ISAs v Pensions: The Official Retirement Debate

gpage2000

This may seem a little simple on the back of some of the comments here... but pending a payrise next year, I had thought to save £300 each in to my finance and my ISA's which on an under-estimated rate of 5% over 27 years (taking us to just over 55 years old) would yield roughly £410,000 presuming ISA rates don't go up and allowance don't increase.

Surely with this almost guarantee of 'cash' savings at 55 is a SAFER option when compared to S&S ISA's? Though there is every chance there would be a higher end figure, there could be a lower one.

I have a good pension where I pay 4% salary in (2% standard and 2%AVC) which is matched, so that's 8% total plus various other bits. Mortgage will be paid off by 50 presuming I don't overpay if I get the chance. I also have an excellent sharesave scheme which in around 5 years I will be able to pump in the maximum £250 a month giving me a good benefit in the future (so long as a draw on the shares under the CGT limits!)

Very difficult to gauge at 26 if this is the right idea or not.... and will I end up with too much or too little at the end of this all with a view to retire at 55?


Any thoughts much appreciated!

jamesd

That 410,000 would be worth 210,500 in today's money if inflation was 2.5% - multiply by 0.513 to adjust values after 27 years at 2.5%. Assuming that the compensation scheme limits remained the same in today's money you'd need to use savings accounts in six banks to protect it.

The stocks and shares ISA option has historically returned around 12% in just the UK main market, more elsewhere and more with better fund choices than a basic tracker. That's the sort of return that will deliver 7-12% a year after fees and inflation.

In the last few decades there hasn't been a time when investing in the FTSE index with a lump sum for ten years would have caused you to end up with less money than you started with. Doesn't take that long if you're using regular investing so you can't buy all of the investment just before a bug drop.

But if you don't trust shares, you can also use corporate bonds, UK government bonds or other options within a stocks and shares ISA. Better not to stick purely to those but to include such things as BlackRock UK Absolute Alpha, Invesco Perpetual Income and Artemis Global Growth in varying proportions to match the level of up and down movement you'll accept.

You could usefully consider a pension mortgage if you're content to repay at age 55, the earliest age you can take a personal pension in your case. It's very tax-efficient for both building up the lump sum used to pay off the mortgage and then generating ongoing pension income. Basically you invest into the pension about 2.5 times the difference between interest only and repayment amounts and have an interest only mortgage. Then 25% is taken out to pay off the mortgage and 75% remains for the pension income. Even more efficient for higher rate tax payers, if the pension is paid via salary sacrifice so it's boosted by not having to pay NI or if the employer will match the extra contribution value.

dunstonh

It is also worth noting that whilst cash rates are around the 5-6% mark now (average) they will also fluctuate and it wasnt long ago that the cash ISAs were paying 3%. Everything goes through cycles of ups and downs. Cash rates included.

Also, when the stockmarkets go down, its a great time to be buying. In the long run you want stockmarket drops in the earlier years. The other thing is that you you can diversify your pension contributions to include fixed interest funds, property and stockmarkets from around the world. You can average out the amounts you pay into each to suit your risk profile so you dont need to go 100% in to the stockmarkets.

jamesd

Agree about a time to buy.

Come 20 April I expect to have committed myself to investing all but 6500 or so of my income into salary sacrifice and other pension contributions over the next year.

I can transfer that salary sacrifice money to any pension of my choice, so I expect I'll ask you for your thoughts on an pension option that'll handle both unit trusts/OEICs and investment trusts. I'm not keen on the options in the GPP part of the SL GPP/SIPP even at 0.57% AMC/FMC reduction with no adviser costs. The 300 or so setup charge plus 400 a year charge just to use the SIPP option doesn't seem to make sense for my end of year fund value (under 50k). Might end up with a couple of pensions if I can't find some more efficient way to do it. Hassle but getting the right investment mix cost-efficiently is worth doing.

doire_2

Reading the first 8 pages im inclinded to open a Stocks and Shares ISA.

Im an IT contractor so my "employer" would'nt make any contributions if i opended a pension.

I already have a cash ISA.

Has anyone any idea where i can find info on which Stocks and Shares ISA to use? Its a bit mind boggling!


Thanks

EdInvestor

Try one with a discount broker who rebates the charges eg https://www.h-l.co.uk

janbabe

I've just started work again after having a year off. I took an early severance from work and with the package took a huge chunk off the mortgage.
My pension from work has been frozen and I will get a lump sum and a yearly pension when I am 60. (I am now 50).
Obviously for the last year I haven't paid into a pension as I haven't been working, though the JSA paid my stamp for me.
Now I've started work only for 4 mornings a week at the mo, my new employer does not offer a pension scheme. My salary is not a lot as I'm only working 16 hours a week (might get a bit of overtime later) so can't really afford to pay into one myself. I have a mini isa which I've paid £100 month for about 3 years and last year paid an extra £1800 into it.
I've had to drop my payments into it for a few months while I've not been working down to £25.
Is not paying into a pension gonna harm me for the future if it carries on like this? I am married and my husband has a fairly good pension, but feel as if I ought to do something - but not sure what!!
cheers
Jan

jamesd

janbabe, you and your husband each get a personal allowance which is free from tax. When you're over 65 that allowance increases to almost 10,000. Good pension planning is for each of you to plan to have a pension in your own name of about that much. This way you get tax relief on the pension contributions but pay no tax on the first 10,000 when over 65.

So, you and your husband should review both of your pension contributions and try to arrange for both of you to get about the same. You should not do this by reducing his contributions below the amount that his employer will match, just use any additional contributions he's making and make them into a pension for you instead until pension projections suggest that you will have about 10,000 in pension income in your own name.

Remember to include the state pension in your planning. If you don't know what it will be, assume 4,500 per year for each of you. Also if 20,000 is high compared to your current combined income you can reduce your targets to something more realistic.

There's a good pension calculator at Hargreaves Lansdown.

Mini cash ISAs are useful but they are not suitable for pension planning because they don't grow by much more than inflation. You need to use investments inside a pension or stocks and shares ISA when investing for retirement.

stphnstevey

I am just in the process of setting up a Ltd and was contemplating investing more in my S+S ISA. It occured to me that a better way now maybe for my company to pay into a SIPP for me. Can anyone advise on the which would be best tax wise?

jamesd

stphnstevey, the company contributions would avoid NI on the salary so it'd probably be better for both you and your company. Have a read of the salary sacrifice sticky topic.

Only 1% employee NI for higher rate tax payers but there's still the employer NI to save and it's quite common for employers to top up the pension contribution by that amount. For higher rate you also have the advantage of not having to wait until after tax return filing to get the higher rate rebate, since the company contribution is gross including higher rate taxable part.

For basic rate there's both employer and employee NI to save.