ISAs v Pensions: The Official Retirement Debate

Diversified

I believe a pension gives you too little control. True, it has its benefits, the tax aspect being the most obvious. The tax man effectively puts in an extra 22/40% of what you contribute for you. However, the government can (as we have seen) move the goalposts at will. The pension fund may go under. The markets might take a dive. Its impossible to take a calculated risk, because you have no control.

I acknowedge that, for many, a pension is the safest, most sensible option, but I'm considering from my point of view. I would be due to take my pension soon, but instead I have money in ISAa (which, for my purposes, is attractive because I like the flexibility). The mainstay of my 'pension', however, is my property. This provides me with an income now, and will continue to do so into retirement. I made the decision not to go for a pension years ago, and I thank my lucky stars I did! I have friends who, close to retirement, are worried whether they will actually recieve that pension that they worked so hard for for years. If I screw up with my property or shares, its because I made the decision, and not somebody else's mis-management! Also comes in handy having access to cash, and has been important at various points when I needed to help the kids out (bank of Mum and Dad...)

Anyway, pensions are a very personal thing, this is my own experience!

dunstonh

I believe a pension gives you too little control.

You mean the choice of 50,000 or so different investments isnt good enough?

The pension fund may go under.

No it cant.

The markets might take a dive.

They might but you dont have to invest in them if you dont want to. That is personal choice and part of the control you have.

You say your property is your pension. What if you get a bad tenant. What if property values drop and rental incomes with it. What if the Govt decides to tax second (and more) properties harder unless within a business (as they did recently). Nothing is certain in any area.

Its impossible to take a calculated risk, because you have no control.

Its perfectly possible to take a caculated risk as you can invest in most asset classes. Just as you can with the ISA.

but instead I have money in ISAa

Which has virtually identical investment options to the pension.

I have friends who, close to retirement, are worried whether they will actually recieve that pension

That doesnt make the pensions bad. That makes their planning and understanding bad and possibly a paranoia built up by newspapers over the years.

If I screw up with my property or shares, its because I made the decision, and not somebody else's mis-management!

The tax wrapper, whether its pension or ISA or any of the others can hold many direct investments. So, you still make the choice.

jamesd

Diversified, you wrote that the markets might take a dive. What have the markets done to the value of your properties over the last two years if you want to take the money out to buy an annuity? What about if you leave it invested to produce an income? Both of those are options that people who invest via pensions have, just as you have. And inside a pension, with that tax relief, you can also buy property if you want (commercial, not residential).

Someone who put their pension money in bonds (corporate and government) over the last year would have a nice gain right now. Someone who moved some into the markets at the start of March could be sitting on a gain of 60% or more on any money they put into Russia. That degree of control is available, you just need to learn how to use it, in the same way that you learn how to use residential or commercial property outside a tax shelter.

For what I assume are your residential properties you have taxable income and capital gains tax on sale to deal with. You don't have taxable income from the pension, not even with commercial property, until you start taking an income and don't have capital gains tax to pay.

You're right that there is legislative risk to pension investing and income taking. There's also legislative risk to property ownership, as those who own holiday lets are discovering. That might help to make property more affordable for locals in the affected areas, so their loss is potentially a nice improvement in the situation of others.

What will you do if private residential lettings cease to receive mortgage interest relief, just as happened for people's own homes when MIRAS was ended? Do you see any great reason why the government should give a tax break to landlords that owner-occupiers don't get, making it harder for the latter to get on the property ladder? Best prepare your arguments for your member of parliament and the Chancellor since this seems like an easy target for raising money. If you think that rents would go up (why? Property prices would be more likely to fall unless supply and demand changes, so new landlords could buy more cheaply to get the same yield) it's easy enough to use means tested benefits to protect the poorest, while still raising money.

There are risks either way. A mixture is a good thing, in general.

DRAWDOWN_OPPOSER

Everyone talks of a 25%tax free sum from their pension fund.When I was in business I was advised to start a pension and this I did using profits from the company paid into the fund,I was also told at the time I would be able to take 25%tax free sum when I retired. 9 years later after further advice I transferred the fund to another company into a personal pension fund.On retiring I was only allowed approx 8% tax free sum quite a shock at the time,reason given, inland revenue regulations so the 25% tax free sum doesnt always apply.

dunstonh

On retiring I was only allowed approx 8% tax free sum quite a shock at the time,reason given, inland revenue regulations so the 25% tax free sum doesnt always apply.

I can see no case where a personal pension would pay less than 25% tax free cash. Some older retirement annuity contracts could pay less than 25% before 2006 (or more than 25% depending on the annuity rate). Section 32 buy out bonds can often restrict the availabilty of tax free cash.

However, in all those cases, if the 25% is important to you, then you can transfer into a personal pension and take 25%. Its not always the best thing to do though.

invisibleangel

ManAtHome wrote: »

But you can take 25% out tax free (from the pension) which would put you back in front...

Sorry i am new here and unable to find how to put my question, so i hope it is ok to ask here?
It is about the same kind of thing Pensions.

In my divorce settlement i received 20% of my ex pension from his works pension.

How ever because i am dissabled and ill and not able to work, i was pensioned off at 50.

The problem is, the pension share order i get is take off me by social security, they say it is classed as earning because it is a private pension.

Before any one thinks i have laods of money, i will try to explain.

Because of having to start over again i took 25% off the 2 pensions, i was advised to split it into 2 pensions just incase.

So i have a pension worth £8,000 and another worth £4,000.
After i had taken the 25% lump sum, i now receive 2 payments a year, £290 off the £8,000 pension and £149 off the £4,000 pension.
Social worked this out to be around £8.50 a week, so this is deducted weekly from any money i get.

But if i worked i could earn £16 a week before any money was deducted??

Is it me or is this just wrong?

My ex refused point blank to give me a lump sum payment and all i was offered was the pension.

Is it right to be deducted from my social security payment as a pension? I am on income support and incapacity payment.

I was on DLA. but after 6 months they decided i was no longer in need of that. But that is another story and i will not bore you with that one.

Any help or information would be appreciated.
I have been told i can not sell the pensions as they are too small??

thanking you in advance for any information.

:beer:

dunstonh

Is it right to be deducted from my social security payment as a pension?

To be blunt, yes it is. The rules are in place to encourage people to go back to work. A pension income is not employed income and is no encouragement to work. The fact you now have some money from it now may not benefit you in the short term (in your case using an indexed income makes sense) is unfortunate in some respects but also fortunate to in others as you are now less burden to the tax payer than you were previously. Benefits are there to help those without money. You now have some money so the benefits go down to reflect that.

I have been told i can not sell the pensions as they are too small??

You cant sell pensions full stop.

wendyi

I currently pay £180 a month into a pension which I've seen decrease dramatically in value.

I'm considering cancelling/freezing the pension and either:
1) Investing the money in an ISA
2) Paying more money off my mortgate - I'm on a fixed rate of 4.99% with another 5 years at that rate and around 17 years left in total
3) A combination of 1 & 2

I appreciate that I have to be disciplined to not spend the money I save before my retirement but I don't have much faith in banks any more and have been disillusioned to see my pension fund decrease - that wouldn't have happened in an ISA or in property long term.

Any advise on the pros/cons of this approach?

Wendy

dunstonh

1) Investing the money in an ISA

Changing the tax wrapper wont make any difference. If you invest in the same investments in an ISA or pension then the growth/losses will be identical in percentage terms.

2) Paying more money off my mortgate - I'm on a fixed rate of 4.99% with another 5 years at that rate and around 17 years left in total

Stockmarkets are up over 20% recently. If you didnt buy those units cheap after they dropped you wouldnt have gained 20% or so on them in the short term. You would have just saved an annual equivalent of 4.99%. Actually it would be worse as you dont get tax relief on the mortgage and if you are in receipt of working/childrens tax credits, the payment there would drop as well.

A stockmarket drop is a great time to be buying units/shares for the long term. Its not good for those retiring shortly but if they have any sense they will have already reduced their risk in the years leading up to retirement and wont be hit as hard, if at all, by short term fluctuations.

I don't have much faith in banks any more and have been disillusioned to see my pension fund decrease

What have the banks got to do with the pension tax wrapper?
What has the pension tax wrapper got to do with the fund value decreasing? (the pension doesnt make or lose money. Your investments do that).

that wouldn't have happened in an ISA or in property long term.

Yes it would and has. As already said, the tax wrappers dont matter and property has dropped in value and historically underperforms the stockmarkets over the long term.

You havent actually said anything about your investments so its hard to make any comment without knowing what you have. Also, why are you thinking long term with property but not long term with, what i have to assume are, equities.

ceejayblue

I am currently employed in a job which pays me just under £24K a year and I am in the company pension which is a final salary one, I pay in around 8% and my company pay in around 17% - brilliant! Now due to a restructure my salary has been frozen for 2 years (no cost of living or other rises allowed) and as I am only about 4 years off of my retirement age I now have the problem of knowing what to do with the pension.

As my salary is above the current level for the job under the restructure it may be that in 2011 I will have to take a pay cut of up to £3K a year! I have been advised that I would be best to freeze the company pension and then take out another pension which obviously would not be final salary. I've got 2 ISAs with First Direct totallying around £17K in accounts that are only paying around 0.25% and I was wondering whether it was worth me taking £10K out and putting it into my pension as an AVC and getting the 20% back from the tax man? I have a Regular Saver ISA which I started this year, paying 7% interest but I'm not sure what I should do with my other ISAs - add them to my pension pot or move to a better paying ISA?

Any advice would be great.

Thanks