S&S ISA as non-official pension

hugheskevi

There is also the combination option - put money into an ISA when young with an intention of moving it into a pension at a later date.

That gives you the flexibility of an ISA as well as the tax relief of a pension. For someone only paying basic rate now who later becomes a higher rate payer with salary sacrifice available this can lead to a much better outcome.


Few things to be careful of, not least the Annual Allowance. Rules might change about tax relief too which is quite a risk - although this does go both ways, as the rules on pension assets could change detrimentally in which case you would be in a better position to respond than those who had committed the money to a pension. Also non-pension assets will affect means-test should they ever be relevant, and are not protected from bankruptcy.

atush

ViolaLass wrote: »

But only for the lump sum, surely, since any income will be taxed (and if the capital has grown, so will the 20% that will be removed).

Also, you can only withdraw money from your pension after a certain age so ISAs win on flexibility.

I take everyone's point about the lump sum though. I'm certainly not advocating ISAs alone.

You obv didn't read my reply as I covered the income tax bit by withdrawing before state retirment age. AS the personal allowance of 10-10.K and I assume growing larger, would keep some/much of your pension tax free.

Yes, ISas can be more flexible so you should have some. But they are also subject to forfeit if you fall into debt, and are means tested if you need benefits. So there are drawbacks to them that are not drawbacks for pensions.

jem16

atush wrote: »

You obv didn't read my reply as I covered the income tax bit by withdrawing before state retirment age. AS the personal allowance of 10-10.K and I assume growing larger, would keep some/much of your pension tax free.

I think you perhaps missed her previous post atush.

ViolaLass wrote: »

part saving in a pension and part saving in an ISA, figuring that that way I will gain flexibility whilst still making sure that my personal allowance gets used fully once retired.

atush wrote: »

Yes, ISas can be more flexible so you should have some. But they are also subject to forfeit if you fall into debt, and are means tested if you need benefits. So there are drawbacks to them that are not drawbacks for pensions.

There are pros and cons for both. The ideal answer is to use both to utilise the pros and mitigate the cons as much as possible.

jem16

hugheskevi wrote: »

That gives you the flexibility of an ISA as well as the tax relief of a pension. For someone only paying basic rate now who later becomes a higher rate payer with salary sacrifice available this can lead to a much better outcome.

Very good idea, although some of the NI saving is lost as it drops from 12% to 2%. However the higher rate tax relief paying in and 20% or less paying out is the greatest gain.

kyana

thank you all! the question was actually more 'how can i get a good spread of investments in my ss isa'? thanks for the responses on that. i'm a bit nervous about investing but think for such long-term savings it's the best way.
i appreciate there are cons to an isa and i will be investing suitable amounts in a pension but i want the option to retire earlier or take time out when i want (or use it for other long-term goals).
thanks for the clarification that state pension age and private pension age are separate, i hadn't realised there was a 10 year gap between. good to know but i still don't trust the government not to up the private age and i want to be able to retire when i chose not the government.

atush

jem16 wrote: »

I think you perhaps missed her previous post atush.





There are pros and cons for both. The ideal answer is to use both to utilise the pros and mitigate the cons as much as possible.

I didn't miss her post, but figured she didn't read mine. As no tax would be paid on pension withdrawn up to the PA. As state pension would not yet be in payment. So the pension should perhaps be the main focus and S&S isa a minor one when splitting savings.

But I did say, and do agree that both are important.

Perelandra

jem16 wrote: »

Very good idea, although some of the NI saving is lost as it drops from 12% to 2%. However the higher rate tax relief paying in and 20% or less paying out is the greatest gain.

Only with salary sacrifice schemes- if you don't have access to those, the you can't save on the NI...

... which creates another point to add to hugheskevi's post:

If you do not have access to a salary sacrifice scheme now, there may be an additional advantage of using an ISA "now", if you subsequently get that in the future.

i.e. (in this situation) you can't save on the NI now, but might be able to in the future- even if your marginal (income) tax rate stays the same.

jem16

Perelandra wrote: »

Only with salary sacrifice schemes- if you don't have access to those, the you can't save on the NI...

Yes I know that but it was the salary sacrifice comment in hugheskevi's post I was answering.

hugheskevi wrote: »

That gives you the flexibility of an ISA as well as the tax relief of a pension. For someone only paying basic rate now who later becomes a higher rate payer with salary sacrifice available this can lead to a much better outcome.

There's more benefit on salary sacrifice, NI wise, for a basic rate taxpayer than higher rate.

jamesd

kyana wrote: »

the question was actually more 'how can i get a good spread of investments in my ss isa'?

Do you want guidance on which investments will be best? A good foundation fund choice is a global markets tracker. Those are readily available at low cost and track the major world markets, either developed or including emerging as well. The emerging included choice is better overall for a foundation fund. These are also available in ex(cludes) UK or includes UK version, with the excluding UK more common and probably a better choice. This is because you'll probably have lots of UK investments already.

The global trackers will be mainly very large companies and will be weighted according to market value of the company and the total size of the stock market in each country. Addressing those limitations and the focus on shares is where other options come into play.

kyana wrote: »

i'm a bit nervous about investing but think for such long-term savings it's the best way.

Yes, it is worrying at times but it is also the best way. The risk - really the downs that come along with the overall up trend - that worries us all is why the returns are higher.

First thing to do is pension to get all possible employer matching. Above that at basic tax rate investing in a S&S ISA is a good choice. Either beats something like overpaying on a mortgage (except if it gets below a LTV threshold or is at an uncommonly high rate) or savings accounts except for a generous emergency fund.

Once you get closer to age 55 or whatever the age is when you're closer to it, under current rules the pension is better than the ISA. I'll assume that the changes planned for next April happen. Pension gains over ISA from:

1. 25% tax free lump sum. For exactly the same net cost and tax rates this increases the value of the pension pot after tax by 6.25% compared to the ISA due to the combination with the pension tax relief when paying in.
2. Personal allowance. The first part of pension income will be within the personal allowance and won't be taxed on the way out, so there's a tax gain even at the same tax rate.
3. Possible availability of salary sacrifice for workplace pension contributions, saves 12% employee NI for basic rate (roughly) people and often some or all of employer NI is added as well. Lower employee NI gain for higher rate tax band, technically those above the upper accrual point.
4. Possible lower tax rate in retirement than now can produce a pure tax gain.

Both pension and ISA benefit from:
5. Deferred payment of many taxes on investments, so you can gain from the growth on the tax that isn't paid earlier or at all.

Using ISA in the early years then switching the money into pension later once closer to your planned retirement age is likely to be a good plan. That gets you the flexibility early on and when the pension uncertainties have reduced you can swap that for the tax-based gains of the pension. It's also more likely that a person will be subject to higher rate tax at older ages because of general income trends, increasing the potential pension income tax benefit compared to earlier pension use.

Even at a younger age you shouldn't completely neglect pension use because unlike the ISA option it is ignored for benefits means tests and bankruptcy or other insolvency. At younger ages it's not usually practical to have accumulated so much capital that you can live off it indefinitely to make the benefits issue moot. That does become possible later, though.

kidmugsy

Your_Hero wrote: »

But as we live in a world where you get a 25% tax free cash, and generous personal allowance that increases every year

Indeed we do, but will the OP? Kyana is thinking of 30 or 40 years from now.

Contributing to a pension is inflexible compared to an ISA. This disadvantage is outweighed if you get employer's contribution, or salary sacrifice, or avoid 40% tax. If not, I'd go for an ISA.