ISAs v Pensions: The Official Retirement Debate

jamesd

jem16 wrote: »

However your figures assume that the lump sum is invested within an ISA to provide extra income. I know from experience of a friend recently retiring that not everyone will choose to do that and prefer to keep the lump sum accessible in a savings account.

Yes, they assume that for both pension and ISA the average income available is 5%, so using investments for most of the money. The risk of using savings and getting a lower income is higher for ISA because it's not possible to just use a savings account for most of the pension money.

jem16 wrote: »

The next figures for 35 years and 40 years look to be over the personal allowance reduction figure but perhaps some of the gross is ISA income and not taxable income?

The income limit this year is £22,900.

After 35 years the taxable state and personal pension income is £18,788, so below the limit. Adding income from the ISA investment of the £78,589 lump sum produces the final net income of £20,960.

After 40 years the taxable state and personal pension income is £22,148, so it's still just below the £22,900 limit. Adding income from the ISA investment of the £100.983 lump sum produces the final net income of £24,767.

jem16 wrote: »

As I said I'd like to see the figures for £7k/£5k (for self-employed who don't get S2P) state pension, £3k/£5k private pension with appropriate lump sum invested in ISA as you suggest, plus ISA income to make up the total income. ...In other words can a mixture beat either of the options you have given or not?

A mixture can't beat them because any money taken from the pension reduces income. So it doesn't matter how much you switch from pension to ISA, you're always worse off for long term income at least until age allowance starts, assuming that you're not getting means tested benefits. For someone who doesn't get the additional state pension the pension advantage grows because more of their personal pension income will be within the personal allowance.

jamesd

Lets start with the initial figure for £300 a month that over 40 years can produce either £24,767 if invested in a pension or £23,157 if invested in a S&S ISA.

Now switch that to £150 each to pension and ISA. The pension part for £150 a month is £16,184 (including state pensions, after tax, including income from lump sum put into ISA). The £150 in the ISA part produces £8,078. Total of the two incomes is £24,262.

Now back to £300 a month for pension only for a self-employed person getting only the £4,953 basic state pension, no additional pension. The pension option produces a total income of £23,130 while the ISA produces £21,110.

Switch that self-employed person to £150 a month to each and the pension part produces £14,546 while the ISA part produces £8,078 for a total income of £22,624.

So the summary for £300 a month for 40 years:

PAYE: pension only: £24,767. ISA only: £23,157. 50:50 mix: £24,262

Self-employed: pension only: £23,130. ISA only: £21,110. 50:50 mix: £22,624

The self-employed person could also choose to pay pension contributions with salary sacrifice, adding both the saved employee and employer NI to the pension contribution. I've ignored this gain for the pension in the calculations.

Judwin

I understand and agree with the general jist of James' argument, but the income from the ISA invested pension lump sum is a little misleading, in the first few years at least.

As things stand, you can only put £10K p/a into an SSISA. So if the lump sum is bigger than this, it's going to take multiple years SSISA allowance to get it all in. The "40 years" pension lump sum is £100K, and that's going to take 10+ years to get into an ISA.

The balance of the money is going to be outside any tax shelter during that time, so whilst it could be invested in stocks/shares/OEICS etc, you'll have to pay tax on dividends and CGT on any disposals above the allowance. There is going to be a big temptation to just leave it in a savings account earning at best a few percent above CPI, or worse spending it. :eek:

Financial dicipline is going to be required.

jamesd

Judwin wrote: »

I understand and agree with the general jist of James' argument, but the income from the ISA invested pension lump sum is a little misleading, in the first few years at least.

Yes, it'll take a while for the larger amounts, even if a partner's allowance is available. What you'd really be looking to do is start using the maximum ISA allowance before you finally retire, using a phased retirement approach of taking 25% that's sufficient to fully use the ISA limit each year and leaving the 75% pension part in drawdown but without taking an income from it.

Self-control is definitely required. That 40 year ISA option ends up with a £320,000 lump sum, all of which can be got at and spent in one month. The pension version has less exposure to this risk but still the lump sum can be quite substantial.

jem16

ifadoncaster wrote: »

John Davies - ifadoncaster *******

Welcome to MSE.

However could you please remove your phone number - it's against forum rules to advertise.

mistermoneysaver

hi all . just dug out last years statement for my pension and its 11700 now. Do I need to carry on paying into it or not?

this was in a very good post earlier on.

3 - when your pensions are on track to give a real term income in excess of £10k, then switch to ISA.

sorry not v good with pensions.

jamesd

What is that 11700? Is it the current value of the investments? Is it the expected income if you continue paying in as you do now (most likely)?

Even above 10k the pension still provides more income than using ISAs. The reason some people might want to switch to using ISAs after that is to get a bigger lump sum, at the cost of a lower income.

mistermoneysaver

thanks for replying.
it says based onservice to date before the 11700.

It also says based on prospective service to NRD normal reirement date that it will be 26000.

I just need to know whether that will be enough fo me to have both an ISA and a pension really.ie stop paying into a pension and pay the 300 a month into an ISA

jem16

mistermoneysaver wrote: »

thanks for replying.
it says based onservice to date before the 11700.

As you are mentioning service to date, it sounds like a final salary pension.

I just need to know whether that will be enough fo me to have both an ISA and a pension really.ie stop paying into a pension and pay the 300 a month into an ISA

Do not stop paying into this final salary pension. It has no investment risk to you and is based on years of service. Absolutely nothing you can do with an ISA will come anywhere near to this.

Who is your pension with?

Corporate_Gifts

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