ISAs v Pensions: The Official Retirement Debate

jamesd

Some interesting assumptions there:

1. The whole of the pension income is taxed at 20%, as if the pensioner had no personal or age allowance to reduce tax by around £600 a year (after allowing for £7,000 of state pensions that are taxable and use some of the allowance).
2. That the ISA has charges or 0.55% and the pension has charges of either 0.45% or 0.95% more than the ISA. No need for this when the Hargreaves Lansdown ISA and SIPP and others have FTSE trackers at 0.25% annual charge, the HSBC FTSE All Share Index tracker.
3. Only 6% growth before fees when the FTSE pays out 3-4% just in dividends, even before growth.
4. That the pension has a spouse benefit, as if the spouse didn't have their own pension, and that an annuity is used for the pension instead of using fully inheritable by the spouse income drawdown.
5. It's unclear what happens to the pension lump sum. Is it used to generate tax-free income by moving the money as fast as possible into a S&S ISA?

dunstonh

http://www.thisismoney.co.uk/pension...8&in_page_id=6


Unusually thorough (for the press) comparison of the pros and cons of pensions and ISAs.

Although it has technical inaccuracies and incorrect assumptions.

James has higlighted a few but when the first line says pensions have higher charges then you know that the article is flawed.

IN addition to James' points, they asked HL to supply info on ISAs on their discounted terms and for L&G to provide details on their full cost terms. Why not like for like?

EdInvestor

dunstonh wrote: »

.....when the first line says pensions have higher charges then you know that the article is flawed.

But they often do.For instance trackers are almost always much cheaper in an ISA than a pension, as are unit trusts - the pension mirror versions often have higher charges and lower returns.It will not be so in all cases, but it's sufficiently common to be a factor, especially when you take into account initial charges and discounting.

dunstonh

But they often do.For instance trackers are almost always much cheaper in an ISA than a pension, as are unit trusts -

You can get the pension and the ISA wrappers supplied at zero cost. Put the same funds in both and you get the same charges.

The article was written on the a similar basis of one buying a TV from John Lewis and the
other buying it from a discount shop. That is not like for like and introduces a bias.

The article also tells an outright lie. It says the typical AMC for stakeholders is 1.5%. There is only one stakeholder on the market that has a 1.5% amc. The rest have 1% or lower. So, how is 1.5% typical?

In fact, the pension using a tracker can be cheaper very easily than using HL for an ISA investing in a tracker.

EdInvestor

dunstonh wrote: »

You can get the pension and the ISA wrappers supplied at zero cost. Put the same funds in both and you get the same charges.

But typically you don't get such deals on pensions and hunting them down would not be within the capacity of the average person.The Mail article is much more reflective of the reality.

dunstonh

But typically you don't get such deals on pensions and hunting them down would not be within the capacity of the average person.The Mail article is much more reflective of the reality.

The typical person doesnt buy from HL either. However, that didnt stop them using HL as an example. A standard stakeholder bought execution only can get tracker funds at 0.5% (or as low as 0.3%). So, to compare HL's offering to 1.5% which is nowhere near typical is misleading.

kinglewis

The state pensions and final salary pensions don't normally allow for this but it's one reason why in a job with exactly equal benefits for men and women the women would have a lower gross salary: the employer would be paying them more in pension benefit value because they would live longer in retirement. It's one reason why money purchase schemes can end up being easier for an employer, since those treat the pension benefits identically and remove that as a reason to pay the women a lower gross salary.

Don't think I'll be bringing that up with my sister but how true!!! A valid reason why men are paid more.. I like it!

wary

Did anyone listen to Radio 4's Moneybox on 9 January? IFA James Brook was claiming that for basic tax-rate payers at least, the figures show that unless one lives to around 115, they'd be better off putting their money into an ISA than a pension/annuity.

He certainly seemed confident but I'd be interested to see what others think of his claims. It's probably still available as a podcast but certainly still available on BBC iPlayer. The article starts at 6:15 into the broadcast.

boobbby

wary wrote: »

Did anyone listen to Radio 4's Moneybox on 9 January? IFA James Brook was claiming that for basic tax-rate payers at least, the figures show that unless one lives to around 115, they'd be better off putting their money into an ISA than a pension/annuity.

He certainly seemed confident but I'd be interested to see what others think of his claims. It's probably still available as a podcast but certainly still available on BBC iPlayer. The article starts at 6:15 into the broadcast.

this is the link..very interesting !!


http://www.bbc.co.uk/iplayer/episode/b00pn34d/Money_Box_09_01_2010/

dunstonh

wary wrote: »

Did anyone listen to Radio 4's Moneybox on 9 January? IFA James Brook was claiming that for basic tax-rate payers at least, the figures show that unless one lives to around 115, they'd be better off putting their money into an ISA than a pension/annuity.

He certainly seemed confident but I'd be interested to see what others think of his claims. It's probably still available as a podcast but certainly still available on BBC iPlayer. The article starts at 6:15 into the broadcast.

Its an assumption that uses a number of assumptions. HL did one a while back as well where they made the ISA look better than the pension but that involved using the ISA capital and assuming that you would be dead by the time the money ran out. I personally find that too risky.

The bottom line is that pound for pound contribution, the pension will beat the ISA at providing an income. It will not beat the ISA for capital provision or benefits on death after retirement (assuming annuity) or age after 75 (if drawdown is used).