Keeping retirement and savings separate when ISAs are involved

borborygmous

I feel there is some moral hazard involved in using ISAs to save for retirement (the "other person" involved being the future me!). Partly for that reason I intend to continue contributing mostly to pension schemes rather than ISAs - but I will be using (both stocks and shares and cash) ISAs to some extent, and do want to keep some separation between retirement and more short-term (5 to 10 year) savings.

Since one can only pay into one ISA per year, this sadly isn't a matter of just setting up separate accounts and being done with it. If you tried to keep track of "separate" contributions over time that could get quite complicated.

How do people here deal with keeping these two separate in their minds?

I imagine different people tackle this in their own ways - I'm interested both in technical answers (say strictly calculating how much each separate contribution has grown, or keeping the same fund twice in the same wrapper, if that is feasible), or more "psychological" ones in terms of ways of thinking / behaviour, or something else I haven't thought of...

BananaRepublic

I allocate funds based on maximising the advanatage, well, hopefully. Thus a pension contribution increases by 25% (assuming basic rate tax), but when you take the pension, you get a tax free lump sum, and the rest is taxed as income subject to the personal allowance. An ISA does not get tax back, but incurs no tax when you withdraw. So, they are different vehicles, with different up sides and down sides.

bowlhead99

You can only contribute to one ISA in a year but you can have as many old ISAs as you want. So one easy way to do it is if ue using ISAs to plan for multiple goals is to find a S&S ISA which allows you to transfer part of the balance out without totally emptying and closing the account.

So, say each year you want to put in £5k for retirement and £10k for medium term stuff (house or car or wedding or kids education)

Throughout the tax year you contribute £15k to Current Year ISA, call it ISA 'A'.

Once you get into year 2, you have £15k of old assets in it, plus or minus growth. Transfer £10k of assets into ISA 'B' and £5k of assets into ISA 'C'. If your funds have done well, maybe it's £12k and £6k; if not, maybe £8k and £4k.

Continue contributing to your now-almost-emptied ISA 'A' over the next year. After another year, repeat the process. So every year you're siphoning off £10k and £5k chunks into B and C. Periodically, as B is supposed to be for medium term goals, you may want to raid B and spend the contents. Do not raid C, which is your long term pot, unless you are going to use it to make pension contributions.

One alternate approach is to just have two ISAs running and take it in turns to only contribute to long term goals one year and medium term the next.

Finally there is the "heavier recordkeeping approach" where you keep all in one pot and note what percentage of the total money "belongs" to the long term stream and what belongs to the medium term stream. If you raid the medium term stream note its now reduced percentage.

A more practical way of seeing what amount belongs to what stream in the last example is to define what investments are used by what stream which works OK if you don't have billions of different holdings.

So for example, decide that all your holdings in the ISA of ABC Properties REIT and DEF Mixed Assets Trust are for medium term use and all your holdings of RST Strategic Bond and XYZ Multi 6 are for retirement. Buy whatever proportions you want as you go along but only raid your ABC and DEF for your children's driving lessons and your dream holiday, and keep RST and XYZ exclusively for pension top-up or a "forever" portfolio.

Linton

You could maintain separate dummy accounts managed by spreadsheet or money management tool, populated with investments that happen to be held in the same physical accounts. I do that with my ISAs that are used for separately managed income and growth portfolios.

racing_blue

Perhaps locking away £££ in a pension scheme subjects the current "you" to moral hazard. No man knows when the reaper will call, but in this transaction there is information asymmetry, as the 55+ year old "you" will know he did not die young, where as the current "you" has no such knowledge.

With this cheery thought in mind, I'm at the point of leaving an occupational pension scheme which is starting to feel overfunded anyway. My ISA will be the chief vehicle for retirement saving over the next few years. I just spreadsheet the lot & lump it together.

Aged 50 I hope to have around £1 million earmarked for "retirement", mainly in pension vehicles but also in ISA. Actually I hope the balance will be higher than £1 million because then I can goof around for a few years before the pension stream kicks in.

Malthusian

There is nothing to stop You^2036 from saying to yourself "I know that I^2016 put this money in ISA B with the intention that ISA B would only be spent in retirement. But I^2016 didn't know about this really important need that I now have in 2036. So there is nothing wrong with cracking open ISA B."

There used to be this element of trusteeship with pensions - trusteeship in the sense of preventing you from blowing all your money - but post pension freedoms even this no longer exists, as people are free to blow all their money at age 55, years before retirement, if they really want to.

If you can recognise you might be tempted to blow your retirement savings and think about strategies to prevent it then you already have all the mental tools you need to overcome that temptation. Self-discipline is what's needed to avoid spending retirement savings, not two separate ISAs.

As others have mentioned there's nothing to stop you having two separate ISAs for accounting purposes. Personally I don't see the point. Say I have £5,000 in my Medium-Term ISA and £10,000 in my Retirement ISA. My kitchen then explodes due to uninsurable Act of God requiring £5,000 of repairs - oh well, that's what the Medium Term ISA was for. Then my car breaks down and I need a new one. I'm not going to go without a car and lose my job just to avoid touching the Retirement ISA, that would be stupid. No matter how you label them the reality is that it's all one pot.

borborygmous

BananaRepublic wrote: »

I allocate funds based on maximising the advanatage, well, hopefully. Thus a pension contribution increases by 25% (assuming basic rate tax), but when you take the pension, you get a tax free lump sum, and the rest is taxed as income subject to the personal allowance. An ISA does not get tax back, but incurs no tax when you withdraw. So, they are different vehicles, with different up sides and down sides.

Thanks - a great point and I do understand that. My question stands, though: once one has identified the investments and tax wrappers one considers appropriate (I have, more or less), there's still the problem of whether / how to keep different savings separate.

borborygmous

bowlhead99 wrote: »

You can only contribute to one ISA in a year but you can have as many old ISAs as you want. So one easy way to do it is if ue using ISAs to plan for multiple goals is to find a S&S ISA which allows you to transfer part of the balance out without totally emptying and closing the account.

Aha, I see.

Finally there is the "heavier recordkeeping approach" where you keep all in one pot and note what percentage of the total money "belongs" to the long term stream and what belongs to the medium term stream. If you raid the medium term stream note its now reduced percentage.

I think even I may end up doing this even if I do periodic transfers, because the different investments within the single wrapper will in general have significantly different growth rates (pension hopefully higher in long term, but obviously sometimes shrinking). If so, consistently getting the needed data sounds a chore (i.e. I guess the investment values for each holding immediately before each investment occurs).

A more practical way of seeing what amount belongs to what stream in the last example is to define what investments are used by what stream which works OK if you don't have billions of different holdings.

So for example, decide that all your holdings in the ISA of ABC Properties REIT and DEF Mixed Assets Trust are for medium term use and all your holdings of RST Strategic Bond and XYZ Multi 6 are for retirement. Buy whatever proportions you want as you go along but only raid your ABC and DEF for your children's driving lessons and your dream holiday, and keep RST and XYZ exclusively for pension top-up or a "forever" portfolio.

I'm not sure yet whether this will work for me. On the other hand, I won't have much of shorter-term (5-10 year) savings in stocks, maybe nothing at all. If that turns out to be true, I guess the whole problem goes away! Especially so given presumably poor cash rates on non-cash ISAs, and personal savings allowance...

borborygmous

Malthusian wrote: »

There is nothing to stop You^2036 from saying to yourself "I know that I^2016 put this money in ISA B with the intention that ISA B would only be spent in retirement. But I^2016 didn't know about this really important need that I now have in 2036. So there is nothing wrong with cracking open ISA B."

Of course. But psychology and government both come into it too. Government: "ah, I see you ran into unexpected hardship, we'll relieve you of those savings, thankyou very much" - not making a moral or ethical point here, just one about how things sometimes work. Many "behavioural economists" recommend "tying oneself to the mast" as a useful MO (not to the nth degree, but to some extent - there is a big element of judgement of course!).

There used to be this element of trusteeship with pensions - trusteeship in the sense of preventing you from blowing all your money - but post pension freedoms even this no longer exists, as people are free to blow all their money at age 55, years before retirement, if they really want to.

Right. There is still some of that left, even so (again, it's a judgement involving politics etc.).

If you can recognise you might be tempted to blow your retirement savings and think about strategies to prevent it then you already have all the mental tools you need to overcome that temptation. Self-discipline is what's needed to avoid spending retirement savings, not two separate ISAs.

I don't think it's so simple for several reasons (not only involving me), but I don't want to get too far into that subject...

Then my car breaks down and I need a new one. I'm not going to go without a car and lose my job just to avoid touching the Retirement ISA, that would be stupid. No matter how you label them the reality is that it's all one pot.

That's not the reality, because pensions and ISAs are not the same. And I assure you I have more than one way to be stupid at my disposal

borborygmous

racing_blue wrote: »

Perhaps locking away £££ in a pension scheme subjects the current "you" to moral hazard. No man knows when the reaper will call, but in this transaction there is information asymmetry, as the 55+ year old "you" will know he did not die young, where as the current "you" has no such knowledge.

Which would mean I would have the problem described in my question, right?

As for your point on its own terms: that is true and very much in my mind, but in the end it's "just" another factor to be weighed up.

borborygmous

Linton wrote: »

You could maintain separate dummy accounts managed by spreadsheet or money management tool, populated with investments that happen to be held in the same physical accounts. I do that with my ISAs that are used for separately managed income and growth portfolios.

This would mean you need to record the values of investments before each contribution is added, right? Unless no holding (fund/whatever) is part of both portfolios? Do you do that by hand?

The calculations don't bother me as much as getting hold of the data. It seems few providers have any public API.