ISAs v Pensions: The Official Retirement Debate

dunstonh

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

You can have as many pensions as you like as long as you dont exceed the annual allowance (which you can still do but you dont benefit from tax relief due to a tax charge cancelling it out)

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.

Why would you want another one?

EternallyGrateful

Alp1ne wrote: »

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?

You need to talk with an Independent Financial Advisor.

dave1952_2

Dunstonh - I have just seen this old comment of yours from 2007 about there being . Is this still true in 2011?
Many thanks.
Dave

2 - no inheritance tax to pay if you die before retirement as lump sum is outside of estate

dunstonh wrote: »

Things that are the same:

1 - both have tax free growth
2 - both can invest in virtually identical areas
3 - charges can be exactly the same (although pensions do have a budget option with stakeholder)

Benefits of pension

1 - tax relief on contributions
2 - no inheritance tax to pay if you die before retirement as lump sum is outside of estate
3 - on death before retirement, the death benefits (value) will be 22% higher than an ISA
4 - not accessible until 55 (from 2010). Double edged sword for some but some need the tie in.
5 - contributions can increase your working/childrens tax credits received giving upto a potential equivalent of 72% tax relief

Benefits of ISA
1 - flexible. The lump sum is yours to do with as you wish
2 - income or fixed regular withdrawals in retirement are tax free
3 - on death after retirement, the lump sum is paid to beneficiaries
4 - If pensions get improved later or something better comes along, you can move your money into that.

Negatives of pensions
1 - Annuity compulsion. You have to purchase an annuity at some point. Ok, we have ASP and USPs but the Govt keeps fiddling with these so at this time, its worth having the mindset that you may be forced to buy an annuity
2 - income from pension annuities is taxable
3 - If you die after purchasing the annuity, the income can die with you (subject to spouse benefit and guarantee period)
4 - If you start the pension income early, the annuity rate is likely to be very low
5 - If something better comes along later, you cannot take the money out of the pension and put it into that.

Disadvantages of ISA
1 - Its too easy to dip in and you need to be disciplined.
2 - For the first £10k of income in retirement, the income from the ISA would be lower than what the pension would have provided.
3 - On death, the lump sum forms part of your estate and IHT could be payable.
4 - means testing can mean that ISAs are taken into account when looking at benefits but pensions are not (until they are commenceable)


Ideal scenario for a basic rate taxpayer is
1 - contribute to pensions to aim for a £10k income in retirement as this uses up the £7,280 personal allowance and £2150 10% lower rate band. (the pension tax relief at 22% is valuable in this case as you get 22% going in but pay nothing or just 10% coming out.
2 - always split your retirement planning equally between couples. You both have that £7280 personal allowance which is nearly £15,000 a year tax free income
3 - when your pensions are on track to give a real term income in excess of £10k, then switch to ISA

Notes to be aware of:
1 - self employed individuals only get the basic state pension of £4381. They do not get SERPS/S2P.
2 - Taxable income in retirement above £20,100 increases your tax burden. For every £2 above £20,100, your age allowance is reduced by £1. Income from ISAs does not count towards your taxable income. (savings account interest goes towards the £20,100 so dont be too heavy in cash).
3 - age allowances increase annually. So this £10k target could well be £15k in 10 years time and age allowance reduction £25k. Work in real terms (with inflation taken into account) to keep yourself on track.

dunstonh

There have been a few changes to legislation which alter some of those things but with regards to death, if you die before crystallisation (before taking pension benefits) then a personal pension will pay the fund value to the nominated beneficiary outside of the estate.

If you crystallise the pension and take the unsecured income option, then on death the pension can be passed to spouse for him/her to continue an income until their death (taxable as income) or they can take the fund value (outside of the estate) with no IHT chargeable but a 55% tax charge. That applies on second death as well (i.e. if one dies and the spouse continues the income until they die, then the children can take the value as a lump sum minus 55%).

55% sounds a lot but its not as bad as it looks as by that time you would have had 25% as a tax free cash payment and the years of tax free growth. The 55% is effectively taking back the tax relief you got on the contributions. However, there is still no IHT to pay on it.

boney752

It doesn't look like this thread has been used for a while but it seems the most appropriate place for my query so here goes...

After reading through this forum I've answered a lot of my queries and while my original question was going to be 'Pension or ISA' i have decided to opt for a split between a pension, a cash ISA and a S&S ISA.

Given that my job doesn't require me to pay income tax should this influence the way I split my money between the 3?

Thanks in advance for any advice.

Iain

atush

Can you explain why you are exempt from Income tax? Resident abroad? What are your tax liabilities there?

fairleads

The standard pension debate more often than not revolves around the benefits of taxrebates added to our contributions, and more often than not, to the exclusion of all else. This is a mistake because saving for retirement requires a far more inclusive approach. For starters, self contributory pensions, for 20% tax payers, are not worth the tax rebates because your tax obligation in retirement will wipe out most, if not all of the tax advantage gained in your earning years, and this is before taking extra costs into account. In addition, for most of us, our annuity will be determined by current annuity rates, and where will they be 20 or more years hence? Moreover are you happy to entrust a third party with at least 75% of your pot.
So perhaps we should forget the taxrelief and rather ask ourselves do we want to take control of our destiny, save sans HMRC's partnership and retire on a date of our choice and with full control of all our retirement capital. Or shall we follow the herd and become yet another statistic in the ongoing pension saga.

dunstonh

fairleads wrote: »

The standard pension debate more often than not revolves around the benefits of taxrebates added to our contributions, and more often than not, to the exclusion of all else. This is a mistake because saving for retirement requires a far more inclusive approach. For starters, self contributory pensions, for 20% tax payers, are not worth the tax rebates because your tax obligation in retirement will wipe out most, if not all of the tax advantage gained in your earning years, and this is before taking extra costs into account. In addition, for most of us, our annuity will be determined by current annuity rates, and where will they be 20 or more years hence? Moreover are you happy to entrust a third party with at least 75% of your pot.
So perhaps we should forget the taxrelief and rather ask ourselves do we want to take control of our destiny, save sans HMRC's partnership and retire on a date of our choice and with full control of all our retirement capital. Or shall we follow the herd and become yet another statistic in the ongoing pension saga.

You have assumed annuity but increasingly that is becoming a less popular option with investors. The unsecured option is more flexible and gives you the same investment options as the other tax wrappers (mainly ISA).

You also disregard the personal allowance on income which means not all of the pension will be taxable. Plus, 25% of it is tax free to do as you wish. There are also the better death benefits and IHT avoidance.

EternallyGrateful

boney752 wrote: »

It doesn't look like this thread has been used for a while but it seems the most appropriate place for my query so here goes...

After reading through this forum I've answered a lot of my queries and while my original question was going to be 'Pension or ISA' i have decided to opt for a split between a pension, a cash ISA and a S&S ISA.

Given that my job doesn't require me to pay income tax should this influence the way I split my money between the 3?

Thanks in advance for any advice.

Iain

Non tax payers can make a maximum pension contribution of £2880 net p.a. This is grossed up by HMRC to £3600. A "non tax payer" seems to be defined though as a "non earner".

One of the keys to your question is the reason why you don't pay tax. If it's legitimate then you need to take advice from HMRC. However, if you go out on the rob and 'earn' your money through a fence the I would suggest you limit yourself to the £3600 and invest the rest of your money (given the limits) 50/50 in S&S and Cash ISA's.

Regardless of whether you pay tax now or not you will be liable for tax on any pension you receive above your tax allowance and after taking 25% tax free lump sum. The money you get back from your ISA investment is not liable for tax.

I expect we're all intrigued to know why you don't have to pay tax.

wensleydale

EternallyGrateful wrote: »

I expect we're all intrigued to know why you don't have to pay tax.

I think that there are many jobs that you dont have to pay tax on- from what I understand many "European Government" type jobs are tax free- eg the European equivalent of the FSA, certain MOD type jobs etc where you are based in Europe for a fixed term.