Pension/ISA Question

Marvel_2

Probably an obvious question but just want to be sure before I do anything rash. I've got a personal pension through work which I pay into, the company tops up and I pay AVC's. I've also got a cash ISA with some money in. I'm coming up 52 and would retire tomorrow if could. Am I correct in saying that if I pay a lump sum into the pension this gets topped up at my income tax rate. If it is why should I keep any money in the ISA (except for emergencies) earning a paltry 3% when I could get an instant 20%. I appreciate it would be tied up until I'mm 55 but that's not long for me. And I could then take out 25% tax free. It seems to me that I should be putting every spare penny into my pension.

mania112

that's true, you should. Although don't forget, after your tax free cash the annual income will be taxed (probably at 20%) and there's a [good] chance you will die before you've received all the money you put into it (if you're married that's less of a problem because it will be passed on).

In terms of the priority of where your money should go, here's the order:

1. Protection
2. Income Protection
3. Pension
4. Savings
5. Investments

- not a hard and fast rule, but start from the top and work your way down (you can see a Pension has priority over an ISA)

dunstonh

Am I correct in saying that if I pay a lump sum into the pension this gets topped up at my income tax rate.

If you are a basic rate taxpayer then yes. It works slightly differently if you are higher rate.

If it is why should I keep any money in the ISA (except for emergencies) earning a paltry 3% when I could get an instant 20%.

Different maturity process which may or may not be suitable for you. Pensions are good at paying income but lousy for capital provision. ISAs are good at having capital available but lousy for paying income.

The other option is S&S ISAs where the benefit of pensions is not as great and S&S ISAs may be better. There is a sticky at the top of the forum that higlights the pros and cons. Its getting on a bit so allowances have moved on and changed but the concepts are much the same.

Linton

As mania says the benefit of tax refund when money goes into a pension is mainly taken back when the money being paid from the pension is taxed. So the net tax benefit is in the 25% tax free lump sum.

There may be a reasonable chance you will lose out by receiving less than you paid in, but there is also a reasonable chance (admittedly slightly less) that you will make a profit on the deal. In the former case you wont know its happened 'cos your dead, in the latter case you are doubly happy - you've lived a long life and taken money from an insurance company!

Also disagree that income protection is more important than a pension. Income protection with a high probability wont be needed except as a temporary measure whereas you will with a high probability live beyond the time when you want to stop working.

dunstonh

Also disagree that income protection is more important than a pension. Income protection with a high probability wont be needed except as a temporary measure whereas you will with a high probability live beyond the time when you want to stop working.

Oh the debate you can have on these is extensive and there is no right or wrong.

1 in 5 men will not make retirement. Yet most people take out life assurance to cover that 1 in 5 event but the 4 in 5 typically have insufficient retirement provision despite being more likely to need it than life assurance.

mania112

Linton wrote: »

Also disagree that income protection is more important than a pension. Income protection with a high probability wont be needed except as a temporary measure whereas you will with a high probability live beyond the time when you want to stop working.

fair enough, but I can't claim to be the creator of the 'PIPSI' acronym - I read it in a book :P

dunstonh

mania112 wrote: »

fair enough, but I can't claim to be the creator of the 'PIPSI' acronym - I read it in a book :P

PIPSI or PIMPSIO being variation. Oh they bring back memories to simpler days although not better days.

For old school sales reps, that is a good guide. Everything was much simpler then. However, in these days where we analyse statistics and look at odds because people will not pay towards things they need unless it is electronic or you can utilise with a bottle of win, you find the budget is not available as it once was. You must find yourself having people give you a budget they are willing to spend to cover all their needs that is probably many hundreds of pounds less than it should be. Something has to give and PIPSI doesnt really cut it any more.