ISAs v Pensions: The Official Retirement Debate

dustyjack

Oh crikey - quite a long section this one - in a nutshell, a bit of both (ISA's & pensions) would be my choice.

zolablue25

dunstonh wrote: »

Benefits of pension

1 - tax relief on contributions
2 - no inheritance tax to pay if you die before retirement as lump sum is outside of estate
3 - on death before retirement, the death benefits (value) will be 22% higher than an ISA
4 - not accessible until 55 (from 2010). Double edged sword for some but some need the tie in.
5 - contributions can increase your working/childrens tax credits received giving upto a potential equivalent of 72% tax relief

I appreciate that this is from an old post and things might not be the same now, but can you explain how (or if) point 5 works?

Thanks

dunstonh

I appreciate that this is from an old post and things might not be the same now, but can you explain how (or if) point 5 works?

The figures are out of date but the concept behind them is the similar. Pension contributions reduced your declarable income for working/childrens tax credits. The lower the income you have, the more credit you get.

e.g. someone earning say £50k a year but pays £20k in a pension would have been treated as earning £30k for tax credits.

zolablue25

Sorry, taking this thread off topic. Transferred to own thread.

Ilya_Ilyich

Is there a rule of thumb for determining what proportion of your pension fund you'll actually be able to access over your lifetime after allowing for GAD maximums/income tax? i.e. as you can only ever take a percentage of your fund (of which some/most will be taxed) you'll end up with some/most of your fund still invested when you die -- is there some rule of thumb for how much will be 'left over' in this way or do I have to just model it?

EternallyGrateful

Ilya_Ilyich wrote: »

Is there a rule of thumb for determining what proportion of your pension fund you'll actually be able to access over your lifetime after allowing for GAD maximums/income tax? i.e. as you can only ever take a percentage of your fund (of which some/most will be taxed) you'll end up with some/most of your fund still invested when you die -- is there some rule of thumb for how much will be 'left over' in this way or do I have to just model it?

IMHO the only rule of thumb that would apply is one based on people who match your personal criteria.
Also, with the greater flexibility there is today I don't think looking at 'history' would be that reliable either.
Personally, I am currently making my decisions (I am 60 next year) based around my personal circumstances along with the aid of my IFA.

fairleads

Ilya_Ilyich wrote: »

Is there a rule of thumb for determining what proportion of your pension fund you'll actually be able to access over your lifetime after allowing for GAD maximums/income tax? i.e. as you can only ever take a percentage of your fund (of which some/most will be taxed) you'll end up with some/most of your fund still invested when you die -- is there some rule of thumb for how much will be 'left over' in this way or do I have to just model it?

It has to be modelled. However, according to what i've seen for DDown, if you start it at age 60, and need your income to grow at 3% p/a, you'll need a growth rate of at least 7% p/a to provide a decent income stream. Unfortunately, there is a more than even chance that your income could still 'fall off a cliff' after 30 odd yrs.

atush

Paul_Herring wrote: »

You're missing my point - the speculation is they'll bundle NI into income tax, so no-one gets charged NI any more - they all simply pay (loosely based on today's rates) 31% basic rate, 51% higher rate, income tax on ALL income, regardless of age.

Meaning that both groups I mentioned will end up paying more tax - without age-related allowances, you can't separate them.

(My example rates also miss the finer points of NI where it tapers, and doesn't include, at all, employer's NI.)

Not missing your point, just saying what i personally would be willing to back.

kylehp04

I definitely believe that in this day and age people are more likely to go for the ISA. Since the recession we all prefer having a bit more control over our finances and with an ISA its much easier to add a bit more one month and a bit less on others and monitor the progress.

I would go with ISA but that's just my opinion.

dunstonh

kylehp04 wrote: »

I definitely believe that in this day and age people are more likely to go for the ISA. Since the recession we all prefer having a bit more control over our finances and with an ISA its much easier to add a bit more one month and a bit less on others and monitor the progress.

I would go with ISA but that's just my opinion.

You can do that with pensions if you want.