ISAs v Pensions: The Official Retirement Debate

EdInvestor

stphnstevey wrote: »

Is State Pension age the same age at which you can take a personal pension?

No.State pension age for men is 65.Personal pension age is 55 from next year.

There is no real tax advantage from pension tax relief for those paying 20% basic rate tax, apart from the 25% tax free cash.

Those getting 40% tax relief and paying 20% basic rate later on the pension income clearly benefit.

Anyone who can squeeze their pension income (incl state pension) into the annual c.10k personal allowance will benefit.

Watch out for age allowance clawback from pension income of 23k upwards.Also try to equalise pension income between spouses so both can benefit from the 10k allowances.

jamesd

stphnstevey wrote: »

Also, is there a difference between the tax benefit of payments into a pension from:
1) salary that is under the tax threshold so no tax was paid on it
2) salary that is over the tax threshold and tax paid on it

1) seems to be 22% saved when into pension, 22% payed when take from a pension = 0%

2) seems to be 22% payed when receive salary, 22% saved pension payment, 225 payed when take from pension = -22%

I'd have to go and look up the rules for someone who is earning and who pays a contribution from part of their income where tax isn't paid to see whether none, up to 3600 or all gets the tax rebate. I don't know. For salary sacrifice it's easy: it's before tax so there's no income tax rebate because there was no income tax to pay in the first place.

Regardless of how the money gets into the pension, it's taxable income in retirement, except for the 25% tax free lump sum.

stphnstevey wrote: »

Also, there is a difference of around £3000 between the normal tax free allowance and the age related allowance. So it is possible you would pay have payed 22% above the normal tax free allowance, but when draw pension it is under the age related allowance, so tax free. This £3000 over 25yrs would equate to an extra £16500 tax free on top of the normal 25% tax free?

This is one of the ways that pensions have an advantage for those who are paying basic rate tax, because part of the pension income will be tax free. Ignoring inflation the benefit is 20% basic rate tax on the 3,000 a year for 25 years, so 15,000 of tax not paid. That's per person so it's good for couples to have at least 10,000 each in taxable income so they get the full benefit.

The other advantage is the 25% tax free lump sum, so 25% of the pension pot value can also be taken tax free and some of that is part from tax rebates for contributions.

When you compare putting the same net amount of money into a pension or an ISA at basic rate tax the pension ends up with 31.25% of the lump sum that you end up with in the ISA. But the pension ends up with 7.8% more income just around the end of the personal allowance limit, dropping to 6.95% more income just before age allowance reduction starts.

For higher rate contributions the pension lump sum amount is 41.67% of the ISA lump sum. The income from the pension starts out about 17% higher than the ISA, gradually dropping to about 16.8% more just before age allowance reduction starts.

For basic rate contributions with salary sacrifice the advantage for the pension is around the middle of the basic and higher rate benefits if the employer isn't paying in their saved employer NI. Basic rate with employer NI added is even better.

Pensions are a particularly great deal up to the 10,000 a year in income point (tax relief going in, no tax on income) but still beat ISAs for income beyond that point, just by less.

The pension income calculations above take the lump sum from the pension and invest it in an ISA to generate ongoing tax free income. They assume that the state pensions pay 7000 a year and that income is 5% of capital.

doiknowu_2

Hi Everyone,have been reading these posts for the past 5 hours and none have really answered my question, so i have decided to post myself.My husband has just got a letter about his pension from B&CE giving him until 16th sept to take up a compulsory purchase annuity using whole fund or taking 25% tax free. his annual summary purchase price is £11,721, this gives £555.37 gross annuity.guaranteed for 5 years.Or a £2,930 tax free lump sum and £411 gross annuity.He is 52 years old . These figures are not much obviously , and we don't want to go for annuity , so i just want to know if he can take out his lump sum of £2,930.42 and then take out the rest (£8,791) and put it in an isa, and if so do we ignore this acceptance form , and who do we contact to take out his 25 % and his lump sum.Thank you for your help .

EdInvestor

doiknowu wrote: »

... i just want to know if he can take out his lump sum of £2,930.42 and then take out the rest (£8,791) and put it in an isa, and if so do we ignore this acceptance form , and who do we contact to take out his 25 % and his lump sum.Thank you for your help .

No.You can take out the 25% tax free cash and leave the rest invested, so as to take an income later, but to do that you will first have to transfer the whole pension elsewhere,into something called income drawdown, usually done in a SIPP.

Here are a couple of low cost companies which offer this arrangment:

https://www.h-l.co.uk
https://www.sippdeal.co.uk

If you move the money there they will pay out the 25%, and then you need to invest the remainder for later.

Your husband is too young for an annuity, so this plan is sensible.

dunstonh

The B&CE scheme has some advantages. Taking it early and reducing death benefits and massively increasing your charges by using a SIPP seems a bit daft. Especially on a small fund of £11.7k.

There is no reason to take benefits now. If can be deferred until a later age.

jamesd

Unless he needs the pension income he should leave the money invested until he does need it. If for some reason B&CE won't let him do that he should just move the money to another pension provider.

If he has an existing personal pension somewhere else he could just transfer it there.

Note that from April 2010 the minimum age for taking money from a pension increases from 50 to 55 so if he thinks he'll need the money before he's 55 he should take the 25% now but can leave the rest invested. The 25% can be invested via a stocks and shares ISA to keep the ongoing growth it would have received in a set of pension investments.

EdInvestor

dunstonh wrote: »

Taking it early and reducing death benefits and massively increasing your charges by using a SIPP

Low cost providers will not massively increase charges.

jamesd

Hargreaves Lansdown isn't a low cost provider when it comes to not taking money out and even when taking an income low cost isn't cheap. It charges the full annual management charge on the funds that the money is invested in, no discounts at all. It's only relatively inexpensive in some of the fixed costs, with a £75 fee to do the required GAD calculation before you can take out any money and again whenever you want it done again. Also £10 any time you want to change how often or how much you are paid or £25 for each one-off payment you want. If you want to transfer the money somewhere else, say to buy an annuity from somewhere else, there's a £75 fee.

Full annual management charges are typically without the 0.5% saving you might get elsewhere. On £8,791 that 0.5% is £44 a year in commission going to HL. If you're taking 6% of the capital as income each year you're taking £527 in income yourself. That's 7% of your potential income going to HL instead of you.

For their ISA they typically refund half of the commission to you so at least you'd get half of that £44 back and cut the cost to 3.5% of your income.

Those fixed costs are lower than many SIPP providers would seek but it's worth comparing them to the costs of other options, like normal non-SIPP personal pensions.

dunstonh

EdInvestor wrote: »

Low cost providers will not massively increase charges.

Yes it will. The B&CE scheme has something like a 0.3% AMC. Using someone like HL will see the AMC rise to typically 1.5%. That is five times more than the B&CE. That is a massive increase.

Some of the older B&CE schemes also allow full 100% payout on fund value at scheme retirement age (but not earlier). We dont know what type of scheme this one is.

isobelle

Personally I put my money into an ISA and other savings rather than a private pension. The reason is my father died one and a half years after retirement. My parents were divorced and I am his/their only child. I received three and a half years worth of his pension i.e. it was guaranteed to pay out for five years after retirement to his next of kin if that was an offspring if he died within this initial five year period (would have paid out obviously to my mother until her death if my parents were still married). The pension company kept the rest. He had contributed to his pension for forty years.

I also have a daughter. If I die shortly after retirement I would rather her inherit what is in my ISA and other savings than let most of my money go to the pensions company.

That is the reason that I will never contribute to a private pension.

If there is a terrible flaw in my plan I am welcome to suggestions from anyone!

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