ISAs v Pensions: The Official Retirement Debate

dunstonh

On my last statement the buying power of my projected pension is £1590
per year which is rubbish.

Were the assumptions in line with how you would take the pension? i.e. typically nowadays you see projections using inflation, spouses pension and annually increasing. i.e. the lowest type of income going.

should i freeze my pension plan and keep paying the same money into an isa

The ISA will provide the same sort of income rate as the pension. So, if its rubbish in the pension, it will be rubbish in an ISA. Indeed, the pension will be 25% higher due to tax relief. So, the ISA will be worse.

because it seems that the pension fund just isn't rising enough to give me a decent pension,after all these years of paying into it.

The main reason is that you are making a very small contribution. It isnt the pension that is failing but the amount going in. Pensions (or any alternative) are only as good as what you pay in. Paul has made some good points which I agree with.

cagney123

Thank you Paul and Dunstonh.

In reply to your questions,i have about £13,000 in savings,no debt,no mortgage,i am on quite a low income which is why i have never been able to increase my contributions.

As far as the projected figure of annual payment,inflation was the only factor taken into account.

The reason i am thinking of freezing is to use those contributions to buy the house in the future,which would give me a rental return of around £450.00 per calender month which is far superior than what i would recieve from the pension even after contributing another £9576.

Is their some bigger picture that i am not grasping?

I really welcome your advice David.

Paul_Herring

cagney123 wrote: »

The reason i am thinking of freezing is to use those contributions to buy the house in the future,which would give me a rental return of around £450.00 per calender month which is far superior than what i would recieve from the pension even after contributing another £9576.

This presumes, of course, that you can rent it out at that figure for 12 months in every year, and that your brother would be willing to sell.

Is their some bigger picture that i am not grasping?

Another option could be selling your share to your bother, and (e.g.) getting a Purchased Life Annuity with the proceeds.

Or you both sell together.

srcandas

First a beginners question:

When you pay into a private pension from your bank account is it normal that you get the tax back via tax code or are there schemes where you pay say £1000 in and they give you 1200 assuming basic tax?

I have appreciated this thread especially as I have recently inherited and for the first time can play with funds in ISAs. In particular I am now grasping how to lessen the tax burden on the way in and the way out.

And finally I was recently contacted by a company offering annuity advice. Using their quote engine two things surprised me:

Using their quote engine the variance in pension from big famous name players. It seems worth shopping around when the time comes.
If I smoke it seemed that I may get more pension as I will have a shorter life expectancy. Is this true and should I take up smoking when I reach 64?

:beer:

atush

you have to inform HRMC that you are contributing to a pension and the amt, and they will adjust your tax code.

As to the above poster with a small pension who wants to buy and rent a house. You are missing a whole lot of things.

Do you own where you live now? If yes, what are your costs? Ie council tax, insurance, maintenance? All those costs and more will have to be paid out of your rent, so you will not have 450/month to live on. your pension is projected to be low, as you only pay a small amt in each month. So what you get back will be small. To get more, you have to pay in more. And to invest in ISAs instead would mean you will be paying in 20% less as you won't get tax relief.

I can only see 2 realistic ways for you to go. Both sell your share of the house and you invest the proceeds to provide mroe income, or you and your brother keep the house and rent it out- at least then you will share in the costs/risk. I cannot see you being able to afford to buy him out.

srcandas

atush many thanks for quick reply :beer:

As you suggest the house renting idea of the other poster can be very dangerous. A friend of mine owns 6 houses near me that he rents out. One nearby has a young lady on benefit who stopped paying rent in July. He has paid for the necessary procedures but she will not be removed until November. He will lose more than £3000 in rent and then will need to redecorate throughout.

As he says if he was not a retired builder and thus can do the maintenance and share costs/risks between the 6 it would be touch and go as to whether it was profitable. And of course the capital growth has been zero for some time.

jem16

srcandas wrote: »

First a beginners question:

When you pay into a private pension from your bank account is it normal that you get the tax back via tax code or are there schemes where you pay say £1000 in and they give you 1200 assuming basic tax?

When you pay into a private pension, the pension provider automatically claims for the basic rate tax relief from HMRC. Any higher rate tax relief must be claimed by yourself from HMRC either through your tax return or via a change in the tax code.

So for example if you want to make a pension payment of £1000 gross, you pay in £800 and the pension provider claims the other £200 from HMRC and adds this amount to your pension. ( Your example wasn't quite correct - it's always the gross amount you start with. If you pay in £1000, £250 tax relief would be added to make £1250)

If you are a higher rate taxpayer and pay the £1000 gross you then claim the other £200 from HMRC who will either refund that amount to you via cheque or bank account or adjust your tax code so you pay less tax. However it would not go into the pension unless you then paid that £200 in yourself.

srcandas

jem16 wrote: »

When you pay into a private pension, the pension provider automatically claims for the basic rate tax relief from HMRC. Any higher rate tax relief must be claimed by yourself from HMRC either through your tax return or via a change in the tax code.

Tx jem. That is a concern. My tax form is completed by my accountant. I know I'm responsible as I sign it but c'est la vie.

My tax code looks high to me and for no good reason.

If these things always go that way presumably there is little chance that it has been entered or handled wrongly??? I pay £100 into a scottish equitable and 67 into a pru with profits each month. Bog standard and they are listed on my tax form quite clearly or so I thought.

I know I should call the hmrc but could do without having to get a bill for unpaid tax until April next year. Of course I may be worrying about nothing but I do wish that these things were simpler.

wensleydale

srcandas wrote: »

Tx jem. That is a concern. My tax form is completed by my accountant. I know I'm responsible as I sign it but c'est la vie.

My tax code looks high to me and for no good reason.

If these things always go that way presumably there is little chance that it has been entered or handled wrongly??? I pay £100 into a scottish equitable and 67 into a pru with profits each month. Bog standard and they are listed on my tax form quite clearly or so I thought.

I know I should call the hmrc but could do without having to get a bill for unpaid tax until April next year. Of course I may be worrying about nothing but I do wish that these things were simpler.

I dont think it would change your tax code as far as I am aware.
I get basic relief straight away added to my pension contribution- the higher rate relief is then claimed back in my return and then gets added into my total balance at the end of the year- no change to the tax code unless you roll it over to the following year.

jem16

srcandas wrote: »

My tax code looks high to me and for no good reason.

What is your tax code? Do you receive a P2 coding notice and if so what does it say?

If these things always go that way presumably there is little chance that it has been entered or handled wrongly??? I pay £100 into a scottish equitable and 67 into a pru with profits each month. Bog standard and they are listed on my tax form quite clearly or so I thought.

My higher rate tax relief for pension payments goes towards reducing my overall tax bill that would see me paying extra tax on savings interest and dividend income. Any extra rebate is paid back to me. My tax code is not adjusted.

Some people do not complete a tax return and simply phone HMRC to advise them of pension payments. This would result in a change of tax code or a refund, whichever the taxpayer wanted.

Are you a higher rate taxpayer?