ISAs v Pensions: The Official Retirement Debate

thills

EdInvestor wrote: »

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

Exactly. It becomes the money of the pension industry & you can only get back what they offer you. Isn't it historic, in a slower changing life a pension made more sense, in modern, fast changing life they are inflexible & often one ends up with a lot of small amounts & you've no idea who is feeding off them. Money is gone, with ISA's it's yours & feels like yours.

jamesd

If you have a lot of small amounts, I suggest that you consider transferring them so you no longer have a lot of small amounts. The reforms made starting in 2005 have made a huge difference to the flexibility of pensions and how much control we have over them. These days we get even more investment options than are allowed in ISAs. If you aren't getting those options and want them you might consider moving for that reason as well.

Coeus

The saga continues...

Hi all! Brilliant thread very informative. Could you advise on a few bits n pieces of information I am still unsure of? For arguements sake I am a lower rate tax payer (LRTP) (likely to be higher in the future with any luck) and am a tight a$$ with money so ISA savings are viable.

My whole ethos of future savings is based on access of funds to take advantage, or conversley quickly shelter against, economic conditions. Also I like control and pension companies can be somewhat inflexible.

Bear with me, will be viewing this forum on many occasions into the future so answer as many and as often you like!

1. If one were to invest in a S&S ISA in lieu of pension contributions one suffers ~20% tax on the payments to that ISA. If one were to later transfer this into an pension scheme can a tax rebate be granted on the income tax suffered?

2. As a LRTP, if employers make contributions to pension schemes it is advisable to salary sacrifice in order to attain the extra contributions, save ~20% income tax and then invest any surplus funds into an S&S ISA?

3. If employers cap contributions at a value (say £500 p/m) one should only salary sacrifice this amount, the remainder going into a S&S ISA suffering 20% income tax?

4. A bit of course but just a thought. When a individual has a mortgage does it make more sense to contribute to the mortgage over investing in a pension/ISA. My main line of thought here is that you can be fairly certain on mortgage interest but not capital returns. Lower existing debts, save on interest and pay more into the future?

Hopefully answering other's questions here to! Feel like a nuisance

Happy Saving,
Coeus.

Paul_Herring

Coeus wrote: »

1. If one were to invest in a S&S ISA in lieu of pension contributions one suffers ~20% tax on the payments to that ISA. If one were to later transfer this into an pension scheme can a tax rebate be granted on the income tax suffered?

Yes, up to a point. If you put in your post-20% pay into an ISA, and later become a 40%er, you'll get the 40% rebate on the amount you've paid 40% on if you subsequently put into a pension. Separate from that, you can only put in, in total, the amount you've been paid that year.

2. As a LRTP, if employers make contributions to pension schemes it is advisable to salary sacrifice in order to attain the extra contributions, save ~20% income tax and then invest any surplus funds into an S&S ISA?

As far as I know, all your salary sacrificed must be put into a pension.

3. If employers cap contributions at a value (say £500 p/m) one should only salary sacrifice this amount, the remainder going into a S&S ISA suffering 20% income tax?

Caps tend to be a percentage, and relate only to how much the employer will contribute/match, rather than limit how much you can contribute. Up to you what you want to do with anything over that cap.

jamesd

Paying money off a mortgage with money that could be invested is a way to make yourself poorer, assuming that past returns are continued in the future. You can reasonably expect 10% or more after inflation from the UK stock markets (though plan on less) and that's well above typical mortgage rates.

Paying off mortgages is still very popular with those who like low risk or have a budgeting approach to money rather than an investment one. Just not the optimal way to do things for long term financial planning for those who don't mind taking capital risk. You can usefully designate the lower risk portion of your investments as a future mortgage early repayment fund and watch that growing over time.

armanleg

Coeus wrote: »

The saga continues...

Hi all! Brilliant thread very informative. Could you advise on a few bits n pieces of information I am still unsure of? For arguements sake I am a lower rate tax payer (LRTP) (likely to be higher in the future with any luck) and am a tight a$$ with money so ISA savings are viable.

My whole ethos of future savings is based on access of funds to take advantage, or conversley quickly shelter against, economic conditions. Also I like control and pension companies can be somewhat inflexible.

Bear with me, will be viewing this forum on many occasions into the future so answer as many and as often you like!

1. If one were to invest in a S&S ISA in lieu of pension contributions one suffers ~20% tax on the payments to that ISA. If one were to later transfer this into an pension scheme can a tax rebate be granted on the income tax suffered?

2. As a LRTP, if employers make contributions to pension schemes it is advisable to salary sacrifice in order to attain the extra contributions, save ~20% income tax and then invest any surplus funds into an S&S ISA?

3. If employers cap contributions at a value (say £500 p/m) one should only salary sacrifice this amount, the remainder going into a S&S ISA suffering 20% income tax?

4. A bit of course but just a thought. When a individual has a mortgage does it make more sense to contribute to the mortgage over investing in a pension/ISA. My main line of thought here is that you can be fairly certain on mortgage interest but not capital returns. Lower existing debts, save on interest and pay more into the future?

Hopefully answering other's questions here to! Feel like a nuisance

Happy Saving,
Coeus.

Hi you raise many complex issues, but here's my take on some of them:
Firstly, if you invest in a S/S isa, and then transfer the money into a SIPP, you will get a tax credit at your marginal tax rate.
Secondly, it has got to be worth contributing the max. into any company / government pension scheme. Yes it reduces your tax, but mainly, it's a scheme where all the costs are paid for by your employer.
Thirdly, if there is a contributions cap, consider a stakeholder pension vs ISA contributions. It all depends on how much access you may require to your savings. Stakeholder contributions save tax at your marginal rate.
Fourthly, paying off debt is inherently a good thing, but if you have a low interest rate on your debt, then it makes sense to service the interest, and invest your surplus - but only if you can find an investment that will pay you a good return (after tax). Be prepared to switch to debt repayment immediately, if interest rates go up.
Finally, whenever you can afford it, build up your cash ISA savings. Everything else is subject to tax.
Kind Regards.

Telsc0mbe

Dear Martyn,
During the past twenty years I have struggled hard to be prudent and make a go of pension investment and I wish I could agree with your sentiment "I’m a fan of pensions you see" but continuous disappointment prevents me from agreeing with you.
This may well be because you are a financial expert and I am amateur in financial matters and I believe this illustrates the critical point that; personal pension schemes are only ever a suitable vehicle for retirement saving if you are a financial savant.
Anyone alse should be very, very careful about deciding to contribute from their hard earned cash into a pension scheme as this could, ironically, be deeply damaging to their retirement plans.

I'm not convinced that you make this distinction clearly enough in your website comments and that you are only presenting a partial story on pension schemes, which could be misleading financial naifs
like myself.

Firstly, you say "No private pension has ever underperformed".

I understand the distinction you make between the tax wrapper and the investment but for a pension to work investment success means everything. This is an extraordinarily difficult thing for an ordinary individual to achieve but you do not spend any further time on this point, and so you are giving us only part of the picture we need to see and comprehend.

Would it not be realistic and illuminating to be adding the pragamatic qualification that that saving in a private pension is only a good thing :-
1) If you have the knowledge,confidence and energy to manage the investment continuously, OR,
2) You can afford to pay someone to do this in your behalf.

This is a crucial. If neither of these apply, then saving in a private pension can be an absolutely dreadful way of attempting to save for retirement and can lead to financial loss and disillusion on a grand scale.

Secondly, I also have an issue with the phrase that we hear so often repeated by financial savants ie.

"Pension's killer feature: the tax boost".

I understand the theoretical value of the Inland Revenue's top-up incentive to pension contributions but again the reality can diverge so far from the theory as to render the "tax boost" worthless.

To illustrate both points here is a real world example taken from my own annual pension statement:
£
1. Cash investment by me (one month) ....... 100
2. "Boost" by the Inland Revenue ........... 25
----
Sum sent to insurance company .............. 125
Increase in value of my pension fund ....... 66
----

Investment loss ............................ 59
----

What the example shows me is that the investment return is so deeply negative, ie. -50%, that I am immediately losing 50 % of my money by giving it to the insurance company,and so should cease throwing my money away in this way, as soon as possible.

Furthermore, in what way is the tax boost a "killer feature" here ? Surely it is merely a feeble mitigator of the size of the loss I have incurred.
This pension's "killer feature" is not a positive one - the tax boost, but a negative one - the hopelessness of the investment which renders the tax boost along with the original investment practically meaningless.
For someone like me to "save" in such a personal pension scheme amounts to foolishness and I wish that I could have accessed a people's website like moneysavingexpert.com. to warn me aganst such folly, before embarking on it.

Martyn, like you I wish to believe in pensions funds saving, but the reality is that insurance company managed pension schemes are a risky and dangerous form of investment which should be avoided by everyone unless they really, really know what they are doing. They masquerade as schemes for the prudent but in reality can do serious damage to one's financial health.

I wish that this message were made more clearly by yourself and the other financial experts who contribute to moneysavingexpert.com ?

dunstonh

Firstly, you say "No private pension has ever underperformed".

I understand the distinction you make between the tax wrapper and the investment but for a pension to work investment success means everything. This is an extraordinarily difficult thing for an ordinary individual to achieve but you do not spend any further time on this point, and so you are giving us only part of the picture we need to see and comprehend.

Its not difficult at all. Most investments within pensions have done what you would expect them to do in relation to the cost of living. The most common failure is the expectation of the individual.

There are investment options that cater for experienced investors and self balancing funds for inexperienced investors with automatic risk reduction as you get closer to retirement.

1) If you have the knowledge,confidence and energy to manage the investment continuously, OR,
2) You can afford to pay someone to do this in your behalf.

This is a crucial. If neither of these apply, then saving in a private pension can be an absolutely dreadful way of attempting to save for retirement and can lead to financial loss and disillusion on a grand scale.

Why are they the only two options? You can DIY and pick a novice investor fund. It wont be best, it wont be worst but it will do the job.

Secondly, I also have an issue with the phrase that we hear so often repeated by financial savants ie.

"Pension's killer feature: the tax boost".

I cannot be ignored. Without it, pensions are pointless. With it, it results in the fact that income from a pension plan will beat any other alternative using the same investment funds (i.e. ISA or unwrapped investments).

What the example shows me is that the investment return is so deeply negative, ie. -50%, that I am immediately losing 50 % of my money by giving it to the insurance company,and so should cease throwing my money away in this way, as soon as possible.

Nothing to do with the pension. If you are investing in high risk funds that make a loss of that size in the 12 month period then that is your choice. If you cant handle that degree of loss then you shouldnt invest in such high risk funds.

Furthermore, in what way is the tax boost a "killer feature" here ? Surely it is merely a feeble mitigator of the size of the loss I have incurred.

No. You are mixing up the invesmtents with the tax wrapper. If you used the same investments in the ISA or unwrapped then you would have suffered the same loss. The pension hasnt lost money

For someone like me to "save" in such a personal pension scheme amounts to foolishness and I wish that I could have accessed a people's website like moneysavingexpert.com. to warn me aganst such folly, before embarking on it.

It sounds like you dont understand investments and have picked very high risk funds which are more volatile. Even if you were 100% UK equity based you wouldnt have seen a 50% loss from the peak to the bottom during the worst of the recession. So, you must be pretty high up the risk scale. You also must be ignoring the subsequent recovery that occured which would have seen substantial gains in that period.

They masquerade as schemes for the prudent but in reality can do serious damage to one's financial health.

If you dont know what you are doing and dont use an adviser then going DIY can be a costly mistake. Just like DIY is in anything you do whether it be decorating, servicing your car, legal matters etc.

jamesd

What investment or investments did you pick to lose half the money during one of the best growth years in UK stock market history?

Telsc0mbe wrote: »

What the example shows me is that the investment return is so deeply negative, ie. -50%, that I am immediately losing 50 % of my money by giving it to the insurance company,and so should cease throwing my money away in this way, as soon as possible.

How did the same investment do if it was held in an ISA instead?

Telsc0mbe wrote: »

Furthermore, in what way is the tax boost a "killer feature" here ? Surely it is merely a feeble mitigator of the size of the loss I have incurred.

It's a mitigator you wouldn't have had if you'd used an ISA instead of a pension. That means you'd have more money in the pension than if you'd done the same thing in an ISA.

Telsc0mbe wrote: »

the hopelessness of the investment which renders the tax boost along with the original investment practically meaningless.

Pensions have default funds, usually a balanced managed fund. If you don't know what you're doing and don't want to get professional help, use the default fund. That's what it's for.

stphnstevey

I was just wondering if someone could tell me if the growth on Unit Trusts would be considered compuonding or not?

I haven't had investments like this long enough to really see