ISAs v Pensions: The Official Retirement Debate

Elisabeth_J

I am 60 years of age and have a paid up pension fund with Scottish Life of £17111.33. This amount seems to go down every year as I was not due to take the pension until I was 74. The transfer value is £13495. Would I be better taking the money and transfering it to an ISA and if so would I be liable for tax on the £13495.

dunstonh

Would I be better taking the money and transfering it to an ISA

You cant and if you could you wouldnt be better off as the same investment options on ISAs are present on pensions. So, put the same investment into a pension or an ISA and you get the same return.

This amount seems to go down every year

Why does it seem to do that? Is that just a assumption or has it dropped in value every year for say the last 5 years?

Many scot life plans also have valueable guarantees. Their value is not in the investment return but in the guarantees that are available. Most of the guarantees tend to be in their Talisman plans and the good thing about those is that they have a unit linked fund range as well as the older, less attractive, with profits option and the guarantees on the plans I have seen dont require it to be in with profits.

The guarantees are often close to or in double digits. Just looked one up and at age 65, the guarantee on that one was 10.887% gross for men or 9.079% gross for women. Try and get that on a cash ISA.

jamesd

wary wrote: »

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.

See post 404 in this topic where I give the expected income for pension or ISA if the same investments are used and income drawdown is used for both.

The pension can be made to look worse by using an annuity for the pension and not for the ISA. Or the ISA can be made to look even worse by using an annuity for it and not for the pension.

At the moment the best age to buy an annuity is around age 75, if not later. If you can accept the investment risk ands extra complexity before that. Many can't or aren't willing to or just aren't interested and go with an annuity option.

Imposter67

I have a 7 year teacher's pension and a 4 year company pension from my last employer. In my current job of last 4 years, I've had no company pension and have only saved about £7000 in ISAs.

I need advice now on whether to stick to ISAs or invest in a personal pension? I am 42 and have no idea about whether to go for a SIPP or Stakeholder...I want to start a pension but am scared by being at the mercy of the stockmarket. Would I be safer just sticking to ISAs?

jamesd

If by ISAs you mean cash ISAs then you would have to put a lot more money into your retirement funding because cash savings only barely beat inflation, so you're getting minimal investment growth. For this reason a cash ISA is unsuitable for long term pension investing.

Investing in funds via a stocks and shares ISA is much closer to investing in them inside a pension but you lose the tax breaks that give the pension an advantage when it comes to generating income. This table from post 404 above illustrates the after tax income advantage of using a pension with basic rate tax relief compared to a pension. Same investments, costs and income generation used in each case:

10 yrs pen  9609	ISA 9087
15 yrs pen 11286	ISA 10469
20 yrs pen 13063	ISA 12141
25 yrs pen 15213	ISA 14165
30 yrs pen 17813	ISA 16613
35 yrs pen 20960	ISA 19574
40 yrs pen 24767	ISA 23157

Either SIPP or Stakeholder types of pension can do the job. So can a general personal pension that has more investment choices than a Stakeholder pension and typically lower charges than a SIPP. The key choice isn't which of these you use but the investments you use within them and putting in enough money to reach your target.

It seems that you would benefit from a discussion with an independent financial adviser, best found via unbiased.co.uk if you don't have a friend of other person who can recommend one based on their personal experience. An IFA can explain to you how a mixture of investments can be used to hit any target for up and down variation in investment value from day to day and year to year. Accepting 30% or so variation is likely to maximise investment growth for many people. That 30% would typically be seen once or twice each decade just due to the way markets around the world work.

The investments aren't straight line growth but long term they have easily beaten cash and also beat residential property.

mitchaa

A newbie question, but surely a pension pot is going to be a lot larger than an ISA pot?

Take someone with a £30k salary that contributes 6% into his pot. This equates to £1800 with employer matching £1800 so total in pot = £3600.

Play around with the calculator below..

http://www.thesalarycalculator.co.uk/salary.php

£30k with no contributions = £1885pm
£30k with 6% contributions = £1765pm

So in effect your pension contributions are costing you £120pm. Take this £120pm and put it into an ISA and at the end of the year you only have £1440pm in the pot.

£3600 in pension pot vs £1440 in ISA pot. Not to mention death in service benefits provided by pension

Am i missing something here, why would anyone opt for an ISA over a company pension? A company matches the employees contributions so in effect you are getting 'free money' put into your pot that you wond not get from an ISA.

dunstonh

Am i missing something here, why would anyone opt for an ISA over a company pension?

They wouldn't unless they are silly. "Free money" from the employer will never be beaten.

Paul_Herring

mitchaa wrote: »

A newbie question, but surely a pension pot is going to be a lot larger than an ISA pot?

Take someone with a £30k salary that contributes 6% into his pot. This equates to £1800 with employer matching £1800 so total in pot = £3600.

Um - if you want to compare apples with apples, you need to take the oranges out of the basket.

Don't include the employer contribution.

£30K salary, '6%' of contribution net of income tax
ISA: £1,440
Pension: £1,800 (income tax is refunded by HMRC)

Both are using the same fund, and increase by 1000% over the period:

ISA: £14,400
Pension: £18,000

Then HMRC (I'm greatly simplfying here) deduct income tax from your pension:
ISA: £14,400
Pension: £14,400

Play around with the calculator below..

http://www.thesalarycalculator.co.uk/salary.php

£30k with no contributions = £1885pm
£30k with 6% contributions = £1765pm

So in effect your pension contributions are costing you £120pm. Take this £120pm and put it into an ISA and at the end of the year you only have £1440pm in the pot.

£3600 in pension pot vs £1440 in ISA pot. Not to mention death in service benefits provided by pension

Am i missing something here,

You're missing 1/2 the tax. Your ISA is taxed 'on the way in', your pension is taxed 'on the way out.' Due to the commutativity of multiplication, there's no difference:

ISA: Gross x (1-tax%) x growth x growth x growth
Pension: Gross x growth x growth x growth x (1-tax%)

why would anyone opt for an ISA over a company pension?

Now that's the simplistic explanation. There are, however, some important differences that affect the actual numbers:
1) The tax rates may differ (e.g. you're a higher rate payer earning, lower rate in retirement.) This favours the pension.
2) Currently you can, on retirement, withdraw 25% of your pension fund tax free (so only 75% gets taxed.) Another one for the pension.
3) The remainder of your pension must be used to buy an annuity. (Unless you want to get into drawdown and ASPs) Rates are dire. Your ISAs can be used to purchase a Life Annuity if you want to. Or not - it's up to you.

A company matches the employees contributions so in effect you are getting 'free money' put into your pot that you wond not get from an ISA.

That's one of the compelling reasons why you should take a company pension, however, if your employer doesn't contribute, it isn't quite as compelling.

EdInvestor

mitchaa wrote: »

Am i missing something here, why would anyone opt for an ISA over a company pension?

They normallly wouldn't, as is made clear towards the begininnng of this thread. ISAs are usually preferrred for basic rate taxpayers over pensions which don't atttract company contributions (which BTW are often a lot less generous than you assume).

For some people, if the 'free money' from the company is meagre, an ISA will still have many advantages because you don't lose the capital.Unlike with a pension,you can withdraw as much savings and income as you please whenever you like, and leave the money eventuallly to your heirs.

Once money goes into a pension, you lose effective control of it forever, and that can be an important issue.

jamesd

mitchaa wrote: »

Am i missing something here, why would anyone opt for an ISA over a company pension?

This discussion is also about pension or ISA contributions above the level needed to get employer matching. Pension contributions still have an advantage then but less.

The ISA can come into the picture if you want a higher proportion of capital than the pension delivers or if you want to be able to take income earlier than you can take it from a pension.

Paul_Herring wrote: »

Um - if you want to compare apples with apples, you need to take the oranges out of the basket. ...
2) Currently you can, on retirement, withdraw 25% of your pension fund tax free (so only 75% gets taxed.) Another one for the pension.
3) The remainder of your pension must be used to buy an annuity. (Unless you want to get into drawdown and ASPs) Rates are dire. Your ISAs can be used to purchase a Life Annuity if you want to. Or not - it's up to you.

You need to take that annuity orange out of the basket. There's no need to buy one with a pension and you're artificially hurting whatever option you select if you make the money be used to buy an annuity.

EdInvestor wrote: »

ISAs are usually preferrred for basic rate taxpayers over pensions which don't atttract company contributions (which BTW are often a lot less generous than you assume).

The pension is still are expected to deliver around 8% more income than ISA only for identical contribution levels, investments and income generation method.

EdInvestor wrote: »

an ISA will still have many advantages because you don't lose the capital.Unlike with a pension,you can withdraw as much savings and income as you please whenever you like, and leave the money eventuallly to your heirs.

You don't lose the capital with a pension. The pension pot can be inherited, after a tax charge if you've started to take benefits.

You do lose the capital with most of the annuity purchasing options and you can choose to make this purchase with either a pension or an ISA lump sum.