We’d like to remind Forumites to please avoid political debate on the Forum.

This is to keep it a safe and useful space for MoneySaving discussions. Threads that are – or become – political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.

📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!

ISAs v Pensions: The Official Retirement Debate

14647495152101

Comments

  • dunstonh
    dunstonh Posts: 120,177 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    shazspice wrote: »
    Hi just need a bit of advice :)

    Is it better for someone earning around £11,500 per year after tax to have a pension where the employer contributes the same % or save the money in an isa?

    TIA

    Say the annual contribution is 5% and matched by the employer.

    on £11500 you you pay £460, tax relief is added to bring it to £575 and the employer pays £575. Making a total of £1150.

    In the ISA you pay £460. No tax relief and no free money.

    Growth will be the same in either ISA or pension as both share the same investment options. So, lets ignore that for now.

    Lets say you paid the same for 20 years. That would give you
    £9200 in the ISA
    £23,000 in the pension

    Take an income of 5% on both and you have
    £1150p.a on the pension
    £460p.a. on the ISA

    As i said, I ignored growth so the figures look low. Plus, you would have indexation on your contributions (as you get paid more). So, the end result would be more. The point was to show the difference.

    Where the employer pays its a no brainer and you should take the free money.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • shazspice
    shazspice Posts: 1,466 Forumite
    Part of the Furniture Combo Breaker
    Thanks for the advice dunstonh I've just been looking at the application form and it has different risks involved, is a pension risky will I end up losing money?
    How lucky am I to have something that makes saying goodbye so hard - Winnie the Pooh
  • lvader
    lvader Posts: 2,579 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    shazspice wrote: »
    is a pension risky will I end up losing money?

    Even the least risky invesments can lose money over a short term period (say 5 years). The longer you have to invest the least likely you are to lose money overall.
  • dunstonh
    dunstonh Posts: 120,177 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    shazspice wrote: »
    Thanks for the advice dunstonh I've just been looking at the application form and it has different risks involved, is a pension risky will I end up losing money?

    Everything has risk. Even money in a savings account. Risk is not on/off but a sliding scale.

    With the free money from the employer (And the tax relief) you would have to lose over 60% just to match what you would get with a cash savings account.

    Even during the worst of the financial crisis, a typical medium risk (Balanced) fund lost around 25%-30%. And drops of those levels dont happen that often. Although they can be highly beneficial when they do as although what you have paid in has lost money, what you pay in after buys the investments much cheaper. So, when it goes back up again, the investments bought cheaply make more money.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • shazspice
    shazspice Posts: 1,466 Forumite
    Part of the Furniture Combo Breaker
    Ive just had a look through the application form and it says about investment fund. I can either choose to have the default lifestyle profile or i can choose what % i want to invest in the following

    L&G uk equity index fund
    L&G world equity fund
    L&g all stocks gilts index fund
    L&G cash fund
    L&G equity market weights
    L&G property fund
    L&G pre retirement fund
    L&G ethical global equity index fund

    Are these the usual sort of things that people invest in pensions. Sorry if thats a really stupid question dont know much about pensions
    dunstonh wrote: »
    Everything has risk. Even money in a savings account. Risk is not on/off but a sliding scale.

    With the free money from the employer (And the tax relief) you would have to lose over 60% just to match what you would get with a cash savings account.

    Even during the worst of the financial crisis, a typical medium risk (Balanced) fund lost around 25%-30%. And drops of those levels dont happen that often. Although they can be highly beneficial when they do as although what you have paid in has lost money, what you pay in after buys the investments much cheaper. So, when it goes back up again, the investments bought cheaply make more money.
    How lucky am I to have something that makes saying goodbye so hard - Winnie the Pooh
  • dunstonh
    dunstonh Posts: 120,177 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    shazspice wrote: »
    Ive just had a look through the application form and it says about investment fund. I can either choose to have the default lifestyle profile or i can choose what % i want to invest in the following

    L&G uk equity index fund
    L&G world equity fund
    L&g all stocks gilts index fund
    L&G cash fund
    L&G equity market weights
    L&G property fund
    L&G pre retirement fund
    L&G ethical global equity index fund

    Are these the usual sort of things that people invest in pensions. Sorry if thats a really stupid question dont know much about pensions

    Yes. Remember that the pension is just a container for your money. It doesn't make/lose money itself. Where you invest does that.

    If you take the UK equity index fund for example, that will basically follow the UK stockmarket. It will go up and down. Sometimes quite sharply in either direction. That may make you want to look at cash funds but whilst they rarely go down in value, cash rates over 20,30, 40 years will typically see you worse off than a fund that zig zags up and down.

    Typically the lifestyle option is for the inexperienced investor who wouldnt know what to do or when to do it. It wont be the best option, it wont be the worst. Typically its the middle of the road option which saves you having to keep an eye on things.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Hi Martin and all,

    Very informative and helpful forum...I am learning lots!

    I have consulted a financial advisor re a personal pension. I am self employed, aged 54, £30,000 income, hoping to not retire until age 75 (although this could be wishful thinking!) The figures I have been given to ponder over are as follows:

    Proposed Contributions: £200; Basic rate Tax relief: £50; Total: £250

    The figures given state that at age 75, if investment grows at e.g. 7% and interest rate at retirement is 4.1% the fund value could be £113,000 which may give a yearly income of £10,200.

    At the end of term, the effects of the various charges applied are as follows:

    Total paid in: £63,750 Total actual deductions: £16,800 Effects of deductions: £29,300 Transfer Value: £113,000

    The charges, I am told, will reduce the investment growth from 7% to 5.1%

    My queries are as follows:
    Is a personal pension my best option?
    Are the charges to be applied typical? They seem high to me.
    Would I be better advised to retire a bit earlier, at say age70?

    Many thanks for your help.

    Stephen W.
  • dunstonh
    dunstonh Posts: 120,177 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Is a personal pension my best option?

    Your contribution is in personal pension territory and the time to commencement is as well.
    Are the charges to be applied typical? They seem high to me.

    They are high. The reduction to 5.1% compares to the basic pension product (stakeholder) which would be to 5.9%. That is the benchmark Now, I'm not saying you would want a stakeholder but a modern PPP should be able to see a reduction to 5.5% (if external funds used) to around 6.3% (if internal funds used on a PPP).
    Would I be better advised to retire a bit earlier, at say age70?
    Do you want to? Can you afford to?

    Choosing when to retire is a personal choice. That choice may be influenced by affordability.

    For reference, in future, its best to start your own thread asking questions and not post to a thread that has nothing to do with what you have posted. It can make threads confusing if you do.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Hi dunstonh,

    Many thanks for your reply.
    Sorry my post ended up as part of someone elses thread! I thought that as it was pension related I might be posting in the right place. I'm a bit new to discussion groups.

    I am a bit puzzled by your reply to my question..."Is a personal pension my best option?"
    This is a propsed pension at this stage. I haven't signed anything and I was wondering if an ISA might be a better bet. I am aware from other posts of yours that you are very keen on pensions. As I am self employed, the employer contribution bit of course doesn't apply, making a pension not quite so appealing, in my eyes. But what is the alternative? I need to start saving...somewhere!

    It seems as though, (as I suspected,) the charges are too high. It looks as though I may need to ask my financial advisor to search other products. The figures above were the only ones he came back to me with.

    As I don't have the necessary knowledge nor time to control my own pension (or any other form of investment of this nature) I am needing to have it managed for me.

    Thank you, once again.

    Stephen W.
  • LongTermLurker
    LongTermLurker Posts: 1,998 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    edited 11 September at 12:02PM
    [quote=[Deleted User];34796775]I am a bit puzzled by your reply to my question..."Is a personal pension my best option?"
    This is a propsed pension at this stage. I haven't signed anything and I was wondering if an ISA might be a better bet.
    [/QUOTE]In that case, this was the right thread to post in, perhaps your thoughts about ISAs weren't so clear from your post. Not a problem.
    As I am self employed, the employer contribution bit of course doesn't apply, making a pension not quite so appealing, in my eyes.
    Er, I might be wrong, but if you're self employed isn't your employer (i.e. you) entitled to contribute towards your pension? That could be very appealing... Your company could add a goodly amount to your pension pot (depending on your business' balance and earnings of course).

    The high charges could indicate your advisor is taking a high commission - have you spoken to other advisors to get a comparison?
    You've never seen me, but I've been here all along - watching and learning...:cool:
This discussion has been closed.
Meet your Ambassadors

🚀 Getting Started

Hi new member!

Our Getting Started Guide will help you get the most out of the Forum

Categories

  • All Categories
  • 352K Banking & Borrowing
  • 253.5K Reduce Debt & Boost Income
  • 454.2K Spending & Discounts
  • 245.1K Work, Benefits & Business
  • 600.7K Mortgages, Homes & Bills
  • 177.4K Life & Family
  • 258.8K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 16.2K Discuss & Feedback
  • 37.6K Read-Only Boards

Is this how you want to be seen?

We see you are using a default avatar. It takes only a few seconds to pick a picture.