ISAs v Pensions: The Official Retirement Debate

Hazzinho

I'm sticking with an ISA, i would gain more in a pension but I'll die before i spend most of it, I'll be comfortable on my ISA, i want to be in a position i can blow the lot should i get bad news, you can't take it with you.

jamesd

Hazzinho wrote: »

I'm sticking with an ISA, i would gain more in a pension but I'll die before i spend most of it, I'll be comfortable on my ISA, i want to be in a position i can blow the lot should i get bad news, you can't take it with you.

From a pension pot in drawdown you can normally take out 100% of the pension pot value if you have a medical diagnosis saying that there is a high chance that you will die within a year.

If that doesn't happen, you can put money into a personal pension and start income drawdown at age 55, investing the income and lump sum outside the pension, say in an ISA. Retire at say 65 and you've ten years of income and perhaps 6% x ten years x 75% (the part within the pension) plus 25% of the capital as lump sum extracted from the pension already before you retire. That's 70% of the total capital at age 55 extracted. And 70% means that with tax relief on the way in you've already got out almost all that you paid to get it in there, even if there were no employer contributions.

You won't have got it all out because there will have been capital growth along the way and the GAD limit might eventually restrict how much you can take out but you can easily end up taking out more than you put in after a while.

mickeypops wrote: »

we all have a £10.6K CGT annual allowance, so it would be a very hefty gain to be realised before any CGT was payable in any year.

That amount isn't necessarily a hefty gain. Depends on how much is invested. A hair over 10% gain for someone with £100k in the wrapper.

My age 40 case was forced early retirement due to inability to work, or voluntary early retirement. Similar for 55.

mickeypops wrote: »

(Don't forget that CGT is payable only when the capital gain is "realised", i.e. cashed in, not when it's a "paper" gain.) Really, it is only in a minority of cases, I believe, that S&S ISAs hold any real benefit over making the same investments outside an ISA.

There may be no CGT to pay after using the CGT allowance but outside the ISA you still need to track every purchase and sale so you can prove your calculations. No need for that paperwork within the ISA.

For pure income generation the pension is better but the capital access trade off can make a mixture best. A 40% tax payer in a salary sacrifice scheme getting their full employer's saved NI and their employee NI added can do pretty well from a pension though:

Pay in £10,000, get 15.8% NI added, so £11,580 in the pension. Take 25% lump sum and you have £2,895 lump sum that you can put into an ISA plus £8,685 to generate taxable income, vs just £6,000 that you could have in an ISA for the same after tax cost. A bit over twice the lump sum in the ISA but way more income generating potential from the £11,580 pension combination.

If you want to retire at say 60 and start drawdown at 55 you can even out the capital availability difference by either saving the pension income or reinvesting it to get more pension tax relief and another lump sum.

dunstonh

I'm sticking with an ISA, i would gain more in a pension but I'll die before i spend most of it, I'll be comfortable on my ISA, i want to be in a position i can blow the lot should i get bad news, you can't take it with you.

So, pension & IAS seems to be the best option on that objective. Not ISA by itself.

stephenong85

If you're self employed what is the better option?

I have neither a pension nor an ISA, I have been self employed for two years now, just had a busier year, so looking to invest.

I don't get any contribution from my employer, as I don't really have a permanent one. I work for a few companies but they're on short term contracts so I guess I can't get a pension with them?

I'm looking to invest £5k in the next couple of weeks, before end of tax year. Is an ISA better for self employed or should I start a pension?

I'm a relatively low earner, 2013 £35k, 2012 £20k. I'd say the rough amount I would earn a year is going to be between £20k - £40k so never really in higher tax band.

Sorry if this has already been answered, I used the search but could only find this thread and it's pretty long.

dunstonh

If you're self employed what is the better option?

Historically as pension as the self employed get a lower state pension and therefore have more personal allowance to use up.

jamesd

The pension offers three major advantages for you as a self-employed person:

1. Protected from insolvency and any other creditors, so it's safe even if there's an accident where you are liable and your insurance doesn't pay out for some reason.
2. Tax relief on the way in, but not taxed up to the personal allowance on the way out, so a tax gain there that is bigger for a self-employed person than others.
3. The 25% tax free lump sum.

MEM62

Forum Members,
I am at that age (50) where I am giving more thought toretirement planning. With that in mind Irecently received a statement for my company pension. This particular scheme I have only been infor a few years since joining this company. The valuation and projections give me some cause for concern and I amnot sure whether this is a lack of understanding on my part. The facts are as follows;
Current FundValue £11,737
Current MonthlyContributions (total) £348.08

ProjectedFund Value at 65 £74,302
Projectedpension £2,530 pa

Thesefigures throws up so many questions for me.

Firstly, andmost importantly, on this basis and using a 25-year post retirement life-span,which I believe most annuities are based on, I will actually get back less thanwas paid in. The current value is £11737and at the current level I will contribute a further £59,174 in the fund beforeretirement. So without any growth on the investment the fund would be£70,910. If that money was ‘under the mattress,it would give me £236 per month for 25 years - again without taking intoaccount any investment growth / interest. My projected pension return is £210 per month.

Also, inrespect of the fund itself, the projected figure at retirement is £74,302. If I put the remaining contributions of £348 per month into an ISA returning 3%the value at retirement would be £79,618; which is more than the projectedvalue of my pension pot even without adding the £11K that is already in there.

OK, I am nottaking the tax element into consideration and I do understand that it is notcosting my pocket the full £348 pounds each month but either way £348 per monthis going into the pension and on the face of it is far from a good investmentin respect of the way that the fund is projected to grow and the return I willbe getting at the end of it. Am I missing something here?

Linton

MEM62 wrote: »

Forum Members,
I am at that age (50) where I am giving more thought toretirement planning. With that in mind Irecently received a statement for my company pension. This particular scheme I have only been infor a few years since joining this company. The valuation and projections give me some cause for concern and I amnot sure whether this is a lack of understanding on my part. The facts are as follows;
Current FundValue £11,737
Current MonthlyContributions (total) £348.08

ProjectedFund Value at 65 £74,302
Projectedpension £2,530 pa

Thesefigures throws up so many questions for me.

Firstly, andmost importantly, on this basis and using a 25-year post retirement life-span,which I believe most annuities are based on, I will actually get back less thanwas paid in. The current value is £11737and at the current level I will contribute a further £59,174 in the fund beforeretirement. So without any growth on the investment the fund would be£70,910. If that money was ‘under the mattress,it would give me £236 per month for 25 years - again without taking intoaccount any investment growth / interest. My projected pension return is £210 per month.

Also, inrespect of the fund itself, the projected figure at retirement is £74,302. If I put the remaining contributions of £348 per month into an ISA returning 3%the value at retirement would be £79,618; which is more than the projectedvalue of my pension pot even without adding the £11K that is already in there.

OK, I am nottaking the tax element into consideration and I do understand that it is notcosting my pocket the full £348 pounds each month but either way £348 per monthis going into the pension and on the face of it is far from a good investmentin respect of the way that the fund is projected to grow and the return I willbe getting at the end of it. Am I missing something here?

I would guess that the projected numbers are based on current prices. 2.5% inflation over the next 15 years would multiply the cash amounts by 1.44. Suggest you look at, and tell us, the stated assumptions on which the projection is based.

MEM62

Thanks for the suggestion. I have looked at the assumptions and also compared them to two othervaluations I also recently received. (These are pension pots from a previous employment) Yes, they are stating that the pension illustrationis showing what the values would be in today’s terms and are predicting aninflation rate of 2.5%. However, fromthe documentation, it is unclear to me as to whether the estimated total fund valueis in today’s terms or an actual figure so I have contacted the pension co toask.

I guess it would be difficult to predict what annuity rateswill be when I retire in 14 years or so but, taking the current prediction ofan annual income of £2,530 pa in today’s terms at face value, I would still begetting less out of the pension than was paid into it.

I will let you know what the pension provider says when theyget back to me.

Jack_Griffin

Historically Inflation rates have been much higher than this.. I make my projections on 4%, that is cautious I know.. but I think risk taking for retirement is a stupid idea.

Below the full historical data
http://www.whatsthecost.com/historic.cpi.aspx

Look at what happened in the 70's, you have been warned!