Stocks and Shares ISA investments vs Pensions

Anonymous101

I'm currently having a rethink of my retirement plan and would like to hear others opinions of what my strategy should be.

I'm 35 years old and currently earn just over £50k.
I have an existing pension pot of £75k to which I pay 10% of my salary into and also receive a 6% contribution from my employer. I have been told verbally that my salary will rise by 5% in the New Year and I think that this is a good time to further increase my AVC's with a target total contribution of 20% of my salary in total.

I have a stocks and shares ISA with minimal balance which I have been thinking about investing into however I can't get away from the fact that I think pension contributions are a much more tax efficient way to save for retirement given that I'm a 40% tax payer. I almost begrudge paying the 40% and would like to pay as much into my pension as possible in order to minimize the higher rate tax I'm paying.

My dilemma is really around whether this is the best strategy given that I have very little in the way of investments save a 2 months salary "rainy day" buffer. I know that this is a very personal stance and possibly not the wisest so I was wondering if there was an accepted % split between ISA investments and pension contributions which I could take a view on?

I'd welcome any opinions on this.
Thanks, Anon. :cool:

RuleTheWorld

I have the same debate - can also throw mortgage overpayments into the debate.

What to do with that extra £1? I always hear the answer is do all three!?!

As a 40% tax payer though it makes most sense to me to pay extra to pension but where do you draw the line?

Anonymous101

I should have said I already making overpayments on my mortgage though a shared account with my Mrs.

That's 2 out of the 3 progressing so perhaps I'm starting to answer my own question.

david78

Maybe put some in your pension and some in a stocks and shares ISA.

Voyager2002

Saving for your retirement (or for any money you might spend after you reach the age of 55, such as helping newly-adult children) should be done through a pension pot. You can use a pension fund to invest in stocks and shares and most other investment vehicles, or (better) a combination of these.

Saving for any expenditure that you anticipate within about five years should of course not use a pension pot, and should not use anything based on stocks and shares either: a temporary downturn in the market at the wrong time could mean that the money is not available when you need it, or in order to gain access to it you have to sell at a loss.

Your stocks and shares ISA, then, should strictly be for any expenditure that you anticipate needing to make around the time when you are in your mid-forties to early fifties.

Anonymous101

Voyager2002 wrote: »

Saving for your retirement (or for any money you might spend after you reach the age of 55, such as helping newly-adult children) should be done through a pension pot. You can use a pension fund to invest in stocks and shares and most other investment vehicles, or (better) a combination of these.

Saving for any expenditure that you anticipate within about five years should of course not use a pension pot, and should not use anything based on stocks and shares either: a temporary downturn in the market at the wrong time could mean that the money is not available when you need it, or in order to gain access to it you have to sell at a loss.

Your stocks and shares ISA, then, should strictly be for any expenditure that you anticipate needing to make around the time when you are in your mid-forties to early fifties.

Thanks, although I understand the various investment streams your post is much clearer than my thinking on it. I suppose at the moment I'm not making provision for my short to mid term future because of my hang ups about its inefficiencies.
I think I need to put this to one side and start to think about how best to balance my saving/investment.

Teaandscones

Anonymous101 wrote: »

however I can't get away from the fact that I think pension contributions are a much more tax efficient way to save for retirement given that I'm a 40% tax payer. I almost begrudge paying the 40% and would like to pay as much into my pension as possible in order to minimize the higher rate tax I'm paying.

:

I can't see 40% tax relief continuing for much longer as pension tax relief is a big "cost" to the government and will only keep increasing because of automatic enrolement. It may be a good idea to fill your boots with as much higher rate relief as possible now while stocks last.

Anonymous101

Teaandscones wrote: »

I can't see 40% tax relief continuing for much longer as pension tax relief is a big "cost" to the government and will only keep increasing because of automatic enrolement. It may be a good idea to fill your boots with as much higher rate relief as possible now while stocks last.

I think you're right, its only a matter of time before higher rate tax relief is withdrawn. I'll be increasing my contributions in the new year.

Linton

Voyager2002 wrote: »

Saving for your retirement (or for any money you might spend after you reach the age of 55, such as helping newly-adult children) should be done through a pension pot. You can use a pension fund to invest in stocks and shares and most other investment vehicles, or (better) a combination of these.

Saving for any expenditure that you anticipate within about five years should of course not use a pension pot, and should not use anything based on stocks and shares either: a temporary downturn in the market at the wrong time could mean that the money is not available when you need it, or in order to gain access to it you have to sell at a loss.

Your stocks and shares ISA, then, should strictly be for any expenditure that you anticipate needing to make around the time when you are in your mid-forties to early fifties.

One factor that may lead you to putting money into S&S ISAs rather than pensions is tax. With too much in pensions you may end up paying higher rate tax just to get at the money within a reasonable timeframe, particularly if you have other significant pension income. So if you are thinking of using part of your pension beyond the tax free 25% for major expenditures in retirement it may be sensible to use an S&S ISA instead.

atush

Also, with 6% pension contributions already, are you going to get only BTR on the new contribution? I would pay in enough to take you out of HRT completely then the rest in S&S isa.

Also, the ISA can be used if required before age 55 so is more flexible.

Anonymous101

atush wrote: »

Also, with 6% pension contributions already, are you going to get only BTR on the new contribution? I would pay in enough to take you out of HRT completely then the rest in S&S isa.

Also, the ISA can be used if required before age 55 so is more flexible.

My taxable income next year will likely be over £60k so it's unlikely that I'll be able to take myself completely our of the higher rate.
I think i'm going to hold my pension contribution at 20% for the time being and put any other savings into the ISA.