Pension vs ISA?

andyste1

I have a couple of personal pensions from when I was in my 20s. (at the height of the "bad pensions advice" era - I actually opted out of a local govt pension for these!). They aren't worth much, as I only paid into them for 7 or 8 years. I think the main one currently has a projected annual pension of around £1000! There is one that I'm still paying into, only around £45/mth (it's index linked, having been £25/mth when I first started it). Again, the projections are pretty dire as you can imagine - I'm not even sure why I took out such a small pension in the first place!

Other than this small pot, I didn't pay into a pension for most of my 30s. I'm now in a job with a decent company pension, which I've been with for 4 years.

The pensions I took out in my 20s are based on a retirement age of 55. So my question is - what should I do about them? Transfer them to my current company pension, extend them to a later retirement age (if that's even possible), or take the money at 55 and invest it elsewhere? I'll be 46 this year, by the way.

The annual pension projections are pretty disheartening, so it got me wondering if I would be better off stopping the £45/mth and putting the money into (say) an ISA instead. Similarly, my wife has been paying £150/mth into a private pension (Virgin) for the last 10 years. Her employer is just about to start a company scheme, so wondered if there would be any benefit to stopping her £150/mth and investing that elsewhere?

Thanks in advance

dunstonh

Again, the projections are pretty dire as you can imagine

The projections use rates the regulator decides and at the moment, the rates are dire because they have decided that its better to understate than overstate.

The pensions I took out in my 20s are based on a retirement age of 55.

Which doesnt mean anything as you can take them whenever you like, subject to legislation. It is only a guide for them to use on the projection examples.

what should I do about them? Transfer them to my current company pension, extend them to a later retirement age (if that's even possible), or take the money at 55 and invest it elsewhere? I'll be 46 this year, by the way.

Without a cost/benefits analysis, nobody here can answer that question. We need to know about the old schemes, the new ones and other alternatives.

he annual pension projections are pretty disheartening, so it got me wondering if I would be better off stopping the £45/mth and putting the money into (say) an ISA instead.

ISAs and pensions share the same investments. So, changing the tax wrapper wouldnt make any difference. If you pay in peanuts, you get peanuts back.

Similarly, my wife has been paying £150/mth into a private pension (Virgin) for the last 10 years. Her employer is just about to start a company scheme, so wondered if there would be any benefit to stopping her £150/mth and investing that elsewhere?

Virgin pensions are one of the worst modern pensions available. Poor value for money and poor quality investments. So, yes, she can do a lot better. She could have done worse (such as paying small amounts or even nothing). So, she should be disappointed. However, she should look at her options.

jamesd

The projections are dire for a range of reasons but two of the main ones are:

1. firms being told to use lower than historic average growth rates for the pension.

2. firms being told to use inflation-linked annuities to provide the income when few people in reality do that because they are such poor value for money at normal retirement ages and deferring the state pension or drawdown offer much better value for money, with close to twice the income available via state pension deferral.

To some extent this helps the pension providers because it might mislead people into paying in more than they really need and since charges are often higher as the amount invested is higher that makes them more money.

The pension would beat a standard ISA because of the effect of tax relief. Just taking into account the income tax relief at basic rate produces a 6.5% higher after tax income from the pension. Often, though, more than just 25% of the pension is tax free, with the personal allowance for income tax now well above the flat rate state pension level and planned to increase further. So initially at least the pension gets tax relief on the way in and no income tax on the way out.

Your wife will probably find that there is at least some employer matching of her contributions available, possibly also salary sacrifice. To the extent that matching or salary sacrifice are available she can expect to be better off using the company scheme instead of the Virgin one.

Your wife should also transfer from the Virgin pension to one that offers better value for money. The same investment can be had elsewhere for one third of the charge level.

atush

I have a couple of personal pensions from when I was in my 20s. (at the height of the "bad pensions advice" era - I actually opted out of a local govt pension for these!).

On whose advice did you opt out of LGPS? Have you filed a complaint?

I would say, in any case, that pensions can be better than ISAs, esp with employers contributions.

For money outside your current work pension, look at having 6-12 months outgoings in cash, look at topping up a PP or Sipp, and filling yoru S&S isa every year.

It isnt pension or ISA, it is pension AND isa.

bowlhead99

All the above comments are sensible. The one that stands out for me is the "pay in peanuts, get peanuts back".

So, yes you should move your wife's pension to somewhere better than Virgin (for both her existing pot and new contributions), and yes you will be able to transfer your existing personal pensions into another scheme before or after age 55 if the one you're in isn't very good (you haven't mentioned what it is; if your current work one is decent you might be able to transfer it in to that) - but the fundamental reason your old pension is not going to pay out very much is because you are not paying in very much- because you stopped paying in, or only made paltry private contributions.

If you're only paying in £500 a year in today's money, from (say) age 25 to 55, that's 30 years of low contributions. You haven't bothered to increase them with any pay rises or your general standard of living. So, paying in £500 a year for 30 years and then stopping is not going to deliver some massive annual income that sustains itself from age 55 to 85 (30 years) or even to age 105 if you're 'lucky'(50 years). Your personal pension pot(s) will deliver more if you keep contributing to it, and not drawing from it, for much later than age 55. Or if you contribute faster.

So really you do need to look at contributing more in, as efficiently as possible (ie using pension for the extra tax relief), rather than only shuffling around what you have already got.

Doing some investment outside a pension (e.g. an investment fund within an S&S ISA) is sensible because then if you realise you have overcommitted yourself with extra pension contributions in the next decade then in a worst case scenario you could cash them in. Or if you make it close to the end of your working life without needing to touch them, you could easily make extra pension contributions at that point, up to the level of your entire annual salary, to grab the extra tax relief at that point.