ISAs v Pensions: The Official Retirement Debate

LongTermLurker

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.

jem16 wrote: »

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.

Come on Jem, you can't state an advantage in one post and then ignore it in the next

For example start off with £1,000.

With tax relief in the pension you get £1250. Double that and you now have £2500.

Take 25% tax free = £625
and deduct 20% tax from the remainder = £1875 - £375 = £1500

Takes you to £2125 or 6.25% more? (not accounting for the tax free £10k you mention)

The answer is that ISAs and pensions both play a useful role; pensions guarantee you an income for life and ISAs have tax-free output. ISAs are restricted to investing £7200pa and pensions to some ludicrously high level.

The other thing is my employer won't pay into my ISA!

jem16

LongTermLurker wrote: »

Come on Jem, you can't state an advantage in one post and then ignore it in the next

I wasn't ignoring it at all. As I said earlier there is a distinct advantage to pensions with the 25% tax-free and the up to £10k in retirement tax-free. Even if you have another pension and use up all of your tax-free allowances you still have the 25% tax-free ( or at least at the moment you do as it could be removed in future). Higher rate taxpayers have the best advantage if they will not be higher rate taxpayers when they retire.

However I was trying to answer a7man as he thought the pension must be better as it grew more with the tax relief added. It does but with the end result that it "may" also be taxed more. In this case a simple comparison was what was needed.

As I said away back on page 1, a mixture is usually best to utilise all tax advantages.

LongTermLurker

jem16 wrote: »

As I said away back on page 1, a mixture is usually best to utilise all tax advantages.

With 16 pages, I started at the back and moved forward - I know you'll have given a valid viewpoint, don't worry.

a7man

so there is more gain in a pension fund due to the tax relief IF you take the max tax free cash...I thought I was going mad with everyone saying I was wrong!

jem16

a7man wrote: »

so there is more gain in a pension fund due to the tax relief IF you take the max tax free cash...I thought I was going mad with everyone saying I was wrong!

I said that you in post 302.

jem16 wrote: »

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.

You have to remember though that the government may do away with the 25% tax-free cash option.

jem16

LongTermLurker wrote: »

With 16 pages, I started at the back and moved forward - I know you'll have given a valid viewpoint, don't worry.

You'll need to read quicker.

a7man

jem16 wrote: »

I said that you in post 302.

I thought that was just a separate point showing the advantages of a pension rather than an ISA. I wasnt referring to your comments, I was referring to previous ones.

They might get rid of the 25% tax free allowance, but this would only make it as good as an ISA, so at worst you are equal, at best you make over 6% extra. This is quite a lot considering the amount in a pension pot.

jem16

a7man wrote: »

They might get rid of the 25% tax free allowance, but this would only make it as good as an ISA, so at worst you are equal, at best you make over 6% extra. This is quite a lot considering the amount in a pension pot.

The problem arises when you have too much pension income which is all taxable. When you get to income of £21,800 you start to lose the age-related allowance until by around £26k you are back at having only the basic personal allowance.

With correct planning of both pensions and ISAs you can have the best of both worlds.

Paul_Herring

a7man wrote: »

They might get rid of the 25% tax free allowance, but this would only make it as good as an ISA, so at worst you are equal, at best you make over 6% extra. This is quite a lot considering the amount in a pension pot.

With an ISA I decide how I want to how much of the money, with a pension fund I'm forced to either buy an annuity or drawdown the funds.

On the flip side, ISA's can be taken if you go bankrupt, pensions cannot.

All swings and roundabouts. That's why I have both.

Izzy_Skint_2

jem16 wrote: »

The problem arises when you have too much pension income which is all taxable. When you get to income of £21,800 you start to lose the age-related allowance until by around £26k you are back at having only the basic personal allowance.

My scheme is a final salary/two thirds pension, am I risking losing my age-related allowance if I were to start paying into an AVC now (I have 23 years of work left, fingers crossed).

Also, can someone clarify. If I were to take out an AVC now to suppliment my company pension, would my AVC also give me a guaranteed income for life as well as my company pension scheme? And if this were so could I therefore glean much more from my avc provider than I put in if I lived to be, say 100 (fingers crossed again)

Many Thanks.