What to do?

dunstonh

investment options in a pension are virtually identical to most of the other tax wrappers (or unwrapped options) such as ISAs and unit trusts. So, you wont earn any more or any less.

The pension benefits from tax relief and tax free growth. There are pros and cons with pensions (and any other investment wrapper) but when it comes to a guaranteed income in retirement, then nothing else beats the pension. Pensions are designed to provide an income. Not to build up a lump sum. So, if it is income provision you are after, the pension is worthwhile. If it is capital lump sum then S&S ISAs and unit trusts are better. Most people are best with a combination.

Whilst the income in retirement from the pension is taxable income, it is worth noting that you will be able to earn around 10k a year each (in todays terms) without the need to pay any tax. So, upto that amount, the tax relief on a pension and tax free growth is a valuable option.

jamesd

Say you were to invest 100,000 via a pension and got 20% basic rate tax relief (the rate next year) then the investment grew at 7% a year. After six years you'd have 180,087. You could take 25% of that as the tax-free lump sum giving you a 45,020 lump sum and 135,065 in the pension to take income from via drawdown or annuity purchase. So, you retain roughly 37,700 in today's money assuming 3% inflation as your usable lump sum. At a reasonably safe 6% income rate the 135,065 provides taxable 8103 pension income. Assuming all ten thousand of personal and age allowance s are used by other income like state pensions that's 6483 a year after basic rate tax.

Now for the non-pension case, the amount it grows to is 150,070. You've probably paid tax on fund transfers above the capital gains tax allowance limit over the years but I'll ignore that for the moment and pretend it's all in a tax-free wrapper like an ISA somehow. Take the same 45,020 as a lump sum and you're left with 105,050 to provide an income. At 6% that's 6303 a year and after basic rate tax that's 5042 a year.

You can probably see why the pension has the advantage in many cases: for a given lump sum you get a higher annual income because of the tax relief. Only if you want a larger lump sum than the 25% pension lump sum and are willing to sacrifice income to get it does the non-pension (or other wrapper) route look more interesting.

Investment bonds are potentially interesting because you can draw 5% a year tax free, a higher percentage rate than the 4.8% that the non-wrapper approach gets you after basic rate tax, but you still have access to all of the capital and avoid CGT over the years on trades. However the 5% is 5% of the initial capital, not of the amount after the growth. From a competitive vendor you probably get 6-7% more than your inital sum invested, not the 20% from pension tax relief, so the pension route has the edge at least up until you've provided for enough income to use up your tax allowances. Assuming a 7% extra allocation you'd end up with 160,580 after 6 years at 7% and 5% of the initial 107,000 invested is the base tax already paid income, 5350 a year with no more tax to pay. However, the 5% a year accumulates if not used so after six years you also have 30% more to draw on whenever you like. Draw on it at 2% a year and it'll last 15 years, taking you to the end of a 20 year bond term with 2% left available for other uses. That 7% of the initial amount is 7490 with no more tax to pay.

However you invest it you need to select good investments and you might well benefit from the assistance of an IFA to do that if you're new to it.

April2

jamesd wrote: »

However you invest it you need to select good investments and you might well benefit from the assistance of an IFA to do that if you're new to it.

Having not understood a word of the rest of your post (:o), I think I'll have to do just that!

Many thanks for your time though - I'm sure most people understood your advice - but I'm afraid I didn't.

The other complicating factor is, I've had enough and don't intend to carry on working (if I can help it) any longer.