MSE News: Pension system 'too complex'

jem16

ani_26 wrote: »

There's no comparison between pensions and isa's. You're talking about two completely different products, here. I wouldn't ever class an isa as an alternative pension fund. Isa's are a higher rate of interest, tax free, instant access saving mechanism, for those who are in the fortunate position of being able to save. You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%. I can remember the days when it was 12%, and thats a compounded AER.

ISAs can be an alternative to a pension but it is not the cash ISA but a S&S ISA. With a S&S ISA the only difference is how the tax is handled.

CLAPTON

ani_26 wrote: »

There's no comparison between pensions and isa's. You're talking about two completely different products, here. I wouldn't ever class an isa as an alternative pension fund. Isa's are a higher rate of interest, tax free, instant access saving mechanism, for those who are in the fortunate position of being able to save. You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%. I can remember the days when it was 12%, and thats a compounded AER.

Lets face it , there isn't enough money in the pot for state pensions, with the growth of the population, people living longer, etc, etc, and HMG wants us all to take responsibility and provide for our retirement. However, they will penalise us by whatever means they can, along the way.

how is allowing tax relief on pension payments 'penalising' you?

gadgetmind

jem16 wrote: »

ISAs can be an alternative to a pension but it is not the cash ISA but a S&S ISA. With a S&S ISA the only difference is how the tax is handled.

I regard a health crop of S&S ISAs as being a useful adjunct to a pension as they provide income flexibility that can be used to bridge gaps to both private and state pensions coming on line.

If I remove private pensions from my planning speadsheets, and instead save into ISAs using the meagre amount remaining after tax, then I'd be worse off in retirement. Similarly, if I delete the ISAs, my situation is also negatively impacted.

Of course, I also have NS&I linkers and cash layered at different access periods.

People need to look at the whole dish rather than focussing on a single ingredient.

jem16

gadgetmind wrote: »

People need to look at the whole dish rather than focussing on a single ingredient.

Totally agree.

I use pensions as I have a defined benefit scheme plus also have a SIPP to mop up any 40% tax. I then use S&S ISAs, unwrapped investments (which are bed&ISAd each year) plus index linked certificates and ordinary cash accounts.

jamesd

ani_26 wrote: »

There's no comparison between pensions and isa's. You're talking about two completely different products, here. I wouldn't ever class an isa as an alternative pension fund. Isa's are a higher rate of interest, tax free, instant access saving mechanism

If you're writing solely about cash ISAs there's a little bit of truth there. A cash ISA and a pension with the money invested in a deposit account would still be very close to a cash ISA in risks and returns, though, and savings accounts are permitted investments inside a pension.

ani_26 wrote: »

You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%.

Of course you can. An ISA can hold unit trusts and such, just as a pension can. You do need to use the stocks and shares ISA version and not stick to just the cash ISA for this.

Because of the flexibility of the capital access and rate at which money can be drawn, investments within an ISA are often an excellent substantial part of planning for retirement income in conjunction with a pension. As well as achieving pension levels of growth they provide protection against the possibility of higher income tax rates in the future because there's no tax to pay on income.

ani_26 wrote: »

Lets face it , there isn't enough money in the pot for state pensions, with the growth of the population, people living longer

This is being taken care of with changes to the state retirement age and a range of other measures. There will still be some increase in tax burden, peaking in the 2040-2050 sort of range when the retired baby boomer generation is at its peak and the working population near its lowest.

One other remedy is to seek a significant increase in immigration from those who are under thirty years old because those people, immigrating gradually over the next twenty years or so, will still be earning and paying taxes during the peak need time for workers. So they will help to smooth the difference in generation sizes.

gadgetmind

ani_26 wrote: »

There's no comparison between pensions and isa's. You're talking about two completely different products, here.

No, you're talking about two different tax wrappers.

Isa's are a higher rate of interest, tax free, instant access saving mechanism, for those who are in the fortunate position of being able to save. You're never going to get the return you would by having a pension fund, lets face it, with the highest interest rate on an isa currently running at 3.50%.

The only part of that statement that's accurate is "instant access". I have pensions and ISAs with *exactly* the same underlying assets, so they will increase and decrease in value in exactly the same way. Never ever confuse tax wrappers with asset allocations.

As for "tax free", pensions are better on the way in, and ISAs better on the way out. People need to understand and model their own situation, and that of their spouse, and plan accordingly.

RenovationMan

gadgetmind wrote: »

As for "tax free", pensions are better on the way in, and ISAs better on the way out. People need to understand and model their own situation, and that of their spouse, and plan accordingly.

Not always the case, especially for high rate taxpayers who receive 40% tax rebate on the way in and, in most cases, will pay 20% on the way out. Even for basic rate tax payers, they can withdraw 25% completely tax free and have a pension income largely free from tax (depending on how large the pension income is).

gadgetmind

RenovationMan wrote: »

Not always the case, especially for high rate taxpayers who receive 40% tax rebate on the way in and, in most cases, will pay 20% on the way out.

Sadly, that 40% is subject to lifetime and annual caps, there are threats to the 25% lump sum, and the age related allowance can mean that pension income is taxed at 30%.

But yes, pensions tend to have tax advantages (and enjoy employer contributions and NI boost) whereas ISA are more flexible.

I have both and would part with neither!

jem16

gadgetmind wrote: »

and the age related allowance can mean that pension income is taxed at 30%.

That will be going soon.

ani_26

Well, that proves a point.

It just goes to show how much the ordinary person doesn't know about pensions.