ISAs v Pensions: The Official Retirement Debate

EdInvestor

dunstonh wrote: »

If that is a concern then go index linked.

Index linked annuities are VERY widely regarded as extremeley poor value and hardly any are sold.

They are not ideal but whenever we discuss this issue you never mention an alterantive that can provide a higher guaranteed income for life.
Its all very well slagging off the annuity option but lets hear the alternatives for providing a guaranteed income?

These days many people will be getting adequate guaranteed and index linked income to cover the basics from the two state pensions and the odd old final salary pension.

They thus don't necessarily need the income from their main pension to be guaranteed - at least not until they are somewhat older.IMH0 it's more important to help people understand how to invest their lump sum to get a rising,inflation beating drawdown income and to manage risk.

There are also halfway house products now - the drawdown based "5 for life" type guaranteed income products. They are rather expensive, but better than an annuity IMHO for young retirees who can't cope with doing their own investing.

Jonbvn

Good article on this in the Torygraph this morning.



http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/03/cmpen03.xml&page=1

Pensions may no longer be the best way for basic rate taxpayers to save toward retirement after next April. That is the surprising conclusion of a new analysis of the two most popular tax shelters for savers; pensions and individual savings accounts (Isas).

dunstonh

There is a couple of flaws with this.

They have failed to take into account age 65/75 allowances and assumed every penny is taxed. (mentioned but the impact of this can be significant).

Also with the pension figures, they have deducted 25% for taking tax free cash out. So, the pension figures are automatically going to be 25% lower than they would be if you used 100%. To compare like for like shouldnt they have done the same for the ISA? Or perhaps use the 25% from the pension to provide an income in ISAs/Unit Trusts etc

It also fails to mention what annuity rates were used against what yield on the ISA and critically, they are using the ISA capital up in full assuming average life expectancy. What if you live longer than average? With the ISA on this example, you would have no money left in it and your income would be gone.

There is also no mention of working/childrens tax credits which can be increased by making pension contributions but not with ISA and in effect that increases the tax relief. Additionally, in retirement if you are a low earner then the ISA is treated as capital and would reduce pension credit by a greater amount than income on a pension.

I think the best information on this subject is covered in this thread as it highlights the pros and the cons whereas a chart like that is using distorted figures.

Sterlingtimes

I don't think that this issue has been covered.

If you have ISAs and PEPs and you find yourself to be ill or unemployed, then the government will regard those saving as capital and you will be means tested against them and this may negate any benefits that you would have received. Pensions funds are "hidden" until retirement.

Having been through this experience, I got rid of my ISAs and PEPs upon finding employment again and redirected my savings to pension funds.

It's very important if you find yourself redundant or ill to be seen to have no capital. Redundancy and sickness insurance payments fall below the radar and the means tested calculation.

jamesd

Sterlingtimes, pensions that you are able to take can also be included in means tests sometimes, people have been compelled to retire early (over 50, soon over 55) so that they would get their pension income.

Permanent health insurance and unemployment insurance are two options that can leave you considerably better off than relying on means tested benefits.

Sterlingtimes

jamesd wrote: »

Sterlingtimes, pensions that you are able to take can also be included in means tests sometimes, people have been compelled to retire early (over 50, soon over 55) so that they would get their pension income.

Thank you. I had presumed that future pensions were safe from means testing. When I was temporarily unemployed I lost any chance of benefits, except for interview expenses and free medicine, because my mortgage was PEP linked. I would have been secure if I had had an endowment linked mortgage but the blighters never looked into my pensions.

So will pensions be secure from means testing before one is 55?

jamesd

If you're nearly 50 now the first age that you'll be able to take the pension will be 50, for most of us it's now 55. You can't take the pension before that age so no chance of it being vulnerable.

Tarq

At 41, I am self employed and I do not have a pension. Are pensions for self employed people worth getting?

I have been saving in to an ISA.

jamesd

Yes, tax relief is a good thing, particularly if you're paying 40% now and 20% on the pension in retirement, a benefit you don't get with an ISA. But the ISA can be more useful for lump sum availability without catches, so both are good to have.

dunstonh

At 41, I am self employed and I do not have a pension. Are pensions for self employed people worth getting?

Self employed dont qualify for the full state pensions. You just get qualification for the basic state pension. That is just £4500 a year.

There is no such thing as a self employed pension. Pensions are available to employed, self employed and the unemployed. Its the same regardless. The differences that used to exist went away over a decade ago.

Just adding to james post, I am sure he will confirm that it is the stocks and shares ISA he is referring to and no the cash ISA. The cash ISA is not an ideal product for long term retirement provision. Your state retirement age is 66 and with no existing provision you are not going to be able to retire early. So, this money is going to be there for upto 25 years. Using cash ISAs for to meet your needs would be very expensive to you.