ISA Reform

System

dunstonh wrote: »

Both pension and ISA get tax free growth and can have the same investments and same charges. So, the only difference is the tax and maturity process.

Tax relief going in puts the pension fund as a larger amount. So, death before retirement sees a larger amount paid out than an ISA. Get to retirement and you get 25% tax free with the rest taxable. If you have 40% relief going in and only pay 20% tax taking it out (and only 75% of the amount as 25% is tax free) then you end up with a larger amount than the ISA.

You have to be wary of amounts and timing but for many, pension could easily be more attractive

A very good point indeed, I might have to give the SIPP another look. I suppose my only concern (which remains) is that this or future governments could change pension rules, e.g. increase the minimum age to access funds up from 55...

Scarpacci

teepee83 wrote: »

A very good point indeed, I might have to give the SIPP another look. I suppose my only concern (which remains) is that this or future governments could change pension rules, e.g. increase the minimum age to access funds up from 55...

Indeed. As it happens, they announced plans to raise the minimum age as part of today's reforms:

1.12 While the government is keen to make sure that people have increased choice and flexibility at the point of retirement, it is also important the right incentives are in place for people to accumulate sufficient pension savings to support them in retirement. This is why this consultation also includes a proposal to raise the age at which an individual can take their private pension savings under the tax rules from 55 to 57 in 2028, at the point that the State Pension age increases to 67.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293079/freedom_and_choice_in_pensions_web.pdf

planteria

very good points.

we can hope, and vote, to keep Balls away from the purse strings of course kidmugsy. but the news coming out of the budget was good progress either way, and sensibly an incoming Labour government would want to encourage the increased personal investment levels.

personally: i'm 39, so i will be 57, or perhaps older, by the time i can access my pension pot. it is very very difficult to know whether i will live for 30 years beyond that point, or not even reach it, of course. my initial thoughts are to max the new, increased ISA allowance, next tax year, and make a £10k pension contribution, as this year...and leave it at that. but perhaps i ought to be focusing much more attention, and money, on growing my pension provision.

kidmugsy

planteria wrote: »

personally: i'm 39, so i will be 57, or perhaps older, by the time i can access my pension pot.

The inflexibility of pensions (even if all the new reforms are adopted) gets to be less of a nuisance as one gets nearer to the permitted age for crystallisation. There aren't all that many other consolations of age.

dharm999

dunstonh wrote: »

Both pension and ISA get tax free growth and can have the same investments and same charges. So, the only difference is the tax and maturity process.

Tax relief going in puts the pension fund as a larger amount. So, death before retirement sees a larger amount paid out than an ISA. Get to retirement and you get 25% tax free with the rest taxable. If you have 40% relief going in and only pay 20% tax taking it out (and only 75% of the amount as 25% is tax free) then you end up with a larger amount than the ISA.

You have to be wary of amounts and timing but for many, pension could easily be more attractive

So essentially and correct me if I am being stupid, as a higher rate tax payer, i should pay in to an ISA and a pension, with the aim being to put enough in to a pension so that the pension I get when I retire is taxed at basic rate and that is supplemented by taking money out of the ISAs I would have paid into alongside a pension. The ISA withdrawals are tax free, so dont count as taxable income.Or I am being too simplistic

yatinsardana

dharm999 wrote: »

So essentially and correct me if I am being stupid, as a higher rate tax payer, i should pay in to an ISA and a pension, with the aim being to put enough in to a pension so that the pension I get when I retire is taxed at basic rate and that is supplemented by taking money out of the ISAs I would have paid into alongside a pension. The ISA withdrawals are tax free, so dont count as taxable income.Or I am being too simplistic

I think your understanding is correct. However, I've been informed previously on this forum that in majority of the cases, peoples pension isn't big enough to be taxed at higher rate. But obviously if you think yours will be then you could consider keeping an eye on it. The other thing to also consider is that even if your tax going in and coming out is at higher rate, what you're doing is delaying tax. But your investments in that time are made from your gross salary - in other words, you're investing with more money and making your money grow more and then taxing it later.
So the 3 benefits of pension that I think dustonh has mentioned are:
1) It's likely that you save 40% tax going in and pay 20% tax coming out.
2) Even if you pay 40% coming out, your investments have been made with a larger some meaning they'll grow "bigger"
3) You still get that 25% lump sum that you've never paid tax on

It's important to have a good balance between ISA and pension (as you've suggested). How the balance between the two is achieved I think depends mostly on your age and how much flexibility/accessibility you want with your money.

Remember that (from my understanding) when you talk about keeping an eye on your pension to ensure it stays within basic tax rate, it includes all your pensions i.e. SIPP, PP, work pension etc. Essentially all the income you'll be getting around retirement (except for ISA)

jimjames

Interesting question came up having heard an ad for ISAs on radio this morning.

Cash ISAs are open to anyone from age 16. S&S ISAs are only available to 18 year olds up.

Does that mean that NISAs will not be available to under 18s if they can contain shares?

innovate

They can have a JISA with stocks and shares, but not an "adult" S&S ISA/NISA.
They can also hold the JISA alongside the adult ISA/NISA between the ages of 16 and 18.

Captain123

Looking at the guidance on the Treasury website I note that one can still only take out one new ISA per year. So in 2014 if anyone wants to get the best return by starting a fixed rate ISA and does so on 6 April, then they cannot add to the cash ISA that year. Does that mean that those investors will have to wait until July? Or have I missed something?

bowlhead99

Captain123 wrote: »

Looking at the guidance on the Treasury website I note that one can still only take out one new ISA per year. So in 2014 if anyone wants to get the best return by starting a fixed rate ISA and does so on 6 April, then they cannot add to the cash ISA that year. Does that mean that those investors will have to wait until July? Or have I missed something?

If you want the maximum flexibility (which might in fact offer you the best return over the year once you get a huge boost to the investing limit in July) you might need to forego the fixed, lock-you-in deals on 6 April.

In theory, knowing now that everyone will have greater allowances by July (and potentially access to large S&S pots that they want to turn into cash), some banks might create innovative savings products where you're locked into a rate with exit penalties but you can add to it for a period through July. This would remove a competitive threat where, as I suggested, their potential customers only wanted to commit to short term products with the intention of jumping ship if their rivals had good products in July.

However, it could be expensive for them to allow you to add to a fixed ISA once it had launched because it might be carrying a rate that is no longer justified by the market . E.g. if you can add to your existing ISA with them at say 1.75% in July because that's the rate you signed up for in April, however the going rate for a 1 year fix by July might have fallen to say 1.6%. and they really wouldn't want you to be able to triple your investment at the 1.75% rate, especially when you only want it for another 9 months from that point and not the full year.

This is of course just speculation really. A market shake-up offers the opportunity for innovation from the banks, building societies and brokers/platforms but that doesn't mean we'll get it. One school of thought would certainly be that you should avoid anything that locks you in, when there is uncertainty on the horizon.