ISAs v Pensions: The Official Retirement Debate

dunstonh

Because of the needfor transparency, my IFA tells me they are wanting 0.5% per month to look afterthe fund. This means they will earn an equivalent amount to me.

How is 0.5% an equivalent amount to you? You are getting £1000pm. The IFA will be getting £750 a year.

Am I being naïve in thinking I could set this up myself andso avoid the 0.5% fee

You do not have to use the IFA. However, you will have to run your own investments, rebalance them and comply with the three year review. You may save some of the £750 a year but not all of it.

thus receiving a pension of £2000 per month

This is where you are going wrong. You will still get £1000pm.

or would “hidden” fund chargesmaterialise elsewhere before I receive my pension, giving me the £1000 permonth anyway?

If you use a bundled provider, like Hargreaves Lansdown, then you wont save any money as they keep the 0.5% p.a. for themselves. You would expect to pay something to the provider in that sort of range. or other explicit charges.

which if I am honest, I probably couldn’t do effectively.

If you know the investment strategy you will use and are willing to put in the time to research and review and rebalance then you can DIY. It may save a little, it may save nothing. It may cost you more. First thing for you to understand though is that £750 a year is not the same as £1000pm.

Withergee

Thank you Dunstonh for your response.
Sorry if the sums didn't add up, they were meant as approximate illustrations. I was more interested in whether I could expect to pick up more from the pension if I managed the fund myself, which as I said, I couldn't do.
Your insight is appreciated.

jamesd

Withergee wrote: »

Because of the needfor transparency, my IFA tells me they are wanting 0.5% per month to look afterthe fund.

The meaning of 0.5% in IFA literature is usually 0.5% per year, not 0.5% per month. If it's per month on a £200,000 pension pot, you need a different IFA.

You could save that 0.5% if you were able to manage the investments yourself.

At 0.5% charging on the £200,000 you'd be getting something between £8,000 and £12,000 a year and the IFA firm £1,000.

It is worth considering whether the IFA firm getting between 12.5% and 8.3% of your own income level would be a good deal or not.

It might be possible, say, for them to set up an automatic rebalancing facility offered by some platforms and review only once every three years for a fixed charge every three years instead of ongoing annul reviews.

omits

Has anyone done the real and actual figures behind saving into a pension fund (and thus getting tax relief on it) and all its charges over the years compared with DIY in ISAs (where at the end of the day ALL the money is yours)? Whereas being forced to use a pension provider with the pension pot means you never actually get your capital back and they keep it when you die!

jem16

omits wrote: »

Has anyone done the real and actual figures behind saving into a pension fund (and thus getting tax relief on it) and all its charges over the years compared with DIY in ISAs

Nowadays the exact same investments with the exact same costs are available for both ISAs and pensions so the only difference is the tax.

It really shouldn't be one or the other, it should be both used to maximise all tax benefits.

Thrugelmir

omits wrote: »

compared with DIY in ISAs (where at the end of the day ALL the money is yours)?

What do you intend doing with your ISA when you retire?

Risky strategy holding shares for income. BP was a clear demonstration of that.

Now its Vodaphone that tops the dividend paying list. Vodaphone admits to be under regulatory pressure in a number of countries it operates. so the golden goose may not lay eggs for ever.

Ten shares now account for 50% of FTSE 100 total dividend income. So little to choose from.

At least an annuity guarantees a secure return.

dunstonh

Has anyone done the real and actual figures behind saving into a pension fund (and thus getting tax relief on it) and all its charges over the years compared with DIY in ISAs

Yes. it is identical as ISAs and pensions share virtually the same investment options and charges. You would end up with a value that is only different by the tax relief.

Whereas being forced to use a pension provider with the pension pot means you never actually get your capital back and they keep it when you die!

You are 20 years out of date on pensions. If you die before retirement then the whole fund is paid out tax free. If you die after retirement and using unsecured income option (which you would if you want to compare to ISAs) then the fund can be passed on to spouse and children.

fairleads

dunstonh wrote: »

Yes. it is identical as ISAs and pensions share virtually the same investment options and charges. You would end up with a value that is only different by the tax relief.

But in retirement the isa option, (and for that matter un-isa'd investments) provides for tax free capital gains that can be used for any purpose, whereas gains made in your drawdown fund are not only taxable, but your access to them is limited by the GAD rate.



You are 20 years out of date on pensions. If you die before retirement then the whole fund is paid out tax free. If you die after retirement and using unsecured income option (which you would if you want to compare to ISAs) then the fund can be passed on to spouse and children.

And taxed at the recipients marginal rate.

dunstonh

But in retirement the isa option, (and for that matter un-isa'd investments) provides for tax free capital gains that can be used for any purpose, whereas gains made in your drawdown fund are not only taxable, but your access to them is limited by the GAD rate.

But the fund is higher as you had tax relief and you get to use up some of your tax free personal allowance which an ISA would not do.

Yes you can erode your ISA pot quicker than a pension but most people would not want to do that.

jamesd

With a 15 year gilt rate of 2% for a male aged 55 the GAD limit is 4.1% of the pension pot value. For a person paying basic rate tax in retirement here's how that limit compares to ISA income, after tax, with 6% of the pot as desired income, for a £10,000 gross deposit.

Starting with higher rate on the way in.

ISA (40% tax before paying in): £6,000 pot, 6% tax free income is £360.

Higher rate 40% in 20% out: £10,000 pot, 6% taxable income is £600, GAD limit caps to 4.1%, £410, after basic rate tax is £328. The other £190 accumulates in the pension pot. Takes a 4.5% GAD limit to allow taking same after tax income, which is possible at age 55 with 2.75% gilt yield or at age 59 with 2% limit.

But that calculation isn't the most sensible one. Better to take 25% tax free lump sum and put that in an ISA and take income from both. Then the calculation is £7,500 pension pot, GAD limit caps to 4.1%, £307.50, after 20% tax is £246. For the ISA portion pot is £2,500, 6% tax free income is £150. Total after tax and tax free income is £246 + £150 = £396. 10% higher than paying money initially into the ISA.

Now on to basic rate before and after retirement, assuming no salary sacrifice and no employer contribution:

ISA (20% tax before paying in): £8,000 pot, 6% tax free income is £480.

Basic rate 20% in, 20% out: £10,000 pot. GAD limit caps income to 4.1%, £410 gross, £328 after tax. ISA pays 46% higher income. The remaining £190 of 6% gross remains in the pension pot. Takes a 4.8% GAD limit to match the after tax income level, available at age 55 with 3% GAD limit or age 62 with 2% limit.

As before, that's not the most sensible way to do it, so taking the 25% lump sum instead. £7,500 pension pot produces 4.1% available income, £307.50, after 20% tax is £246. The £2,500 ISA pot from the lump sum produces £150. Total after tax and tax free income is £246 + £150 = £396. Direct contributions into the ISA allow 21% higher income.

Notice the huge difference between higher rate and basic rate cases: 10% higher with pension for higher rate tax paying in, 21% higher with ISA with basic rate on the way in.

But also note that this is with a 2% gilt yield, the lowest one used for GAD calculations, which will be a record low if it's hit, as appears possible. A more normal yield is 4.5% or so.

dunstonh, I have a salary sacrifice pension scheme with 50% employer NI split. Access to capital at a fast enough rate to get and maintain a level income before and after the state pensions start is why I have to use ISAs or other non-pension wrappers. If I could achieve the income target I'd be using the pension. The state pensions will be something like 40% of my target minimum income so replacing them takes a substantial amount of capital drawing until they start. The GAD limit is a huge factor against pension use in my retirement income planning, one that also restricts how early I can retire and which reduces my retirement income level, because I can't use pension tax relief on part of the money.