ISAs v Pensions: The Official Retirement Debate

Paul_Herring

dmliverpool wrote: »

Yes but you do still pay tax at the end of cashing in a pension anyway.

No.

You pay tax on the income generated from (if you're wise) only 75% of the fund. And only on, the amount of that, that takes you over your basic rate allowance.

dunstonh

ow 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.

Two bits of wrong information there.

1 - you invest the money and decide where it goes. If you use funds (which most do) then they are not responsible for this recession.
2 - no unit linked pension provider has gone bust and its pretty hard for them to do so and even if they did, the assets are normally ringfenced and held under a trustee arrangement.

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.

Pensions cannot lose money. They are just a tax wrapper that contains the investments of your choice. If you choose to put investments inside that cannot lose money then you can. Or you can choose to put investments in which are volatile.

Of course, use something like cash for any long term planning is risky and potentially riskier as you are replacing investment risk with shortfall risk and inflation risk. You are guaranteeing you will get back a lower amount. Whereas with investments you may get back a lower amount but you are aiming for a higher amount.

Currently, my pension has just 9% of its holdings in UK equity.

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.

Pensions have virtually identical investment options as ISAs and even unwrapped investments. The pension is just a tax wrapper. That is all. Stop thinking of it as an investment.

dmliverpool

EternallyGrateful wrote: »

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!"

Agreed. I think this forum is for members of the general public not financial experts talking jargon. If you do use such jargon which is mostly understandable via a qualification or specialist detailed knowledge please ensure you explain what you mean to silly people like me:o

dmliverpool

dunstonh wrote: »

Two bits of wrong information there.

1 - you invest the money and decide where it goes. If you use funds (which most do) then they are not responsible for this recession.
2 - no unit linked pension provider has gone bust and its pretty hard for them to do so and even if they did, the assets are normally ringfenced and held under a trustee arrangement.



Pensions cannot lose money. They are just a tax wrapper that contains the investments of your choice. If you choose to put investments inside that cannot lose money then you can. Or you can choose to put investments in which are volatile.

Of course, use something like cash for any long term planning is risky and potentially riskier as you are replacing investment risk with shortfall risk and inflation risk. You are guaranteeing you will get back a lower amount. Whereas with investments you may get back a lower amount but you are aiming for a higher amount.

Currently, my pension has just 9% of its holdings in UK equity.



Pensions have virtually identical investment options as ISAs and even unwrapped investments. The pension is just a tax wrapper. That is all. Stop thinking of it as an investment.

Whats a tax wrapper? ?

jem16

dmliverpool wrote: »

Agreed. I think this forum is for members of the general public not financial experts talking jargon.

A certain amount of jargon is needed for understanding though.

If you do use such jargon which is mostly understandable via a qualification or specialist detailed knowledge please ensure you explain what you mean to silly people like me:o

I think most people on here try to do so.

dmliverpool wrote: »

Whats a tax wrapper? ?

A tax wrapper is simply a container which has tax advantages. An ISA is a tax wrapper, be it for cash or investments, as the it's tax free. A pension is a tax wrapper as it has tax relief when you make a contribution and tax free growth.

Different tax wrappers have different tax free advantages and you need to use the one with most advantage to your circumstances, tax wise.

However none of these decide on the growth or loss as far as investments are concerned. What decides that are the funds or stocks that you put inside.

fairleads

Mr. A, a male aged 56, retires with savings of 250,000 invested mainly in bond income, equity and bond income and equity income unit trusts, most of which are held under the Isa wrapper.
He invests 125,000 @ 7% bond yield and 125,000 @ 5.5% yield
Drawing 6.9% x 125,000 from the bond portfolio provides a tax-free income of 8,625
and 6.5% x 125,000 from the equity portfolio to give another 8,125 also tax-free
The result is an annual tax-free income of 16,750 P/A which equates to 6.7% of the total portfolio.
This is not excessive because some of the Bond UTs are producing 7% income yields and the balance of the portfolio delivers a tax-free yield of 5.5%. He is therefore, in effect, boosting his income with a bit of capital.

Mr. B, of a similar age, retires with a larger pot - 312,500 - courtesy of the 20% tax-rebate on contributions.
He takes 25% as a tax-free lump sum and invests that 78,125 in a matching portfolio, and draws 6.5% tax-free as income.
The balance of 234,375 was invested in a similar manner.
However, because Mr. B has invested under SIPP rules his annual draw down is limited by GAD to 5.4% and the income is taxable at 20%. His income is as follows.
234,375 x 5.4% = 12,656 - 7475 PA = 5181 TI x 20% = 1036 tax.
His net annuity income is therefore 12,656 – 1036 =11,620.
Now add tax-free income (78,125 x 6.5%) of 5,078 to give a total net income of 16,698.

Unfortunately, at the end of year one, the market takes a knock and values fall by 10%.
So Mr. B now finds that the value of his drawdown in year two is also reduced. Whereas Mr. A's income draw is unrestricted.
If however, as I strongly suspect, that SIPP manco costs are greater than those of the ISA wrapper, then this following example is far more representative of the prevailing situation
In this case the deduction of a .5% annual SIPP man- co fee, over the 30 contributing years, reduces the SIPP from 312K to 288K.
In which case 288,328 x 75% = 216,246 x 5.4% = 11,677 - 7475 PA = 4,204 TI x 20% = 840 Tax.
His net annuity income is thus 11,677 - 840 = 10,837.
Now add the tax-free income derived from the lump sum of 288,328 x 25% = 77,082 x 6.5% = 4,685 to give a total net income of 15,522.
The result now is that even though Mr. A has no benefit of the tax rebates on contributions; his income is more than 1,000 P/A greater than Mr. B's.
Further, over the past 20 odd years, I have seen examples in the financial press where individuals who entrusted their retirement savings to FAs and private pensions / SIPPS - found that the value of their pot, on retirement, was/is the same as, or less even, than the sum of their contributions.
This cannot be solely the result of poor returns - no, it is the result of high costs.
In addition, if those costs exceed say 1.5% P/A, which is by no means an industry maximum, they can even negate the doubtful advantage of the 20% tax rebate on contributions. Further, if Mr. B has the benefit of the 40% rebate on contributions but suffers manco fees of only 2% even, then it is entirely probable that he will still not be any better off than Mr. A.
Food for thought?

pitrequesse

I need help and fast. I have to choose whether or not to stay in my 401a plan through my employer and Great West Retirement System or switch to the TRS system of WV. In my TDC plan I pay 4.5 and my empoyer pays 7.5. If I switch to TRS I will start paying 6. It seems like in the TDC the money is mine, but maybe more risky. When I looked at the estimated graphs based on 7 return, my monthly income seems to be about the same in both. Is this a conservative return? Im afraid that the state will cut the percentage in the formula they are using by the time I retire. I have about 20 years before I retire. I have grossed about 35 ,000 over 8 years in the TDC. Which system is better for me and my family. Im married with 2 children. My husbands retirement is a 401K.

EternallyGrateful

pitrequesse wrote: »

I need help and fast. I have to choose whether or not to stay in my 401a plan through my employer and Great West Retirement System or switch to the TRS system of WV. In my TDC plan I pay 4.5 and my empoyer pays 7.5. If I switch to TRS I will start paying 6. It seems like in the TDC the money is mine, but maybe more risky. When I looked at the estimated graphs based on 7 return, my monthly income seems to be about the same in both. Is this a conservative return? Im afraid that the state will cut the percentage in the formula they are using by the time I retire. I have about 20 years before I retire. I have grossed about 35 ,000 over 8 years in the TDC. Which system is better for me and my family. Im married with 2 children. My husbands retirement is a 401K.

All sounds a bit American to me but I'm sure dunstonh will have some sound advice!!!!

dunstonh

EternallyGrateful wrote: »

All sounds a bit American to me but I'm sure dunstonh will have some sound advice!!!!

The initials being used trumped me and you know what I am like for abbreviations! However, the mention of 401K at the end does indicate the US.

Given the complicated tax situation that applies to the US and the fact that most here wont have a clue about US options, I cant see how a UK site can be of much use I'm afraid.

fairleads

EternallyGrateful wrote: »

All sounds a bit American to me but I'm sure dunstonh will have some sound advice!!!!

No but his alter ego will