ISAs v Pensions: The Official Retirement Debate

Thrugelmir

Now that deposit interest rates are so low. Paying into a Pension Scheme that invests in "cash" will produce a fair higher investment return than a Cash Isa. As the tax relief gives a real return on the investment without without risk.

boobbby

Thrugelmir wrote: »

Now that deposit interest rates are so low. Paying into a Pension Scheme that invests in "cash" will produce a fair higher investment return than a Cash Isa. As the tax relief gives a real return on the investment without without risk.

I have been investing in a cash ISA and also been putting the same amount of money in a private pension scheme for over 10 years. My pension fund has reduced by about 25% in the last year and is not worth much more than what I put in. On the other hand I transfered my cash ISA to fixed ISA paying 6.5% over the last year. What interest do you get from the "cash" pension scheme? and is it tax free?

dunstonh

My pension fund has reduced by about 25% in the last year and is not worth much more than what I put in.

How have you managed that?

I have just done a check using a bog standard L&G managed fund and compared it to cash.

£100x12x10=£12,000 in contributions.
L&G Managed value = £13,576.

8 years of £78 and 2 years of £80 for cash = £7488 + £1920 = £9488.
Cash average = £10048.

So, like for like, the pension is £3500 more in 10 years than you would have got had you paid cash (assuming basic rate taxpayer) even if you picked a bog standard sector average performing balanced managed fund. Plus that is just after a major crash when its the best time to be paying into a pension invested in the market.

If you picked the best selling fund from 10 years ago - Fidelity Special Situations, you would now have £17,731 (not the best performer note. The top selling fund). £7000 more than cash and that lost 31% from peak to lowest point in 2008.

garden-lover

I am far from a financial guru and find myself in a pension v ISA predicament.

I live on my own and about 8 years from retirement. I pay into a pension along with my employer, but nothing over and above the minimum as the pot does not grow and like most others, diminishing at present. I have been putting any extra monies into an ISA to supplement retirement.

I find myself thinking that if I was made redundant I would not receive benefits because of £16k plus savings, so would have to use them to live on and then not have any money at retirement.

What would those in the know do? Please be gentle with me if my question seems crass to you.

GL

dunstonh

What would those in the know do?

It depends on more things than you have mentioned. The stocks and shares ISA vs pension debate is really aimed at those looking to fine tune their planning to get the best out of it.

Are you able to fine tune to the required level (i.e. know what you are doing)?
Pensions pay the most as far as income is concerned but are not geared for capital provision. ISAs pay a lower income and you retain your capital. However, if you spend that capital, your income goes down. So, in reality its your beneficiaries that gain more out of it than you do. Especially if the lower income impacts on your lifestyle.

The pension value has gone down because the markets are down. It will go back up when markets go up. Thats what investments do. They zig zag in value. The contributions being made now are buying units cheaper than any time for the last 2 or 3 years. That is good news for the long term.

That said, you probably have a range of investment options available to you but if you use the same investments in an ISA and pension then the returns will be the same. The use of ISA or pension has no impact on the rate of return. It is identical.

mongster

I would suggest both. You aim for a small pension pot with an income you dont pay too much tax on i.e 8 to 10k and plan to draw down a tax free income from your isa pot to make up the difference.

danzily

Why has my husbands occupational pension investment dropped this year, a total of £560 has been paid in, but the total value of the pension has only gone up by about £250. Does this not shout invest in an ISA rather than a pension?

Andy_L

An ISA invested in the same area would have had the same performance

dunstonh

Why has my husbands occupational pension investment dropped this year, a total of £560 has been paid in, but the total value of the pension has only gone up by about £250.

You may have heard phrases like credit crunch and recession and stockmarket crash in the last year. If you invest in areas affected by those then you will have seen your money go down.

Investments zig zag. Always have, always will. Your husband is now buying units cheaper than what they were last year so when the unit price goes back up it will be these cheaper ones that make more money than the ones that were more expensive last year.

Does this not shout invest in an ISA rather than a pension?

Wouldnt be any difference as Andy says. The same investments inside an ISA or pension react the same way. The tax wrapper (ISA or pension) has nothing to do with investment returns.

baby_boomer

If the government does abolish higher rate tax relief on pensions, then higher rate taxpayers who went down the ISA route rather than the pension route would no longer have the option of switching to pensions later without losing out.