ISAs v Pensions: The Official Retirement Debate

woodhouseian

I think there's an important point here that hardly ever gets mentioned, although someone hinted at it earlier.

Saving for retirement means depriving yourself of money now. If you go too far with that it's actually bad thing, ie you owe it to yourself to have a reasonable lifestyle etc throughout your life, not just in retirement. There's no point in suffering to much now unless you're happy with the sacrifices.

This also brings me back to one of the big advantages of an ISA, namely the freedom to use it when you see fit. I know people talk about the restrictions on spending pensions as if they are a good thing (avoid temptation etc). But surely they're a bad thing as well? If we're talking about similar total net amounts from ISAs and pensions (and I think we've established that basic rate taxpayers have no net gain or loss in tax from a pension), and a very similar product in other respects (stock market based, monthly contributions etc), why accept the other strings that come attached to pensions, eg unable to claim until you're 55 etc etc?

By the way, can I put in a plea for those of us who basic rate tax but have a reasonable amount available for retirement savings? The tax system etc does not really seem to consider us..we're too well off to get certain state benefits etc, but not well off enough to get decent tax relief on our savings. (Can't say I expect much sympathy by the way!)

competitionscafe

Starting as early as possible, even if the monthly amount saved is very small does give you a massive advantage from what I have read - eg: starting at 20 instead of 30. In fact I think you can start a stakeholder pension for a baby - so if do that it would give your child a big headstart...and they wouldn't be tempted to blow it on a car when they turn 18 like they would with the child trust fund

I only started paying into a pension at around 30, but then before that I was at uni and before that on mimimum wage (before there was one, but I mean on carp wages that basically only allowed you enough money for rent, food and clothing and the occassional night out) plus a period of time unemployed and also was in a YMCA hostel where you got about a fiver a week from your benefit (they took the rest for food) and no lunch or evening meals at a weekend so basically five quid for your weekend food plus any other weekly expenses like laundry, bus fares, etc. Would have found it very difficult to pay anything then so kudos to you Paul for keeping up your monthly payments regardless....

EdInvestor

By the way, can I put in a plea for those of us who basic rate tax but have a reasonable amount available for retirement savings? The tax system etc does not really seem to consider us..we're too well off to get certain state benefits etc, but not well off enough to get decent tax relief on our savings.

What's wrong with the ISA then? 7k a year isn't bad for your cash bonds and property investments. You can invest direct into shares or equity funds and get effectively tax free divis and capital gains - the CGT tax free allowance is nearly 9k a year.

I'd say the tax environment is quite encouraging for basic rate investors :)Tax is optional.

woodhouseian

As I said, I didn't expect much sympathy...I consider myself suitably..erm.. unsympathised..

anniecave

competitionscafe wrote:

I don't see how cash ISA returns will beat equities over the long term - and saving for retirement is a long-term investment (whether via a personal pension or equity ISA wrapper).

As this chart shows, equities have far outperformed cash over the last 3 years, throughout the 90's and over the very long term (since 1900):
http://uk.standardlifeinvestments.com/content/data/press/press_articles/financial_adviser_06_2006.html

"It is worthwhile therefore to examine the very long term, which can smooth out the effects of cycles in business activity or inflation rates. We can compare market returns since 1900; the average annual nominal return for equities, gilts and cash, was 11.5%, 6.0% and 5.1%, respectively."

I'd agree with this. But I'm risk averse. I like the fact that if I put my £3000 in a cash ISA I will get it all back. Equities look good, but I know people who have lost lots by investing in them.

competitionscafe

anniecave wrote:

I'd agree with this. But I'm risk averse. I like the fact that if I put my £3000 in a cash ISA I will get it all back. Equities look good, but I know people who have lost lots by investing in them.

True, but it depends on how long you would be keeping the money in a cash ISA - if it's over 10 years or more then I think it's highly unlikely you would be worse off in equities.

Of course there is a wide range of equity classes as well - anything from a (relatively) lower risk UK equity fund like Perpetual income/high income to funds investing in biotech, China, emerging markets, etc. And that's just by spreading your money amongst a large number of shares by buying a managed fund - individual shares are obviously another aspect with everything from FTSE 100 companies to tiddlers on Aim.

I learnt the hard way that my share picking knowledge leaves a lot to be desired; but have done quite well short term and longer term by selecting funds (and therfore letting someone else choose which shares to buy). Having said that there are some funds which have taken a decade to show a reasonable return while others have doubled or more in just 3 years. That also illustrates the timing issue - mid 2003 was (in hindsight) a fantastic time to invest a lump sum, while now perhaps isn't? Anyone, (like me) who had money in tech stocks in 1999/2000 and didn't sell before the markets plumetted will be well aware of just how far equities can fall, but I still wouldn't rule out a balanced spread of asset classes (including equities) for long term investment.

jamesd

anniecave, then don't use equities, or use them in moderation. Take a look at these non-equity examples where the h-l charts compare the fund to the UK stock index:

• Norwich Property Trust (h-l) from Property all regions BI - real property uk
• Baillie Gifford High Yield Bond(h-l) from fixed interest - UK junk bonds

Notice that they didn't dip much when the stock market went down? Put most of the money in those two market sectors (commercial property and bonds - though the bond fund is high risk as bond funds go) and add in say 20-30% of more variable ones, things like these, which are very volatile by comparison:

• Jupiter Fund of Inv Trusts from global growth
• Old Mutual UK Select Smaller Companies Fund from UK smaller companies - closed to new money

This isn't a complete selection of market sectors but you can probably see how you can mix the lower risk first two examples with the higher risk second two examples to get a blend that suits you.

Do note that these are just the funds I've picket to use as examples, they aren't specific recommendations and one isn't even available for sale normally any more.

EdInvestor

woodhouseian wrote:

As I said, I didn't expect much sympathy...I consider myself suitably..erm.. unsympathised..

Having said that, you're dead right about the pension system.

How the Government can justify handing out all the perks of pensions to higher rate taxpayers (especially the 18% rebate for PPs which is not even locked into the pension!) and treating those on basic rate so disgracefully I can't understand.:mad:

I suppose they would say that basic rate taxpayers should use the ISA system, not pensions.And they'd be right.

Foxy1075

The problem with ISA's is that they are only guaranteed to be around till 2010. Not really long term saving is it?!

EdInvestor

The Government recently announced it was committing to ISAs on a long term basis.