ISAs v Pensions: The Official Retirement Debate

EdInvestor

The recycling ban excludes reinvested tax free cash up to 15k.

LongTermLurker

EdInvestor wrote: »

The recycling ban excludes reinvested tax free cash up to 15k.

That's worth knowing, but not for a good few years yet

(the rules will have changed by the time I come to look at it, no doubt)

Izzy_Skint_2

Apologies if this has already been answered, I must have missed it.

I am currently in the Police Service pension (please don't all run off!) final salary scheme (joined about 10 years ago). I pay about 11% of my salary into the scheme which is 40/60ths for the first 20 years and 20/60th for the final ten.

I am looking into taking out my own AVC for when I hang up my truncheon in about 23 years. I want to share my investments out on several vehicles to spread the risk hence this decision. My current works scheme obviously provide the facility of a guaranteed income until I die, does the AVC work in the same way? If so, how will the annuity that I buy on the AVC's maturity be calculated? Will it solely be based on what I pay in, or could I end up getting back in income considerably more from the AVC provider than I pay in if I end up living to 120 (well, something in three figures will do anyway, unless we're all living on rafts akin to that awful Kevin Costner film they released in the 90's!)

Thank you all

jamesd

Money purchase pensions, like the personal pension you'd use independent of work, accumulate money based on how much you contribute and how the investments that you select perform. So paying careful attention to the investments and learning more about investing can make a big difference to your final pension pot value. The pension pot size and subsequent income is entirely unrelated to your salary, except as that affets how high your contributions are. You should expect to get back considerably more than you put in, if your investments do even reasonably well.

When you decide to take the pension, any time from age 55 under the rules that are currently expected to apply to you, you have two main choices.

First, you can leave the money invested and take what is called an unsecured pension, also known as income drawdown. This is likely to be best for those who retire at younger ages but it's not as certain as an annuity.

The second option is buying an annuity. Annuity rates as a percentage of the pension pot value vary depending on age, health and the investment returns on government and other investment bonds. The standard annuity types provide a guaranteed income and you can choose various options that reduce the initial payment level to get inflation-linked annual increases or benefits for a spouse.

You can also mix these two options, using some of the money to buy one or more annuities and the rest for income drawdown.

In your case it's likely that the work scheme will provide you with an ample basic income and the flexibility to use income drawdown to get it's potentially higher but more variable income. Add in your likely young retirement age and income drawdown looks very likely to be the option for you, if you can handle the investment ups and downs.

You should also check to see if there are police-specific personal pensions available to you, but do compare them with those available in the broader market because they may not be the best deal.

If you aren't a higher rate tax payer yet and expect to be one in the future you might consider favoring stocks and shares ISA investing now, so you can get higher rate tax relief later, when you can gradually move the ISA investments to the pension.

a7man

ISA's arent suitable for non tax payers and pensions are perfect for the higher rate tax payer.

I'm guessing you are talking about a mixture of cash ISA and S&S ISA, equities have outperformed money markets/ FI investment historically so it makes sense to put more in equities for a long term investment.

Plus with a pension you get your tax free cash & if a higher rate tax payer will have 20% extra in their account compared to an ISA. So I think pensions are the best route.

Also if one year you wanted to make a large investment for retirement, a pension will allow this an ISA wont..

One more thing, the Pension will have more money in it for longer, thus a kind of 'tax gearing', which will lead to much higher gains that an ISA.

EdInvestor

a7man wrote: »

One more thing, the Pension will have more money in it for longer, thus a kind of 'tax gearing', which will lead to much higher gains that an ISA.

A common misconception.There is no such geared advantage

a7man

In what way? Surely if you have more money in a pension through tax relief your gains will be higher?

jem16

a7man wrote: »

In what way? Surely if you have more money in a pension through tax relief your gains will be higher?

You are only deferring the tax. You gain an extra 20% on the way in but will be taxed at 20% on the way out - works out the same in the end.

There is a slight advantage to pensions in that you can have 25% tax free and the first £10k of your income is tax free. It can also help if you are a higher rate taxpayer when working but will be a basic rate taxpayer when you retire.

a7man

I know you are deferring the tax, but deferring the tax means while it is invested you have more invested so will have better gains. What am I missing?

jem16

Basically the more it grows the more tax you pay.

For example start off with £1,000.

With tax relief in the pension you get £1250. Double that and you now have £2500. 20% tax takes you to £2000.

In the ISA you started with £1,000 so doubled is £2,000. No tax to pay.

Exactly the same.