ISAs v Pensions: The Official Retirement Debate

Stephen_W.

Hi LongTermLurker,

Thank you for your reply and apologies for the slow response - I have been away for a few days.

To fill you in a bit more...

I am self employed (sole trader), not a company, with an income of £30,000 so as my first post states, am looking to put only £200 per month into a pension (or ?ISA maybe) pot. (With basic rate tax relief of £50, this would bring the monthly contribution to a pension up to £250).

It would seem that most people on this forum perhaps favour pension over ISA. I have been given forecast figures from a financial advisor for a pension policy. On looking at the figures (see first post, above), I am concerned that too great a part of my fairly meagre contribution would be going to the Finance Company who would be investing my money. The charges, as stated, would reduce the investment growth from 7% to 5.1%.

My financial advisor came back to me with figures from only ONE finance company, therefore only ONE pension plan option. I guess he feels this is the best deal on offer.

As yet I haven't spoken to any other financial advisors.

Stephen W.

jamesd

Stephen W., the charges won't reduce the investment growth from 7% to 5.1%. Rather, if the investments did return 7% they would reduce the return to 5.1%. The 7% return is just a number that they have to use in the calculation so it can be compared across different investments.

ISAs are good for immediate access, pensions are good for the tax relief and protection from creditors in unfortunate cases like bankruptcy or business failure as well as from benefits means tests. That can make pensions a safer choice for those in business. The immediate availability of the ISA money makes it better for those who may need to draw on the money before they an first take pension income at age 55 or who need to take an income at a higher rate than the pension rules allow, perhaps for the years until the state pensions start.

If the advisor is an IFA then it should mean that it's the best product for the amount of money you're planning to pay in and the anticipated time until you retire. Sometimes an IFA might use a product that they are used to instead, perhaps because it lowers their costs. The amount of money being paid in can significantly affect which product is best because you can get 0.5% or so of the ongoing investment fees reduced by paying more money up front as a fee to the advisor.

dunstonh

My financial advisor came back to me with figures from only ONE finance company, therefore only ONE pension plan option. I guess he feels this is the best deal on offer.

There could be two reasons for that.
1 - The adviser is a tied agent and only has one pension plan to offer
2 - The adviser is an IFA and has researched the providers and found the most suitable.

Stephen_W.

jamesd wrote: »

Stephen W., the charges won't reduce the investment growth from 7% to 5.1%. Rather, if the investments did return 7% they would reduce the return to 5.1%. The 7% return is just a number that they have to use in the calculation so it can be compared across different investments.

ISAs are good for immediate access, pensions are good for the tax relief and protection from creditors in unfortunate cases like bankruptcy or business failure as well as from benefits means tests. That can make pensions a safer choice for those in business. The immediate availability of the ISA money makes it better for those who may need to draw on the money before they an first take pension income at age 55 or who need to take an income at a higher rate than the pension rules allow, perhaps for the years until the state pensions start.

If the advisor is an IFA then it should mean that it's the best product for the amount of money you're planning to pay in and the anticipated time until you retire. Sometimes an IFA might use a product that they are used to instead, perhaps because it lowers their costs. The amount of money being paid in can significantly affect which product is best because you can get 0.5% or so of the ongoing investment fees reduced by paying more money up front as a fee to the advisor.

Hi jamesd,

Thank you for your reply.

Yes, I understand. It is the return that would be reduced, not the investment growth.

And yes, he is an IFA so therefore maybe this is the best product on offer.

Stephen W.

dunstonh

And yes, he is an IFA so therefore maybe this is the best product on offer.

Ask for the research/reasons if you have doubts. We dont just pick products out of thin air. There will be a research and reasons behind it.

Simonsays_2

I'm thinking of using all my yearly ISA allowance in an ETF(£10,200). As I don't have a pension would I be better starting one with this amount?

Ginger_Red

Simonsays wrote: »

I'm thinking of using all my yearly ISA allowance in an ETF(£10,200). As I don't have a pension would I be better starting one with this amount?

If you trawl through the whole of this thread - it takes time but is worth it - people seem to have the general opinion that you should save in a pension until you have enough to give you an income of £10,000 p.a. in retirement (including state pension), and then switch to an ISA.

This will depend on whether you're a higher rate taxpayer and other things, so do read through the whole thread if you can.

Simonsays_2

Thanks OK will do!

jamesd

It's not a case of using the pension first until you get to £10,000 pa in expected total income, but of getting there over your lifetime of pension investing. Things like employers matching pension contributions mean that the pension can end up accumulating relatively easily. That means that a good general guide is to start with taking all available employer pension matching and using the ISA allowance after that.

Later, if you become a higher rate tax payer or if income tax rates increase, you can switch some of the ISA money into the pension to get higher tax relief.

dunstonh

and make sure spouse allowances are included.

1 person earning £20,000 pays £2000 income tax. 2 people earning £20,000 (10k each) pays no income tax. Planning should be joint where you are married.