ISAs v Pensions: The Official Retirement Debate

fairleads

jem16 wrote: »

And despite your blinkered approach

Quite the opposite in fact because i speak to an IFA on a regular basis. He is family



You're correct - the article was nonsense.

http://www.moneymarketing.co.uk/1034871.article?cmpid=MME05&cmptype=newsletter&email=true

So how did HL, for example, become a 2.8 Billion cap Ftse 100 company?

jem16

fairleads wrote: »

Quite the opposite in fact because i speak to an IFA on a regular basis. He is family

Oh dear - now do watch out.

So how did HL, for example, become a 2.8 Billion cap Ftse 100 company?

Probably by fooling people into thinking their SIPP was cheap.

j_moomin

Over the last few days I've taken the time to read this entire thread - all 37 pages - and I'm really grateful for the wealth of information contained here.

I'm a higher rate taxpayer in a company DB scheme and I expect to have some spare cash to put away for the future this financial year. After reading this thread, I'm pretty much convinced that investing in a SIPP thereby attracting 40% tax relief is the way to go. The one thing that puts me off is the worry that the government will change the rules about when I can access the money.

I'm currently 40 and my understanding is that, as the current legislation stands, I'll be able to access any money (albeit in a limited way) in a private pension pot from age 55. I understand that this was recently increased from age 50. What worries me is the possibility that some future government might increase this further to age 60 or even 65.

Looking at this thread, there are some regular posters who clearly have a great deal of knowledge and experience in these matters. Of course I realise that no one can predict the future but I'd be grateful if you could let me know whether you think a change to the "access at age 55" rule would be unthinkable or a distinct possibility (or somewhere in between!).

Thanks in advance.

EternallyGrateful

j_moomin wrote: »

Over the last few days I've taken the time to read this entire thread - all 37 pages - and I'm really grateful for the wealth of information contained here.

I'm a higher rate taxpayer in a company DB scheme and I expect to have some spare cash to put away for the future this financial year. After reading this thread, I'm pretty much convinced that investing in a SIPP thereby attracting 40% tax relief is the way to go. The one thing that puts me off is the worry that the government will change the rules about when I can access the money.

I'm currently 40 and my understanding is that, as the current legislation stands, I'll be able to access any money (albeit in a limited way) in a private pension pot from age 55. I understand that this was recently increased from age 50. What worries me is the possibility that some future government might increase this further to age 60 or even 65.

Looking at this thread, there are some regular posters who clearly have a great deal of knowledge and experience in these matters. Of course I realise that no one can predict the future but I'd be grateful if you could let me know whether you think a change to the "access at age 55" rule would be unthinkable or a distinct possibility (or somewhere in between!).

Thanks in advance.

I guess the question is - "Will the minimum age for claimimg the 25% tax free lump sum increase from 55 over the next 15 years?"
Of course nobody knows. What I do know though is that if you let the possibility of that limit the amount you save to a pension fund, then you reach 55 and it's not changed, you will give yourself a severe kicking!
My guess would be the most it will increase by is 1 or 2 years to keep it at 10 years below NRD.
Then again I'm a layman and I know nothing.

jamesd

It'll probably change again at some point. The increase from 50 to 55 was fairly recent so at least a fair number of years without change can be hoped for. But you can never eliminate legislative risk from tax wrappers, whether it's pensions or ISAs or something else.

There seems to be a far higher risk that higher rate tax relief might be eliminated, in part because this was a Liberal Democrat manifesto item. I suggest that you exploit higher rate tax relief as much as you possibly can until the uncertainty is eliminated. No guarantees either way but there's at least some serious interest in getting rid of it.

With higher rate tax involved you get big wins from using a pension sob you should consider it anyway. If you want to retire earlier than 55 or get a higher income than the GAD limit allows you'd also want some money outside the pension, probably best in a S&S ISA. The ISA pot can be drawn down as rapidly as needed, unlike the GAD-limited pension pot. But the tax relief for a 40% tax payer means that the GAD limit is effectively quite a bit higher than it appears due to the increase in the value of the money from the relief.

Since you only get higher rate relief on your higher rate income you might find that you'll have some basic rate income that could best be directed into the ISA pot while you concentrate the higher rate portion into a pension. Should your circumstances change you can move the ISA money into the pension later. It'd perhaps be an interesting thing to do once you get close to 55 or whatever the limit is when you get there. At that point you should have fairly good certainty of how it'll be treated and whether you'll need money outside the pension.

I'm using both and also unwrapped money.

At the moment it's generally advantageous to take personal pension (including SIPP) income as soon as you can but this may change by the time you are able to do it. The advantage comes from the extra 25% lump sum you get on the income that you can pay into a new pension and/or from having the money outside the pension so you can save it up and draw on it as fast as you need when you finally do retire, avoiding the GAD limit partially.

If you're comfortable with investments you might consider whether a pension interest-only mortgage is advantageous. That'll effectively get you tax relief on your mortgage repayment, at the cost of taking investment risk.

fairleads

MSE_Martin wrote: »

Both ISAs and Pensions are tax-free wrappers you can use to invest or save money in to provide a return for your old age.

• ISAs In a nutshell you put money in ISAs from your after tax salary, and the returns aren't taxed (very much in a nutshell, its more complex than that, see the ISA guide)
• Pensions. In a nutshell the benefit it you get to put your money in a pension from your before tax salary, but the returns once you retire are taxed (again read the pensions guide for more on this)

It's important to remember both these are just wrappers, in other words you can choose what you put in them. In both you can have a savings product or a range of investments.

So which is better for retirement?

Now I'm opening the debate up. There's no strict right or wrong answer only views. I thought it would be interesting to canvas opinions, there are many qualified (and unqualified) money nerds on these boards. Now its time to have your say.

Martin

If an individual were going on pension today, by diktat and not by choice, they could find that their pot is far less in value than it was previously, and even worse, the annuity rates - which control the amount of income received - are also lower by more than 20%. Further, the GAD limit is now par with the annuity rate and not 20% higher as was previous. These events have probably nulified the value of the last 3 years worth of personal contributions - as well as a life time of tax rebates - and probably most of the benefit of the employer contribution. But the pensioner has to take it on the chin. There is no alternative. However, although a non-pension (part or fully isa'd) retirement fund is probably suffering the same paper loss, the divi and bond income is still largely intact. And the retiree pays no income tax.

jamesd

It takes much more than we've seen recently to nullify the effect of the tax rebates over a lifetime, if followed by an income in retirement that is mostly untaxed because of the personal allowance, or is lower in retirement than when earning. The dividend and bond income is the same in pension or ISA, largely, so no gain or loss between pension and ISA for those.

The changes to the GAD limits made by the current government have significantly reduced the attractiveness of pensions for those who use drawdown, though they still remain fairly attractive for higher rate tax payers who will be basic rate in retirement.

One effect of the change to the GAD limit is to make it particularly rewarding to start taking pension benefits as soon as you reach 55, so you can accumulate a lump sum to make up for the lower GAD income level. That also offers to option to recycle the pension income to get more tax relief and another tax free lump sum, potentially significantly increasing he benefit of a pension compared to an ISA.

The reduced GAD limit can be circumvented using a scheme pension, where an actuary calculates an appropriate income level for the specific individual. This is likely to be too expensive for for smaller pension pots. the start taking benefits at 55 is the best workaround for those. Scheme pensions haven't had much publicity until recently because they used to be niche products, Now that niche has been significantly broadened, particularly for those with factors reducing their life expectancy who want to use drawdown.

A mixture of ISA and pension tends to remain the best option, though it depends on the individual circumstances, notably planned retirement age. Not a lot of use having only pension income that starts only at 55 if you plan to retire at 45, you need something to cover those ten years.

gadgetmind

jamesd wrote: »

One effect of the change to the GAD limit is to make it particularly rewarding to start taking pension benefits as soon as you reach 55, so you can accumulate a lump sum to make up for the lower GAD

I intend to, but I also intend to stop working. The lower GAD limit means that the years between 55 and (for me) 66 will be relying more on ISAs etc, and less on pensions. Ideally, I'd prefer to draw hard on my pension to max out my 20% band, but I can't see a way of doing this. If I go for flexible, that £20k annuity will be eating so much of my 0% and 20% that the end result will be the same.

I really want to be able to draw a larger percentage (about 7%) at age 55 and drop this to about 4% at 66, which is sustainable.

The reduced GAD limit can be circumvented using a scheme pension, where an actuary calculates an appropriate income level for the specific individual.

How do they calculate this?

jamesd

Yes, that's one case where ISA or other non-pension use is required. Necessary for pre-55 contingency planning as well.

Actuaries calculate scheme pension income based on the individual's specific circumstances, like current health and family background.

gadgetmind

Can a scheme pension take into account other investments and future income streams to allow larger drawdown between 55 and 66 (or maybe even 70)?