Stakeholder Pension 'V' ISA- Please advise!

thatmusicman

Any advice greatly appreciated!

I'm 27 years old and have been paying into a Scottish Widows Stakeholder Pension for 2 and a half years. I would like to know if I'd be better off paying into an ISA.

Here are some details.

I pay £1800 per year at present.
I'm a basic rate taxpayer.
I'm self-employed
I pay a 0.8% management fee to Scottish Widows.
The policy value at the moment is £5490.64.

Is this money now tied-up, or can I take it and put it into an ISA. I'm guessing it's tied up?

If I would be better off paying into an ISA and this money is tied up, shall I just leave it there stopping further payments, and then make future payments into the ISA.

Am I right in thinking that basic rate tax is added to your payments into a pension, and then you are taxed at the same rate on the income you are paid back at the end (although you get a 25% lump sum untaxed), and that with an ISA, they work out the same tax-wise, as none is added to your payments, nor is none taken away?

As you can probably see, I'm a little confused!

dunstonh

Is this money now tied-up, or can I take it and put it into an ISA. I'm guessing it's tied up?

It's tied up.

Am I right in thinking that basic rate tax is added to your payments into a pension, and then you are taxed at the same rate on the income you are paid back at the end (although you get a 25% lump sum untaxed), and that with an ISA, they work out the same tax-wise, as none is added to your payments, nor is none taken away?

Right on the pension. However, with ISAs you get no tax relief up front but no tax taken the other end.

From an investment point of view, there is no difference. The same investments are available on pensions as they are on ISAs and apart from inheritance tax, the same taxes apply (or dont apply) on pensions and ISAs.

You should be looking to do a bit of ISA and a bit of pension. As a self employed individual, you dont get all the state pensions. Just the basic (£4381 a year). So, you should be looking to use a pension to give you an income closer to £5,600 in todays terms as that is covers the nil rate allowance and 10% band in retirement. Once your pension is at that level, then you can look to ISAs (or adjust your premium now and split it between ISA and pension).

If you have children, then the pension will also be increasing the amount of tax credits you are getting back which in effect increases you tax relief (upto a possible 72%). The ISA would not do that.

EdInvestor

thatmusicman wrote: »

As you can probably see, I'm a little confused!

No you aren't. :)You've grasped it all very well.

Dunstonh is right about there being a tax advantage in there for the pension up to a certain limit: at retirement your personal allowance goes up to 7,200 and there's another 2k on top of that taxed at only 10%.

So a basic rate taxpayer can get pension income (which is usually taxable) tax free up to around the 9-10k level. As you won't get the state 2nd pension, being self employed, this gives leeway for around 4k-5k of personal pension income to be tax free. That would be a fund of around 120k. :eek:

BTW do not forget to sign up for the bargain Class 11 voluntary contributions for the basic state pension.They only cost just over 2 quid a week.:T As mentioned above you would have to save up a fund of at least 120k to get a similar income through a private pension these days.

thatmusicman

Thanks you both for the advice. Just a couple of queries!

What's the easiest way to calculate the monthly payments needed to attain the correct final fund? (Correct meaning, just the right amount to be tax free). I would imagine there is some guesswork involved as you don't know how your funds will perform.

Also by Class 11 contributions, did you mean Class 2 contributions? I pay these, and it costs around £8-80 a month.

EdInvestor

Very roughly, someone saving 150 pounds a month for 40 years @ 6.2% growth net of charges would end up with a fund of c.300k, which would buy an inflation-linked single life annuity of around 15k p.a.

But that's

a) not inflation adjusted
b) assumes the whole fund is spent on the annuity, ignoring tax free cash
c) doesn't include any provision foir a spouse's pension


On the other hand, as your tax allowance is already half taken up by the state pension, you are oversaving in the private one.As the ISA is a "use it or lose it" tax allowance, whereas the pension tax relief can be accessed later in your life w ith a lump sum when you might be on a higher tax rate and get motre benefit, I would suggest you divert the investment to using your S&S ISA for the time being. Make sure you go through a discount broker which will rebate the charges.