ISAs v Pensions: The Official Retirement Debate

jamesd

Thanks for mentioning 6.8%, last time I checked it was at around 3.5% gilt yield.

The range of gilt yields has been from 5.3% (August 2007) to 2.61% (November 2009, exceptionally bad conditions) since 2006. That's a 65 year old male cap as low as 5.5% (at 2.5%) to as high as 7.5% and 60 year old woman from 4.8% to 6.6%. Those ranges aren't enough for me to be confident that at state retirement age the income will be above the return from investments - none of them is sufficiently high for me to have that confidence.

More troubling for me is what happens at 55. Even with a 4% gilt yield that's down to 5.2% for a woman, dropping to 4.3% at 2.5% gilt yield, though I hope we don't see it going that low.

None of those levels are adequate for setting a sustainable long term income for retirement before state pension age, unless the pension has been commenced earlier and savings accumulated.

Phased drawdown make some sense but it's a shame to spend the lump sum capital when it can be reinvested to produce tax free income for life. Would be better to be able to draw at a level that produces a consistent, stable long term income from retirement age, not just state retirement age if you're lucky with the GAD limit at the time it's calculated.

It's not going to happen but I'd want to see a GAD limit of 15%+ from age 55 until state pension age to allow for drawing a sustainable level income before and through the start of the state pensions. Then perhaps 10% would be sufficient to keep up with returns without forcing accumulation of more capital in a range of market conditions. But of course I'm assuming that the person doing the drawing will be planning and drawing sensibly, not just taking out the maximum regardless of conditions or future needs.

Not greatly keen on using one month's gilt yield given the significant variations there are in it either. There's more chance of that changing to some average, I suppose.

dmliverpool

I'm young and with the banking crisis and todays pension strikes as well as two more recessions to come before I retire my view is cash upfront in a isa is best. Now many people think because of the upfront tax savings that are gov spin which change every year that pensions are worth it? A flaw with savings is that you can dip in which is the whole point and with a plan of what your later life will be where is the problem its your money and you don't have to wait for a company to decide what you get which will be less than you put in or they will pay out your money to a fat cat. Also you can decide to buy a pension towards the end of your working life anyway that significantly takes away the risk in this outdated system. Also one thing people don't think of is average death ages. What's the point in a pension you will never see or get a year or two out of and then you pop your clogs. Duck credit cash talks money talks.:cool:

dunstonh

Phased drawdown make some sense but it's a shame to spend the lump sum capital when it can be reinvested to produce tax free income for life. Would be better to be able to draw at a level that produces a consistent, stable long term income from retirement age, not just state retirement age if you're lucky with the GAD limit at the time it's calculated.

But if the PCLS is used as "income" then its really no different to someone making a capital withdrawal on the ISA. By taking it from the pension instead, they are not taking it from their ISA. Their total pot is still going down by the same amount. By using phased drawdown, they keep chunks of the pension uncrystallised which is better for death benefits.

More troubling for me is what happens at 55.

Which is why you make sure you have sufficient provision across the tax wrappers. You are not wrong but in the scenarios you mention, you wouldn't not use a pension. You just wouldnt use it for 100% of your planning as it would still have a place.

What's the point in a pension you will never see or get a year or two out of and then you pop your clogs.

How does that differ from an ISA or anything else?

Aegis

dmliverpool wrote: »

I'm young and with the banking crisis and todays pension strikes as well as two more recessions to come before I retire my view is cash upfront in a isa is best.

Not a smart idea. Even in a decent paying cash ISA you'll probably find yourself losing money due to inflation. At best what you'll put away might just about keep track in the long run so that you are effectively having to fund your retirement on a 100% basis because you didn't get decent investment growth.

Now many people think because of the upfront tax savings that are gov spin which change every year that pensions are worth it?

The upfront tax savings haven't changed significantly for the vast majority of people in quite some time. The recent charges have targeted those with income of over £150k or those contributing more than £50k gross into their pensions, which is a very small minority of the country. For the rest of us, tax relief has stayed pretty constant for a long time.

A flaw with savings is that you can dip in which is the whole point and with a plan of what your later life will be where is the problem its your money and you don't have to wait for a company to decide what you get which will be less than you put in or they will pay out your money to a fat cat.

A company can't decide to pay out your pension to a fat cat. You pick your investments within the pension wrapper and you get back the total return when you choose to crystallise a proportion of your pension account.

Also you can decide to buy a pension towards the end of your working life anyway that significantly takes away the risk in this outdated system.

You can, but given (a) limited tax-relievable contributions per year and (b) the shorter timescale to take advantage of the tax efficient investment growth, you would have to be paying in a small fortune in cash each year, which sounds very inefficient.

For the record, the most recent type of pension has only been around for about 5 years, so it's not all an "outdated system".

The government is always going to want to incentivise people to save for their retirement.

Also one thing people don't think of is average death ages. What's the point in a pension you will never see or get a year or two out of and then you pop your clogs. Duck credit cash talks money talks.:cool:

Average life expectancy at age 65 in the UK is 17.6 years for a man and 20.2 years for a woman. If you haven't adequately planned for those years, you're going to have a much worse time than you think and for longer than you think.

atush

One would hope your fund would be gaining and not falling even with the withdrawal. Hopefully it is invested and gaining.

http://www.retirementsolutions.co.uk/income-drawdown-gad-rate-at-4-25-for-march-2011

jamesd

dunstonh wrote: »

Their total pot is still going down by the same amount.

Agreed about the pot size changing at the same rate but it's shifting more of the pot percentage into the pension by not being able to draw from the pension at the rate at which it's generating returns. So the outside pension pots drop while the inside one rises.

dunstonh wrote: »

By using phased drawdown, they keep chunks of the pension uncrystallised which is better for death benefits.

It depends heavily on the specific case but I'd be inclined to go with 100% crystallisation plus life assurance. Then the ongoing income from the pension pot reduces the percentage of the capital that moves into the pension pot as the portion outside is drawn down.

If the capital isn't needed, still crystallising 100% and reinvesting in a pension to get a second bit of tax relief seems likely to be a more efficient idea, depending on the specific situation.

dunstonh wrote: »

Which is why you make sure you have sufficient provision across the tax wrappers.

Agreed. I'm still making very heavy pension contributions because of the applicable tax rate and the effect of tax relief on the comparison of wrappers. 40% or 50% tax relief effectively acts as a multiplier for the GAD cap when it comes to the income that can be taken, if not to whether the pot is forced to rise by a cap below investment returns.

EternallyGrateful

When you read the foregoing you get caught up in all the intricacies of the different vehicles, tax implications, current legislation, potential legislation, all the technical jargon, etc, etc.
It strikes me that saving for your old age shouldn't be this complex. You're simply trying to maintain independence, ensure that you won't be a burden on your family and that will not have to rely on the state. Yet I find myself asking "Why is this so bloody difficult!"

jamesd

Because the government wants to control what you can do after providing the pension tax relief. ISAs are far simpler technically. Both have most of their complexity in managing the investments if you want to learn how to do that well.

Beyond that, everyone always tries to work out how to maximise the benefits of tax tools and governments play political games to please their own interest groups.

dmliverpool

Aegis wrote: »

Not a smart idea. Even in a decent paying cash ISA you'll probably find yourself losing money due to inflation. At best what you'll put away might just about keep track in the long run so that you are effectively having to fund your retirement on a 100% basis because you didn't get decent investment growth.



The upfront tax savings haven't changed significantly for the vast majority of people in quite some time. The recent charges have targeted those with income of over £150k or those contributing more than £50k gross into their pensions, which is a very small minority of the country. For the rest of us, tax relief has stayed pretty constant for a long time.

Yes but you do still pay tax at the end of cashing in a pension anyway.
My point is that betweenv now and my retirement I will live through at very least two more recessions, of course I save into a fund myself but it seems pointless if you can't spend it and live large as I wish to do.

I won't be soley relying on a pension for that to happen. spreading the risk for me seems the better option and it would be naïve of me to think I would actually get a retirement age in 40 to 45 years time. Also one thing you didn't mention once you get a decent amount of cash you can actually invest it in anything you like such as property, business, and more advanced financial products.

Now who invests your pension for you? The same people who put us in a mess where we can't afford to pay for pensions on maturity. Or the companies go bust and your only covered so far.

Lastly pensions can actally lose money as most are traded on the London stock exchange. If you haven't noticed we are now a poorer country and we lose trade deals everyday meaning the value and impact the investment of pensions goes down.

dmliverpool

For me its the inflexibility of pensions that let them down the companies control the risk and at the end you will always get less than expected. Where as with other above mentioned investments you have more choice and can much more money faster and treat yourself along the way. happiness is a key part of the hierarchy of needs and having a more fruitful life in between would lead me to believe I would have a longer life.

Boringly and reliantly saving into a pension alone is a fools game, not now but when you get close to retirement unless you have a golden final salary pension.