Savings - Pension vs Premium Bonds vs ISA

thriftytracey

Hi

My partner and I save £200 per month each into our cash ISA's. Not much I know and well below the £15,000 per year. Obviously the return on these products is pretty abysmal (even when I swap them religiously and this is not likely to change. We now find ourselves in a position to save more (which will vary from month to month and some months there may not be any savings). This month I have saved £600. I was wondering if it would make sense to add this extra cash to one of our pensions as an AVC and get the tax relief of 20%, or increase our Premium Bonds from £400 to £1100.

Now that the Pension rules have changes and it can be treated like a bank account does this make better sense?

The Premiuim Bonds are as safe as an ISA and there is the hope you might win, so would increase our chances but not much I suspect but I could build up gradually maybe put an extra £100 or so each month of what I can save.

Thanks for any advice

dunstonh

Now that the Pension rules have changes and it can be treated like a bank account does this make better sense?

The pension rules havent changed. The "bank account" option has been there for almost a decade. Albeit not in the mainstream. It wont be like a bank account either. That is just a sound bite.

The Premiuim Bonds are as safe as an ISA and there is the hope you might win, so would increase our chances but not much I suspect but I could build up gradually maybe put an extra £100 or so each month of what I can save.

Premium bonds are subject to other risks. Such as shortfall risk and inflation risk. For long term, those risks can actually be higher than investment risk.

You need to look at your objectives and financial planning and utilise products that fit that. At the moment, you are looking at solutions without knowing what you actually need.

thriftytracey

Thanks dunstonh.

I accept that drawdown has been available for a while although for the smaller pension pot it wasn't really an option.

I would like to have lots of eggs in a number of baskets hence thinking about other options.

My objective is to save for retirement.

dunstonh

I would like to have lots of eggs in a number of baskets hence thinking about other options.

Why have lots of eggs in a number of baskets? What eggs and what baskets?

What does that achieve?

My objective is to save for retirement.

The two main things that meet that objective are stocks and shares ISA and pensions. Not premium bonds and cash ISAs.

atush

I agree. You need to save into equities to some degree, to overall give you diversity if you own a home and have cash savings.

You mention AVCs, does this mean you have good DB pensions? How many years with whom?

If you can save 600 per month, i'd be inclined to split 200/400 into S&S isas and a personal pension- if your cash reserves already total 6 months spending.

The S&S isa would be available should you need it anytime (but should be left to grow for 5-10 years min) and the pension could be taken all or in part from any time from age 55. Drawing it tax free using your allowance before taking any DB pensions would be wise.

Retyre

Hi dunstonh, I read your posts and they are most insightful. As an individual with Equitable Life experience I tend to feel there is value to keeping my pension savings with a number of institutions (I also spread my savings but consider this less necessary with the govt savings guarantee).

I get similar charges from each pension provider, am I being unnecessarily cautious, spreading has given me some sense of security?

kidmugsy

thriftytracey wrote: »

My partner and I save £200 per month each into our cash ISA's. I was wondering if it would make sense to add this extra cash to one of our pensions as an AVC and get the tax relief of 20%

Savings that you want to hold as cash will make much higher interest at the moment at interest-bearing current accounts - see TSB, Nationwide and Lloyds for example. Visit the forums on Savings and Investments, and Budgeting and Bank Accounts.

Savings that you want to turn into investments should be directed to S&S ISAs or pensions of some sort. Pensions are more attractive if you can make contributions by salary sacrifice, or if you are near enough to 55 that the inflexibility is reduced. Or if you thereby avoid higher rate income tax.

thriftytracey

kidmugsy wrote: »

Savings that you want to hold as cash will make much higher interest at the moment at interest-bearing current accounts - see TSB, Nationwide and Lloyds for example. Visit the forums on Savings and Investments, and Budgeting and Bank Accounts.

Savings that you want to turn into investments should be directed to S&S ISAs or pensions of some sort. Pensions are more attractive if you can make contributions by salary sacrifice, or if you are near enough to 55 that the inflexibility is reduced. Or if you thereby avoid higher rate income tax.

Yes, the interest bearing accounts do offer an attractive rate of interest but usually limited to maximum of £2000 so you are only talking a few pounds extra especially as you reduce your account down each month.

I am 56 and therefore keen on adding more to my pension. My employer has salary sacrifice for the NIC contributions which I opted into. I do not know if they offer it for the company pension scheme. I will investigate.

I have never been keen on stocks and shares products as I have a very cautious attitude to risk. We have £5k in shares for the past 10 years and the overall growth hasn't been that good.

Thrugelmir

thriftytracey wrote: »

We have £5k in shares for the past 10 years and the overall growth hasn't been that good.

If you plant an acorn would you expect to see a large oak tree grow in a few years. Of course not. You need to invest new money every month along with reinvesting the income. In principle you'll only get out of something what you put in. Unless your exceptionally lucky in your choice of investment. For the majority it's a long slow climb. Magic money trees are the illusions created by politicians.

dunstonh

Retyre wrote: »

Hi dunstonh, I read your posts and they are most insightful. As an individual with Equitable Life experience I tend to feel there is value to keeping my pension savings with a number of institutions (I also spread my savings but consider this less necessary with the govt savings guarantee).

I get similar charges from each pension provider, am I being unnecessarily cautious, spreading has given me some sense of security?

Equitable Life was down to a particular fund with guarantees that could not be met. Back then you were effectively indirectly investing in the company and the profit it could make and it remaining solvent. The pension and investment products today dont work that way. So, there isnt a need to have multiple providers like there used to be. Modern options are little more than administrators for the investments you choose to operate from the whole of market.

dunstonh

I have never been keen on stocks and shares products as I have a very cautious attitude to risk.

Yet the risks you are taking with cash could actually be greater.

We have £5k in shares for the past 10 years and the overall growth hasn't been that good.

The credit crunch in the middle hasnt helped but most multi-asset investments have outperformed cash in that period. However, if you are looking at money being held over 20-30-40 years, then cash is likely to be a higher risk option than multi-asset solution with a sensible equity content.