ISAs v Pensions: The Official Retirement Debate

tjones4

I have £13k which isn't doing very much (£9k in cash ISA and £4k in a rubbish direct access savings account). This thread has got me thinking about my own investment plans:

- overpay the mortgage: monthly payments are affordable, rate is low but expires March 2012, I can reduce the capital by 10% a year without penalty (equates to £11k)

- plough more money into my pension(s): my company pension receives 8% from my employer, and 12% from me; plus my SIPP gets topped up with the occasional lump sum payments (total in pension funds = approx £55k)

- invest in another ISA: use Stocks and Shares ISA as an alternative retirement investment strategy to pension

I'm wondering what people think to:

a) reducing the mortgage now and ploughing the monthly savings into a pension/S&S ISA? or
b) putting a lump sum into the pension(S)? or
c) putting a lump sum into the ISA(S) or
d) other

dunstonh

a) reducing the mortgage now and ploughing the monthly savings into a pension/S&S ISA? or
b) putting a lump sum into the pension(S)? or
c) putting a lump sum into the ISA(S) or
d) other

I have chosen to do over pay the mortgage, maximum the ISAs and pay more into the pensions personally. It fits my objectives and requirements. Make hay whilst the mortgage is dirt cheap by putting extra into all three things.

EternallyGrateful

tjones4 wrote: »

I'm wondering what people think to:

a) reducing the mortgage now and ploughing the monthly savings into a pension/S&S ISA? or
b) putting a lump sum into the pension(S)? or
c) putting a lump sum into the ISA(S) or
d) other

I have to say that my personal priority was to get rid of any debts. We are lucky in that our only debt ever was motgage but it was the best feeling ever when we paid it off.

My choice would be pay off the mortgage and invest an equivilent amount into pension fund and ISA.s. Personally I would but the larger percentage into pension - say 60 to 75% - and split the balance between stocks and shares ISA's and cash ISA's.

jamesd

I have an interest only mortgage and I'm not considering paying off any of the capital in the near future. ISA, non-ISA and pension investing is where my money is going. What you should do depends on how keen you are on the various options. I know that the investments on average over the long term gain more than the mortgage payments save and I'm comfortable with the risk, so I invest. At a time when I expect stock market trouble I might move money to the mortgage offset account. I have enough money to clear the mortgage whenever I want, it's just not worth doing.

EternallyGrateful

jamesd wrote: »

I have enough money to clear the mortgage whenever I want, it's just not worth doing.

I would say it very much depends on your 'mindset'. Paying off the mortgage IS worth doing for more than just financial reasons. Anything can happen in the future and if you're in a position to pay off the mortgage and make the roof over your head yours and yours only then I would (did) do it.

It's a fantastic feeling!

jamesd

Agreed that it depends on the person.

The investments mean that I could probably live for the rest of my life living as I do now. I'm not going to spend the money offering that security on clearing a mortgage that's costing me less than the income the investments could generate.

I intend to clear the mortgage with a pension lump sum, which will mean I've had a large discount because of the tax relief on the pension.

Moby

jamesd wrote: »

Agreed that it depends on the person.

The investments mean that I could probably live for the rest of my life living as I do now. I'm not going to spend the money offering that security on clearing a mortgage that's costing me less than the income the investments could generate.

It depends really on how confident you are regarding the future performance of your investments and how much of your time your prepared to give up to check on them. I'd rather pay the mortgage off. As Eternally Grateful says the 'feel good' factor in getting rid of the biggest debt most of us will ever have cannot be overestimated!

jojooneill

Hi,

I've been reading these threads for a while and still have many questions. I work in the public sector and will soon be coming up to my 3rd year with this company. I initially chose not to join their final salary pension scheme as I didn't think I would be in a permanent role. Now the pension scheme is changing from a final salary to average salary scheme. I'm unsure as to whether I will be in my current job within the next 10 years, but can see me here for the next 5.
Do I pay into the pension (with the employer contributions) or save into an ISA as I am doing currently? If I do leave my job then I can gain back my contributions (minus tax and NI). I am currently 26 and the rule is saving earlier is preferable.
I am utterly confused and would appreciate any help on this matter!

Many thanks.

dunstonh

I initially chose not to join their final salary pension scheme as I didn't think I would be in a permanent role.

Thats a lot of wasted "free money". The benefits are around 20-25% of your salary for a fraction of the cost.

Now the pension scheme is changing from a final salary to average salary scheme. I'm unsure as to whether I will be in my current job within the next 10 years, but can see me here for the next 5.

Famous last words. You hear many people who have been with companies 20-30-40 years tell you that they only intended to do it for a few years.

Do I pay into the pension (with the employer contributions) or save into an ISA as I am doing currently?

Pension wipes the floor with the ISA. The comparison is not even close.

If I do leave my job then I can gain back my contributions (minus tax and NI).

Which is the worst option. Transferring it is better (if you are in the first two years of membership) or keeping it deferred if beyond that.

I am currently 26 and the rule is saving earlier is preferable.

Yes it is. Indeed, the 2 years you have missed could well have already cost you thousands of pounds of lost money.

EternallyGrateful

jojooneill wrote: »

Hi,

I've been reading these threads for a while and still have many questions. I work in the public sector and will soon be coming up to my 3rd year with this company. I initially chose not to join their final salary pension scheme as I didn't think I would be in a permanent role. Now the pension scheme is changing from a final salary to average salary scheme. I'm unsure as to whether I will be in my current job within the next 10 years, but can see me here for the next 5.
Do I pay into the pension (with the employer contributions) or save into an ISA as I am doing currently? If I do leave my job then I can gain back my contributions (minus tax and NI). I am currently 26 and the rule is saving earlier is preferable.
I am utterly confused and would appreciate any help on this matter!

Many thanks.

My view is that ISA's should be considered as a secondary form of investment (if you can afford them) after investing in a pension.

The tax benefits and employer contributions are something that you should not refuse. If your employment lasts for less than two years you get your money back (less tax) if it continues longer you have a guaranteed amount (with an average salary scheme) at retirement.

As an example. I paid into a pension scheme for 10 years between 1976 and 1986. The total cost to me was in the region of £3000. I have just transferred it to another fund and it was worth £36000. I transferred it for very specific reasons but had I left it invested I would have received a pension of £4000pa at retirement. ISA's just can't compete with that!