ISAs v Pensions: The Official Retirement Debate

srcandas

My tax code is 957L. In year 2010/11 on my P60 it says pay 36650 tax 5414. I've had no notification of tax code change since.

That tax code presumably was set based on tax returns back in 2009? Unfortunately at the moment I have access to little else.

I'm single with no kids. I benefit from a company mobile phone so I think that is reflected in my tax code.

Tx for your thoughts so far and any to come.

jem16

srcandas wrote: »

My tax code is 957L.

That is high - you have an allowance of £2100.

In year 2010/11 on my P60 it says pay 36650 tax 5414.

Normal tax on that would be £5835 so you have underpaid tax here.

However with an income of £36,650 you are not a higher rate taxpayer so your pension payments will not matter at all.

I've had no notification of tax code change since.

When you got the 957L tax code did you not receive a P2 coding notice from HMRC? This explains how the tax code is made up.

That tax code presumably was set based on tax returns back in 2009? Unfortunately at the moment I have access to little else.

Could have been. Did you overpay tax taht year?

I'm single with no kids. I benefit from a company mobile phone so I think that is reflected in my tax code.

Can't answer that I'm afraid. How does your employer pay for your mobile?

srcandas

Jem

many tx for your help. I've had a look through lots of papers and I can see that I was a higher rate tax payer year ending 2009. This came about due to a substantial dividend being paid that I hadn't expected. I also paid more into my pensions than at first declared.

So I am guessing that the tax code for 2010/11 may have been changed to allow for this. Only seems odd as having filed a tax return I had to pay a lump sum to HMRC Jan/Feb 2010 and they said they were happy (statement showing zero balance).

Possibly when I completed a self assessment in Jan 2011 I should have received a new tax code but it just got lost?

So reading all I've been given here:

It is unlikely my pension has been miss entered and it shouldn't have effected my tax code anyway.
I can call HMRC and ask what my code should be.
Most likely I will have to pay a bit more tax for the current year as my PAYE is based on a wrong tax code. (presumably 20% of 2000 if my tax code should be for example 757)

well tx one and all. I can now go and enjoy my bonfire night. I hope you all enjoy yours :beer:

srcandas

Having looked and taken on board much from this thread I have put together my strategy. Thought an example might help certainly me. I’d be interested if anyone thinks I have part or the whole thing wrong. All figures are at today's level.

I am 60 August 2012. Both my partner and I work and neither pays higher rate tax. We aim to both work until I am 65 in 2017. The mortgage will be paid on the house.

My partner is Spanish and 55 September 2012. She has 30 years tax paying history in Spain. She will accumulate another 6 years here in the UK by my retirement so I hope she will qualify for a UK state pension when she is 66.

We can live on a minimum of £13000 a year at today’s rates which conveniently is about the sum total of our two personal tax allowances.

So we have:

• 2017 - I retire and have state and private pension. My partner will have no income from this time.
• 2023 - partner retires receiving state pension.

If I buy an annuity when I am 65 I need to consider:

• For 6 years between 2017 and 2023 I need a private income of £8000 (£13000 minus my state pension).
• For years 2023 onwards I need a private income of £4000 (£13000 minus 2 state pensions).

I currently have a pension fund of £167000 plus some terminal bonuses, say £175000. To get a joint £4000 a year with growth built in I need a fund of £125000, plus £4000 top up for each of 6 years.

So I am there with a bit to spare. Lump sum of £43000 gives me ample top up and £132000 buys a good annuity.

So as I see it:

• If I put more into the pension funds I will gain when I put money in but lose it when I take it out.
• If I load ISAs I get flexibility and the same neutral tax position.
So I should use full ISA allowance and only after that consider putting more into my pension.

Or am I missing something? :beer:

jamesd

My guess is that you have that unusually high tax code because HMRC is assuming that you're a higher rate tax payer making pension contributions, so it's giving you the higher rate tax relief that way.

srcandas

James yes I think with the help here that that must be it. So when I do my self assessment I will no doubt owe a little. I'm guessing it cannot be more than 20% of the increased tax allowance for 10/11 (20% of £3100). For this year at about half way through the year that should only be a half of that of the previous year.

Glad I started getting all this stuff sorted. Unless someone shoots my plan above to pieces I feel more relaxed about the future.

:beer:

atush

Not sure you will be 'losing' paying into a pension as you said you will have tax relief to cover the whole 8K you need. And you will gain in the amt going in.

Having said this I am all for flexibility, and think you should have ISAs (cash and S&S) along side a pension so if you don't have enough now, then pay some into ISAs.

And when your lump sum comes, dont forget to open new ISAs for yourself and wife and NSi ILSCs if they are available.

Cloudane

Tricky stuff. The IFA I went to said "go with a pension, that's still what we recommend" but most of the people I talk to these days say they've lost out on them and to avoid them. That said, those people aren't IFAs (but IFAs, even though they're independent, still have certain interests of their own)

But wouldn't a Stocks&Shares ISA have the same complications i.e. you can lose money, you still have to pay lots of fees to an IFA / someone who knows what they're doing (which I certainly don't) etc?

I like the idea of putting into a cash ISA. Nice and simple, no fuss, the fund can't shrink. Is that a total waste of time?

I'll read through the thread (will obviously take some time!) but the facts if anyone has any quick pointers are:
Age 29
Income £18k
Living with parents but considering heading out on my own some time within say 5 years
Completely debt-free
Very little savings (I have £3k sat wasting its time in a basic savings account and so getting SOME sort of ISA is a priority now)
No pension - just starting to consider retirement planning now. A little late I know.

dunstonh

The IFA I went to said "go with a pension, that's still what we recommend" but most of the people I talk to these days say they've lost out on them and to avoid them.

Most people you are speaking to then are clueless.

The pension hasnt lost money. Where you invest loses money and investments do go down as well as up all the time. You dont stop paying when it goes down. Indeed, that is the time you want to be paying as when it goes back up again, all those units that you bought during the low prices are the ones that will make the most money.

but IFAs, even though they're independent, still have certain interests of their own

I would hope so. That wouldnt make them very nice human beings if they didnt.

But wouldn't a Stocks&Shares ISA have the same complications?

Correct. Changing the tax wrapper makes no difference. The same investment held in different tax wrappers will give you an identical return. The difference is the tax and maturity process.

I like the idea of putting into a cash ISA. Nice and simple, no fuss, the fund can't shrink. Is that a total waste of time?

You are 29. So, chances are that means you will have to pay around 3 times per month more (equivalent) than you would have to pay into a pension or S&S ISA as you are replacing investment risk with shortfall risk and inflation risk. Whereas investment risk means you may not get a much as you want in retirement, a cash ISA guarantees you wont get as much as you want in retirement.

If you take the ING Direct savings account as benchmark, this was launched in 2003 and would see your savings 30.4% higher now. If you used a bog standard average balanced managed fund and got sector average performance, it would be 75.22% higher (ignoring tax relief)

Lets use the same info but turn it into monthly payments. At £200pm from 30th May 2003, ING would be £22464. The pension (assuming gross contribution of £200) would be £25,620.

What tends to happen is that people that dont understand investments and make no effort to learn only focus on the negatives and never the positives. You have to average out the ups and downs and not just look at one. In the short term there WILL be periods when its lower. However, this is why you are always told that investing is for the long term and why you shouldnt invest if its short term.

There have been 8 financial crisis since 1956 (or 9 if you class the current eurozone crisis as a new one or 8 if you class it as continuation of 2008). Thats an average of every 7 years. Stockmarkets tend to suffer a crash at least once in every 5-7 year period. An economic cycle typically takes close to 10 years. So, unless you are invested for a whole economic cycle, you are never really going to see a realistic average on the returns. You may get lucky and only see the growth years or you may be unlucky and see the bad first. You never know what is coming and in what order. However, you dont worry about it. You know there will be bad years. So, why should it worry you when they come? It can be uncomfortable but it does get easier with each crash you go through.

Cloudane

@dunstonh thanks for that, much appreciated.

And yeah, on self interest, of course they do. I just mean it does need to be factored into what's said (say if their commission on a pension is better)

I have a lot to think about. There's the added complication that I think I should at some point (considering my age) try to move out of my parents. On the one hand, it's probably easiest to do that if I'm saving as much as possible that can be accessed quickly i.e. I would guess Cash ISA rather than locking it away in long term investments and not having enough left to save. On the other hand I shouldn't neglect retirement planning for much longer. On the whole I think I need a better paying job!