number of people getting the full BSP. So the idea that 10k of tax allowance may be going spare for a private pension is going to be very wide of the mark from 2010.

I never suggested they would have the full £10k for a private pension.

Some people will have only £2-3K for a private pension. Others will have nearly £6k.

Also, as mentioned earlier, there is nothing to say that S2P will stay as it is so is it wise to rely on it?

nrsql

DavidLaGuardia wrote: »

I don't trust chickens due to the recent troubles.
Such is the inane quality of people who use "received wisdom" without elaborating on it. What troubles? are they even relevant to the majority of pensions available. What are you on about?

Sorry - I thought most people knew what had happened to pensions and I wouldn't need to explain that statement. I feel the publicity has swung a lot of people against pensions now for the wrong reasons but....

Well - Allowing pensions to invest mainly in equities then when they were doing well allowing companies to dip into them and GB changing tax relief on dividends then when the market took a downturn changing the rules to stop them (or at least make it less likely) taking advantage of the upturn.

OK that doesn't apply to SIPPs but in my view that sort of thing was inevitable and not just due to the party in power and I don't believe any pension funds are safe.
I just don't like the way the fund is at the mercy of rule changes and whatever happens to be in effect when you take out an annuity/lump sum.

Don't know what you mean by received wisdom.
It's just my opinion - form your own opinion and risk analysis.

nrsql

dunstonh wrote: »

Its a bit like the comment you get at times from people who say they invest in ISAs because they make more money than their pension. There is no sense in that comment but you hear it very often.

Or those that say that they have switched to a SIPP and its making more than their personal pension used to.

It has nothing to do with the wrapper. Its where you invest the money that is important. If you pick the same investment funds in an ISA and a pension, they will perform exactly the same.

The most important part about investing is where you invest the money. Yet when it comes to pensions, people seem to ignore the investment side of it and go with a default fund (which usually ends up being pretty naff). Then they wonder why performance is poor.

A common mistake by the novice investor who altered their investments after a crash (also known as fair weather investors) is to compare what they have now against what they had before and make a judgement based only on that. What they had before went through a crash (often transferred or cashed in before recovery was possible). What they have now has only seen growth and hasnt gone through a crash.

Sorry but the whole point is the wrapper. It's the wrapper that could be targetted not the underlying investment. At least with an ISA at the moment you could close it if there was a rule change (unless that was the rule change) - not so with a pension.

dunstonh

You have missed my point. I was referring to performance only. Not the pros and cons of the wrapper.

The same funds in a pension and ISA will perform exactly the same. People that say their ISA has made more than their pension and that ISAs are better for that reason don't understand what they are doing and why there is a difference. And there is a good many people out there that have that view.

Inv Perp Income fund will give the same returns if you have it in a pension or an ISA. It has the same tax treatment (except for IHT here the pension is outside of the estate but the ISA isnt but thats at personal level not investment level).

nrsql

Sorry, must read more carefully.

Maybe that comes from pension funds that have high charges and sellers that put people into low performing funds.
Always surprises me that people who will spend time over isa's and shares will take any old pension fund.

Browntrout_2

dunstonh wrote: »

You have missed my point. I was referring to performance only. Not the pros and cons of the wrapper.

The same funds in a pension and ISA will perform exactly the same. People that say their ISA has made more than their pension and that ISAs are better for that reason don't understand what they are doing and why there is a difference. And there is a good many people out there that have that view.

Inv Perp Income fund will give the same returns if you have it in a pension or an ISA. It has the same tax treatment (except for IHT here the pension is outside of the estate but the ISA isnt but thats at personal level not investment level).

Yes my self-employed wife has a £234pm (£300 with relief) Stakeholder pension that was signed up for with a default investment profile as follows;

• 75% Stakeholder with Profits Fund
• 25% Stakeholder Managed Fund

Four years worth of payments = £14,400 and has a current plan value of£19,000

I think that works out at 14% per annum growth rate but not sure?

Was thinking of suggesting moving that to a SIPP to select funds and freezing the payments, then saving the cash into an ISA.