ISAs v Pensions: The Official Retirement Debate

david6508

Hi Everyone i am newbie here i hope you will be fine , i did recently join this forum .The problem with ISAs was the determined to dip into before retirement, so I find out the rule - keep money into a pension first and then The pension fan can be ideal for the higher rate taxpayer who will be a basic founder rate taxpayer in retirement. 60% relief going in and 27% coming out.t money into an ISA.!!!

N1AK

I've seriously considered stopping my pension payments. My conclusion was that the employer matching makes it worthwhile but I wouldn't contribute beyond that.

It will be around 40 years until I retire. The risk with a pension is that the benefits, taxes etc related to this can change and you're reliant on the provider and nation to ensure you receive it. Savings/investments are certainly not immune to these kinds of risks; however you do have more control and can spread those risks more easily.

The big advantage of a pension (or an endowment generally) is that it acts as insurance. If you have enough money that you cannot possibly imagine living long enough that it will run out then live off of it; however unless you do, relying on savings means trying to estimate how long you have left and what you need to keep back.

dunstonh

It will be around 40 years until I retire. The risk with a pension is that the benefits, taxes etc related to this can change and you're reliant on the provider and nation to ensure you receive it. Savings/investments are certainly not immune to these kinds of risks; however you do have more control and can spread those risks more easily.

Pensions have can utilise most conventional assets. Modern pensions can access over 27,000 different types of conventional investments from cash right through the scale to more adventurous options. You have just as much investment control on a pension as you do an ISA.

N1AK

If the risk your concerned about is that 20 years from now your pension provider might fail, and the country may not be in a position to support it then it is a risk not shared with savings. Also if I wishes to use the money, for example to found my own business, then I would be unable to do so if it is in a pension. The government may also change the rules on pension tax/allowances in a way that penalises you, without you being able to do anything.

I'm not anti-pensions; I just think that if you're not getting something in return for using a pension (like an employee contribution) then the benefits are nominal and outweighed by the downsides.

dunstonh

If the risk your concerned about is that 20 years from now your pension provider might fail, and the country may not be in a position to support it then it is a risk not shared with savings.

Investments generally have greater protections than savings. The fact it is in a pension wrapper or an ISA wrapper or unwrapped makes no difference. If the pension provider fails it doesnt matter in most cases as the pension provider has no access to your funds to pay their debts and the assets are ringfenced.

lso if I wishes to use the money, for example to found my own business, then I would be unable to do so if it is in a pension.

Which is why you have savings. Pensions are for retirement. Not for now and near term.

The government may also change the rules on pension tax/allowances in a way that penalises you, without you being able to do anything.

Yes. Legislative risk is an issue with any tax wrapper. Governments do tend to play around with pensions too much. However, fundamentally, the main rules haven't changed in 40 years. Most of the changes have actually improved things.

I'm not anti-pensions; I just think that if you're not getting something in return for using a pension (like an employee contribution) then the benefits are nominal and outweighed by the downsides.

And I am not pro pensions. I treat pensions just as I would any other tax wrapper. Today, pensions are no longer a product. They are a tax wrapper which has the same investment options and charges as other tax wrappers or unwrapped. The only difference is the tax and maturity/withdrawal process. Pensions are useless for capital provision but are still typically best for income provision. That is what the pension is there to do. So, it should not be a surprise. A basic rate taxpayer without employer contribution doesnt get much of a gain over S&S ISA but there is still a gain.

If you can manage your finances well and not be tempted to take money out earlier then S&S ISA can often be the better option for some. For most people, a bit of both is the best option.

N1AK

dunstonh wrote: »

Which is why you have savings. Pensions are for retirement. Not for now and near term.

Savings can also be used for retirement, having a pension simply loses you some flexibility on how you can use the money; which was my original point.

If you have savings & a pension, you have by definition, less savings than you would without a pension. If that difference stops you from pursuing an opportunity then it would materially decrease your wealth. Pretending that everyone can have a pension pot and effectively infinite savings, to be able to pursue any opportunity, isn't realistic.

somethingcorporate

N1AK wrote: »

If you have savings & a pension, you have by definition, less savings than you would without a pension. If that difference stops you from pursuing an opportunity then it would materially decrease your wealth.

Assuming that opportunity would increase your wealth, people can also lose as well as make millions investing in an "opportunity" whether this be a business or whatever.

Your post assumes that any opportunity would guarantee a better performance than having money in a pension, which simply may not be true.

Paul_Herring

N1AK wrote: »

If you have savings & a pension, you have by definition, less savings than you would without a pension.

Yes, but if it's in a pension there will usually be 'more money' in total than if you'd put it in savings (employer's contributions, NI/income tax not paid etc.)

spexs

dunstonh wrote: »

However, fundamentally, the main rules haven't changed in 40 years. Most of the changes have actually improved things.

I cannot agree with this. Gordon Brown's change to the tax credit system in 1997 was a mega adverse change and certainly didn't improve things.

dunstonh

Gordon Brown's change to the tax credit system in 1997 was a mega adverse change and certainly didn't improve things.

It made no difference to pension terms. It impacted on investment returns but it did that across the tax wrappers and unwrapped and not just pensions.