ISAs v Pensions: The Official Retirement Debate

jojooneill

Many thanks to everyone for their replies - I have forwarded the paperwork to join our Pension scheme. I may have lost out on money during the two years but at least I can now start saving!
Many thanks.

Bravepants

Hello all,

I would just like a little advice or comment on my situation...

I'm currently employed by an organisation which, while not strictly a public body, has a final salary pension scheme which is "by analogy" to the Civil Service, and we can also subscribe to the actual Civil Service AVC scheme. I have been contributing to the CSAVC scheme since about July 2009. I increased my contribution to £400 per month (10% of gross salary) in July 2010.

Just over a year ago I started a Stocks and Shares ISA with Fidelity, drip feeding £100 per month into each of the Far East Asia and the UK Moneybuilder Growth Fund. This I did for long-term investment. I also have a cash ISA as an emergency fund which I drip feed £200 per month into, and I have separate savings accounts for holidays, car maintenance, household maintenance etc. I also overpay my mortgage by £100 per month.

I'm just wondering whether I should stop the S&S ISA and pay more into the AVC? The level I'm paying into the AVC at the moment means that I do not pay tax at the 40% level. If I pay anymore I would be saving tax at the 20% level, but I like the idea of the S&S ISA. The cash ISA would cushion me in the short term if some emergency happened where I needed cash, but if I was desperate the S&S ISA could also be cashed in. As I understand it from reading here, if I can afford to pay more into the AVC at the expense of the S&S ISA then I should, right?

By the way, I will be 43 years old in May.

Thanks,
P

EternallyGrateful

This is generally for subscribers much more financially able than I am. I would just say though that your S&S ISA can go down as well as up and when it 'starts raining' you could be in a down position, and to be 'forced' to cash in at a loss would really **** me off! I suppose you could hedge your bets by having your money in a cautious fund though. For example, I have an S&S ISA with Jupiter in their Merlin Income Portfolio Ac fund. It has never gone below the amount I invested and in 6 years has grown by an average of 8%pa. It exceeds the growth targets in my projections and is there for the rainy day too. I am sure there are many other similar products available.

dunstonh

AVCs are largely obsolete nowadays with the alterantives usually offering better choice and often better value. There are some exceptions to that. Such as where the AVC can be used for the payment of the lump sum rather than the main scheme or if the employer has matched contributions. However, they are in a minority but do need to be checked.

Bravepants

Hello,

Thanks for the replies so far. Dunstoh the AVC is provided by Scottish Widows and by a special agreement the charges are 0.6% per year, plus I can take 25% as a tax free lump sum from the AVC fund upon retirement. The employer doesn't match contributions to the AVC, but of course contributes to the main scheme. My main reason for going the AVC route is that it "forces" me to save extra for retirement, I can't access the cash and blow it all, and I don't miss it from my monthly salary.

Regards,
P

dunstonh

Dunstoh the AVC is provided by Scottish Widows and by a special agreement the charges are 0.6% per year

Not bad for a no advice historically but not so good for 2011. An IFA can do 0.6% or lower on similar contracts with advice being paid for.

plus I can take 25% as a tax free lump sum from the AVC fund upon retirement.

So, it doesnt have a link with the main scheme allowing greater than 25%?

Using the AVC is not a bad option. Anything extra you pay is better than nothing. However, as you have used this thread to post on, one assumes you are looking at fine tuning to have the best option.

Bravepants

dunstonh wrote: »

Not bad for a no advice historically but not so good for 2011. An IFA can do 0.6% or lower on similar contracts with advice being paid for.

OK. But would I have to cancel my AVCs and get a refund? I would end up paying the tax right? As of September 2010 the fund was at about £9.5k. Is it worth leaving that in the AVC?

dunstonh wrote: »

So, it doesnt have a link with the main scheme allowing greater than 25%?

Well, I can also take 25% from the main scheme...but I probably wouldn't want to. If I buy an annuity I would most likely choose one that would increase with inflation too.

dunstonh wrote: »

Using the AVC is not a bad option. Anything extra you pay is better than nothing. However, as you have used this thread to post on, one assumes you are looking at fine tuning to have the best option.

Yes, more or less. I really want to make sure what I'm doing is sensible.




Regards,
P

P.S. First time I've used the Quote mechanism, so here's hoping the formatting of this reply is OK!

jem16

Bravepants wrote: »

OK. But would I have to cancel my AVCs and get a refund? I would end up paying the tax right? As of September 2010 the fund was at about £9.5k. Is it worth leaving that in the AVC?

You can't get a refund. At age 55 you will be able to access the AVC and take the lump sum plus an annuity.

You can either leave it where it is or transfer to another pension.

jamesd

Bravepants wrote: »

I'm just wondering whether I should stop the S&S ISA and pay more into the AVC? The level I'm paying into the AVC at the moment means that I do not pay tax at the 40% level. If I pay anymore I would be saving tax at the 20% level, but I like the idea of the S&S ISA. The cash ISA would cushion me in the short term if some emergency happened where I needed cash, but if I was desperate the S&S ISA could also be cashed in. As I understand it from reading here, if I can afford to pay more into the AVC at the expense of the S&S ISA then I should, right?

By the way, I will be 43 years old in May.

Wrong.

Much of the tax benefit of the pension is gone when you're not in 40% tax but there's still the 25% of 20% gain from the tax free lump sum that you get in the pension.

Since you appear likely to have quite good pension provision you might well be better off using the S&S ISA for investing to keep the capital available. Then you'll be able to draw from it at whatever rate you need to boost your income until you can take an income from a work pension or the state pensions. You can't do that so effectively with a pension because of the GAD limit on how much income you can take each year.

Later, if you have defined benefit or annuity or state pensions in payment that total at least £20,000 you may get an advantage from the pension using flexible drawdown instead of capped drawdown. Flexible would allow withdrawing all of a non-defined benefit pension pot, subject to income tax.

A good combination is pension to fully use the higher rate tax bracket and S&S ISA for the remainder. Then when you can be sure that you don't need the capital you can put the money into the pension to get the tax relief, subject to the contribution caps of a pension.

You could cancel the ongoing AVC payments and your scheme would presumably allow you to transfer the AVC pot to any other defined benefit pension.

You do need to check whether salary sacrifice is being used for contributions because that can add some significant NI saving to the pension contributions.

Alp1ne

I can never find out if you are allowed to save in more than one pension in addition to a current works pension.

I have a works pension and save monthly in an additional stakeholder pension. Am I allowed to start saving in yet another additional pension or would I have to transfer the stakeholder to the new pension.

In a nutshell am I allowed to save in more than one additional pension outside work?