ISAs v Pensions: The Official Retirement Debate

fairleads

Judwin wrote: »

There is also a slight niggle with the Person B and C.

Fairleads states "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. " Jem60 states similar for Person C.

The single ISA allowance is less tha £12K p/a so it's going to take 7 years for a single person B to get £78K into an ISA, or 10 years for a single person C to get £100K into an ISA. Sure there are other tax free wrappers - but yielding 6.5% ?

And it's NOT neccessery to pay HRT in orger to get 40% 'tax' relief. If you use salary sacrifice, a 20% tax payer can also save 11% Employees NI, and possibly some/all of the 13.8% Employers NI. This means the 20% tax payer actually recieves almost 45% 'tax' relief.

Agreed, but in all my 40 odd working years have never met a 20%- er who was offered the salary sacrifice/cost to company option. 40%- ers yes. As to my Mr B yes, I did cut a corner there, mainly to keep it simple. (a bit sneaky really because i also wanted to see if any-one would indeed pick it up). To your credit, you did - but it escaped our regular experts. Interesting is that taking the Isa investment time frame into consideration ensures that the Sipper does indeed pay some tax on their L/S income until the whole 25% is Isa-ed. Thus making it even less of a viable option.

Judwin

fairleads wrote: »

Thanks Judwin but the operative word here is whenever

Pretty sure it's done monthly - my Prudential yearly reports show the full gross amount being credited on the 1st of every month.

The only thing that's done yearly is the SERPS/S2P payments into the protected rights/opted out parts of private plans. I suppose you could claim thats done in arrears, but not the rest.

fairleads wrote: »

Agreed, but in all my 40 odd working years have never met a 20%- er who was offered the salary sacrifice/cost to company option. 40%- ers yes.

Well you have now :wave:

And many people on these boards post that their employer is offering to match 3% of wages, which is an even better deal - the never refuse free money argument.

fairleads wrote: »

As to my Mr B yes, I did cut a corner there, mainly to keep it simple. (a bit sneaky really because i also wanted to see if any-one would indeed pick it up). To your credit, you did - but it escaped our regular experts.

I doubt they missed it - it's just not the most major error (as they see it) in your original posting.

fairleads wrote: »

Interesting is that taking the Isa investment time frame into consideration ensures that the Sipper does indeed pay some tax on their L/S income until the whole 25% is Isa-ed. Thus making it even less of a viable option.

Whilst some of your points have some merit, the BIG hole in the Mr A argument is that you're taking more from the ISA fund than the yeild - at age 56 :eek: You're not allowing for inflation, and with life expectancy now into the mid 80's you're looking at 30 years to live off an ever decreasing ISA fund. Add to that even if inflation is only 2% p/a prices will double in 30 years, yet your ISA fund size will be decimated. With inflation at 5%p/a, prices go up by 4.32 times in 30 years.

At age 56, I don't see how you can justify taking any more than (Yield-CPI or RPI) p/a from your ISA fund. If you do you'll be skint by age 80. The GAD rules seek to prevent this for pensions.

Paul_Herring

fairleads wrote: »

Agreed, but in all my 40 odd working years have never met a 20%- er who was offered the salary sacrifice/cost to company option.

Really? Strange. Since that's exactly what I've got. The full 13.8% goes into my pension fund.

Seems, looking at Judwin's reply it's not that unusual either.

jem16

fairleads wrote: »

However, if we say that those 22% pay tax at 40% for the last 15 of their 35 contributing years,

You are the one who keeps going on about all one or another. As I have said on many occasions, all one or another is rarely best. Pension works best when there is higher rate tax involved and basic rate in retirement. Pension also works best where there is employer contributions, no matter what the tax situation. Pension works best where a final salary pension is involved. Where it is basic rate tax with no employer contribution and no final salary pension involved, then a combination is usually best.

However, and as Dunstoneh has alluded to, only half of the 40% rebate is credited to the fund on a monthly basis. He said the balance first needs to be claimed on the annual return, and only then is it refunded to the 40% taxpayer. Who are in turn responsible for paying that into their fund. In addition, because this annual payment is made in arrears it impacts negatively on the growth of the pension fund. Thus reducing it further to 328K.

There is more than one way to get the tax relief - granted this may mean in the first year it's paid in arrears but subsequent years are paid straightaway. HMRC can apply an allowance to the tax code that takes care of the extra 20%. The taxpayer then pays the net amount into the pension and the provider immediately grosses it up by 25%. So each month the taxpayer pays an amount into the pension minus 20% tax and also pays 20% less tax courtesy of the tax code adjustment.

Now we come to the controversial subject of the extra man co fees, the ones I believe are higher than those applied to the Isa funds.

As has been said you are wrong to believe this. It is possible to pay exactly the same for a pension as for an ISA.

Further, the Isa investor still has the added advantage of 100% of their personal allowance. Therefore, it follows that, come the day, even the state pension will be tax-free.

Why waste 10 or more years of tax free personal allowance?

A) 6.8% drawdown could well be close to the fund’s annual return

And not for an ISA?

We still have to account for a .45% manco fee.

You might but others won't.

Now we come to the matter of pension fund costs. Please take the time to visit the funds network page on the web site of one of the world's largest fund manager (no names but it does start with an F) and enter as a financial adviser. And see for yourselves the cost structure – the % fee that your adviser can cream off your fund, your retirement investment. And in a bid to further enlighten readers re the question of hidden, or not so obvious, extra manco pension fund costs – here with is a link to an article that provides more info on this controversial subject.
http://www.thisismoney.co.uk/money/investing/article-1726411/Hargreaves-Lansdown-resists-revealing-fund-manager-commission.html

Both bundled platforms. Have you tried unbundled?

You didn't fall for the HL SIPP being low cost, did you?

Now these trail fees are over and above the usual unit trust fund manager’s fee of anything between 1.25 and 2% P/A.

On a bundled platform, the amc/ter includes the trail commission paid to the IFA. A fund with an amc of 1.5% would be 0.7% to the fund manager, 0.5% to the IFA and 0.3% to the platform. HL with its SIPP takes both the platform and full trail commission. Other SIPP providers don't.

Exactly the same costs as with an ISA fund.

When still young enough to enjoy and make best use of a decent pension, the Sipper is restricted to 5.4% drawdown.

I would imagine this would be to ensure they don't run out of money to fund their retirement, which is the whole point.

is it any wonder I am so vehemently opposed to a self invested pension fund - be it stake holder, SIPP or whatever.

What we all wonder is why you cannot do both?

Now let’s meet Mr MSE – he’s done his research and a bit of planning. He’s realised that using all ISA or all Pension isn’t always the best way to do things so;

He read that when he was only a basic rate taxpayer and having no company pension, he was better to invest the money in an ISA. So he did that for a number of years and had a pot of £139,260.

As he grew older, he became more successful, and with that success he became a high rate taxpayer. So he diverted the money into a pension instead. Come retirement he had a pot of £184,566 which had only cost him £110,740.

So he now has 2 pots totalling £250,000.

From his pension pot of £184,566 he takes his tax free lump sum of £46,161. He invests this in unwrapped income funds and takes 5% income from this of £2307.05. He could take more but decided to be conservative and allow for some growth as well. This is taken from the natural dividend income which satisfies his tax liability as it comes with a 10% tax credit.

From the remaining £138,425, he drawdowns 5.4% giving him £7474.95. As this is below the £7475 tax free personal allowance there is no tax to pay.

From his ISA pot of £139,260 he takes 6.7% as Mr A giving him £9330.42

Total of all is £2307.05 + £7474.95 + £9330.42 = £19,112.42

So Mr MSE is still the winner over Mr A by £2,362.42. More importantly he is still allowing for growth/inflation by not taking too much out of either pension pot. Personally I would take less out of the ISA too to allow for growth/inflation but just used Mr A's figures as comparison.

For 10 years ( probably more as state pension age rises) he is not wasting his tax free personal allowance. When he finally gets to state pension age he can add his £5311.80 to his taxable income. He has 2 choices – keep his taxable income to exactly £9940 and drawdown less on his pension fund. Or he can choose to pay tax on £2846.75 @ 20% = £569.35.

fairleads wrote: »

As to my Mr B yes, I did cut a corner there, mainly to keep it simple. (a bit sneaky really because i also wanted to see if any-one would indeed pick it up).

And if you believe that - you will believe anything!

You have done your damnest to prove that all ISA is better than all Pension. If you had seen a way of making Mr B less than Mr A you would have used it.

I hadn't even thought of using an ISA to invest the lump sum as there is no great benefit for a basic rate taxpayer to doing so anyway. Dividend payments within an ISA are already taxed and cannot be reclaimed except in the case of Fixed Interest. I had assumed that you were simply investing the lump sum in unwrapped investments, even if you were using a figure of 6.7% which is too high in my opinion.

Now of course we have the added NI savings for both basic rate and higher rate taxpayers as both Paul Herring and Judwin have pointed out – both make a good case for using the pension wrapper.

fairleads

Judwin wrote: »

Whilst some of your points have some merit, the BIG hole in the Mr A argument is that you're taking more from the ISA fund than the yeild - at age 56 :eek: You're not allowing for inflation, and with life expectancy now into the mid 80's you're looking at 30 years to live off an ever decreasing ISA fund. Add to that even if inflation is only 2% p/a prices will double in 30 years, yet your ISA fund size will be decimated. With inflation at 5%p/a, prices go up by 4.32 times in 30 years.

At age 56, I don't see how you can justify taking any more than (Yield-CPI or RPI) p/a from your ISA fund. If you do you'll be skint by age 80. The GAD rules seek to prevent this for pensions.

The only hole is the one perpetrated by the “industry”. It says that we need a pot big enough to provide a livable, inflation proofed, income for the rest of our life. Naturally, if we follow that advice we’ll be home and dry. But the unintended consequence is that we’ll probably also be the wealthiest person in the cemetery.
I say this because facts I started compiling more than 25 years ago provided me with some basic but very practical information about life in older age. And it is that there would come a time in every person’s life when his or her income needs would start to decline. The reasons are manifold - no work related travelling expenses would be my first example. Moreover, if we construct a spreadsheet comprising income wants growing by inflation, but limited with a drawdown cap of say 10%, the graph shape would mirror that of shallow pitched roof. Therefore, we could draw an inflation-linked income for around 15 years (provided we start with a reasonable amount that is) at which point the income slope declines. However, if we include the inflation linked basic state pension for a couple in this graph, then the income should continue growing from year 15, but at a lesser rate. Nothing is foolproof of course, but it is interesting to note that many 80+ year-old couples live comfortably on their state pensions plus investment income and a bit of capital drawdown from savings that are far less than Messrs A, B and definitely C. Yes, I agree, nothing is perfect, but at least the Isa investor has the unfettered access to all their capital. And it is this factor; by far, I’m sure, that will have the most influence on maintaining living standards in advanced old age, rather than a larger - but mainly inaccessible - pension pot.

EternallyGrateful

It strikes me that there are facts and there are variables and there is the individual. Some facts will certainly change (and become variables) and we as people will also be effected by what life throws at us.
All we can do is take professional advice, do our own research and apply our findings to our lives and the plans we have accepting that our plans will probably have to change - typically because of illness or a job crisis.
We'd be foolish not to take the 20% tax advantage we get for contributing to a pension. We'd also be foolish to put all our eggs into that one basket because we need a contingency. We also need something reliable - even though it may be reliably poor value - a cash ISA!
A mix of investments has to be the best way forward. What the mix comprises is down to the individual with a contingency for the surprises that life holds for us.

fairleads

jem16 wrote: »

Why waste 10 or more years of tax free personal allowance?

Why pay tax in retirement? or should i pay into a pension just so the taxable income will consume all my personal allowance - beggars belief. Mine is still intact should i need to use it- valuable option or waste?




You didn't fall for the HL SIPP being low cost, did you?

Most do tho' - 350,000 people i believe


On a bundled platform, the amc/ter includes the trail commission paid to the IFA. A fund with an amc of 1.5% would be 0.7% to the fund manager, 0.5% to the IFA and 0.3% to the platform. HL with its SIPP takes both the platform and full trail commission. Other SIPP providers don't.

Exactly the same costs as with an ISA fund.

Not with mine and pray tell me what costs are levied on the accumulated pot during the drawdown period?



I would imagine this would be to ensure they don't run out of money to fund their retirement, which is the whole point.



What we all wonder is why you cannot do both?

Because its outside the parameter of the thread


For 10 years ( probably more as state pension age rises) he is not wasting his tax free personal allowance. When he finally gets to state pension age he can add his £5311.80 to his taxable income. He has 2 choices – keep his taxable income to exactly £9940 and drawdown less on his pension fund. Or he can choose to pay tax on £2846.75 @ 20% = £569.35.



And if you believe that - you will believe anything!

You have done your damnest to prove that all ISA is better than all Pension. If you had seen a way of making Mr B less than Mr A you would have used it.

I hadn't even thought of using an ISA to invest the lump sum as there is no great benefit for a basic rate taxpayer to doing so anyway. Dividend payments within an ISA are already taxed and cannot be reclaimed except in the case of Fixed Interest. I had assumed that you were simply investing the lump sum in unwrapped investments, even if you were using a figure of 6.7% which is too high in my opinion.

No you didn't you missed the point completely - you are lagging the curve i' afraid. interesting is that only 50% or so of our pot is Isa-d
But based my input on a full Isa, because, and for the umpteenth time, that is the title of the thread - Pension or Isa

Now of course we have the added NI savings for both basic rate and higher rate taxpayers as both Paul Herring and Judwin have pointed out – both make a good case for using the pension wrapper.

No they haven't, because pensioners are at all times at the mercy of future change to pension legislation and this shadow hangs large until death. Its happened in the past - and people who ignore the lesson of history are doomed to repeat, or fall foul of them. Have included more responces in the body above

jem16

fairleads wrote: »

Why pay tax in retirement?

Would you honestly turn down a final salary pension or one where the employer pays into it, just to ensure you pay no tax?

or should i pay into a pension just so the taxable income will consume all my personal allowance - beggars belief.

Not to me and many others. I see it as making the most of my tax allowances.

Mine is still intact should i need to use it- valuable option or waste?

When would you plan to use it?

Not with mine and pray tell me what costs are levied on the accumulated pot during the drawdown period?

The costs I gave you were the non-discounted costs - same for both pension and ISA. As I have already told you it's possible to get those costs discounted should you wish to do so. It's also possible to get a 0.7% amc on an advised pension. Makes no difference if it's in drawdown or not.

So what are your costs and what are you using for your ISA?

Because its outside the parameter of the thread

No it isn't - right from Post 2 a mixture has been suggested, depending on the individual circumstances.

interesting is that only 50% or so of our pot is Isa-d

Why interesting?

But based my input on a full Isa, because, and for the umpteenth time, that is the title of the thread - Pension or Isa

Actually it's ISAs v Pensions : The Official Retirement Debate.

fairleads

Actually it's ISAs v Pensions : The Official Retirement Debate

Precisely, which is why most of your previous missive was irrelevent.
And only an amateur, or a vested interest, would conclude that the debate included an employer funded pension because experienced investors realise that that option reins supreme over all others. And so there would be no debate.

jem16

fairleads wrote: »

Precisely, which is why most of your previous missive was irrelevent.

Far from irrelevant unless you consider actually answering a question put to you as irrelevant. Tax in retirement cannot always be avoided but it can be mitigated.

And only an amateur, or a vested interest, would conclude that the debate included an employer funded pension because experienced investors realise that that option reins supreme over all others. And so there would be no debate.

Only for those who have no answers.

Once again you don't respond to questions put directly to you. Waste of time really.