ISAs v Pensions: The Official Retirement Debate

peter_green_2

Appreciated your comments and feel connected to your views. Would very much like to give details of my personal circumstances. I am aproaching retirement with both pension and pep/isa. Your comments welcome..





quote=EdInvestor;4312115]What's realistic for a couple?I'd say a retirement income of 20k each, 40k total, would do nicely ( that's compared with the average of 14k for two today.)

Income made up as follows:

1.The two state pensions, both index-linked, let's say 6-6.5k average (part of this might include income from a small contracted out "protected rights" pension).

2. Company or private pension income, either final salary (index linked)or money purchase,or a mixture of the two: 3.5-4k. This would involve a money purchase fund of approx 75-100k to provide for inflation, depending on whether it was annuitised or in income drawdown.

The income above should be pretty well tax-free as it's within the age allowance and 10% band.

3.Income from ISAs - 5k. This would be a fund of 100k, invested in a mixture of property funds, bond funds and cash generating a 5% annual tax-free return.[Much of this money,except for the cash, might have been invested in equities earlier while it was growing.]

4.Income from direct investment 5k - in shares or equity unit trusts. The dividend income is free of additional tax and any top up is covered by the CGT tax free allowance.

This 20k income will be below the threshold at which you are deemed well-off and start losing your age allowance.

How might this be accumulated?

The state pension will grow as you work, and company pensions where employers' contribute should crop up for most people to provide the other chunk.If not use a SIPP.

The first 100k fund needs to be saved in your ISA, first in cash and then in ideally in equities.

But the 2nd one could well come from either trading down from your family home into something smaller at retirement, or from cashing in a BTL.[Of course you might want to keep the BTL, but bear in mind that letting income is taxable.][/quote]

huffyharry

I have 2 pensions with SW which I pay £140/month - been paying these for 9-10 yr. Was thinking of stopping these and just saving the money. Is this a bad idea?

dunstonh

huffyharry wrote: »

I have 2 pensions with SW which I pay £140/month - been paying these for 9-10 yr. Was thinking of stopping these and just saving the money. Is this a bad idea?

Maybe. maybe not. if you are within 5 years to retirement and your pension provision is going to take you over £10,000 a year then switching to cash ISA for short term saving is fine. If you are much younger or you are nowhere near providing any sort of decent income in retirement then the pension is the best option.

Nothing beats a pension for income provision in retirement. Its no good for building capital but thats not why you take a pension out. The quality of your pension may be a different matter. If its an old Lloyds bank or TSB pension then alternative modern options can be better. If its poorly invested at the moment then some fund alternatives could be considered but without any information who knows?

jamesd

peter green, the mangled quoting there made it hard to see if you had a question of your own. Worth trying again if you do.

stphnstevey

jamesd wrote: »

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.

So it's the Employer and Employee Nat Ins saving that makes this a good option for a self owned company

jamesd

There may be other benefits, I'm not sufficiently familiar with the small business aspects of it to say. Better to try say the tax section.

daveyft

I've just read this thread and it's been very informative but I dont recall any mention of the impact of retireing abroad. There must be may people who are not planning to stay in the UK in retirement and this should be factored in to your planning. I havent researched this as I do plan on remaining a UK taxpayer but my initial thoughts would be:

You cant continue to hold an ISA if you are not UK resident for tax purposes. Therefore this is not a good wrapper as you will pay tax on input and will then cease to be eligable for the longer term tax free benefits.

Tax treatment of income from a pension would vary depending on where you were resident for tax purposes. I suspect though, that you would need to take the 25% tax free lump sum whilst still a UK tax payer as this is a UK only feature.

Is this correct? Are there other factors to consider?

JonWB

For higher rate taxpayers the ability to recycle the higher rate relief claimed back through your tax return makes an element of compound relief possible.

If you reinvest the tax relief claimed back through your tax return, you can get just over £666 tax relief (into your pension pot in Year 5) from a £1,000 contribution.

This seems very unfair for basic rate taxpayers who can't do the same thing (and I say this as a higher rate taxpayer) as all tax relief goes straight into the pension pot.

daveyft

JonWB wrote: »

This seems very unfair for basic rate taxpayers

It depends how you look at it. I dont see it as unfair as I look at it like this.

If, as a higher rate tax payer, you decide to put £1000 from your HRT earnings into a pension then £1000 goes into your pension. If a standard rate tax payer decides to put £1000 into a pension then £1000 goes into the pension. If, however, they both decide to take the money as earnings the higher rate tax payer gets £600 where the standard rate tax payer gets £800.

This seems very unfair for the higher rate taxpayer

jamesd

daveyft, you can continue to hold an ISA while not UK resident for tax purposes but can't make new contributions. Whether the foreign jurisdiction respects the tax benefit is a different question and I don't recall reading of one that does, but I also haven't researched it.

The tax free cash is not an option that is UK-specific but it varies from country to country depending on the QROPS options there. For example:

• Cyprus: only 5% income tax on pensions.
• France: no tax-free lump sum, so take it before moving there.
• Hong Kong: 100% tax free lump sum after 5 years outside UK.
• Ireland: 100% tax free lump sum after 5 years outside UK.
• Isle of Man: no annuity requirement at age 75, higher 30% tax-free sum, can invest in residential property, 7.5%inhritance tax even when in income drawdown. 18% income tax.
• Italy: apparently 100% lump sum after 5 years outside UK but maybe worse other taxation.
• Portugal: usually lower income tax.
• Singapore: 100% tax free lump sum after 5 years outside UK. No inheritance tax, no income tax on pension drawings though may be more expensive plans at up to 6% of fund value sometimes.
• Spain: apparently 100% lump sum after 5 years outside UK but maybe worse other taxation.