Stocks and Shares ISA investments vs Pensions

Pincher

Things have been distorted by low returns, so they allow you to save all your earnings, later on in life. When I was 35, I think I could pay 9% of my salary into my final salary scheme, which gets employer contribution, plus ~6% AVC, which only gets tax rebate.

I look for Black Swans, so consider UNLIKELY scenarios that trip you up, so don't take the following too seriously.

Robert Maxwell stole from the Mirror Group pension fund, Phillip Green under funded the BHS pension scheme. Pension Protection could mean 50% hair cut of your pension benefits, now, so what happens when they (CEOs, owners) all try the same trick: 70% hair cut? The BHS employees who put their retirement plan eggs in one basket certainly have eggs on their faces.

I have five years worth of a legacy Final Salary pension, which is closed to new comers, chronically under funded, and run by Equitable Life! Think a 90 year old on life support.

Believe it or not, I was 35, and based on the same salary, which enabled a mortgage, when I started on the property game. Now the pension fiasco is an irrelevance.

So, do you feel your company pension is the one that will run true to the end? Money purchase schemes should be relatively immune to deliberate corporate pension malpractice, as you have your own pot of money.

There's a Chinese saying, a cunning rabbit has three warrens.
Your instinct for spreading your money is entirely sensible.

Anonymous101

bowlhead99 wrote: »

You can think of it as using your savings and investments to make a future pension contribution, or you can think of it as using savings and investments to partially live off to allow you to use some salary to make a pension contribution. It gets you to the same place.

The important thing to realise is that your s&s isa can invest in pretty much all the same things that your pension can invest in, delivering the same returns for the same investment risks. And of course that holds true in negative markets too.

For example, imagine if you invested the £600 in a s&s isa and instead of doubling over next decade, it halved over the next half decade, and you planned to make a pension contribution at that point.

"Oh no!" You might cry,"now I can't afford to make that £2k gross pension contribution because I only have £300, and I won't get much tax relief on a £500 gross contribution!". But not to worry. If you had instead invested the £1k gross salary money in the pension in similar investments, it would also have halved, so you would have only got £500 in the pension by that point anyway. So you can still "keep up" with the pension by using the £300 ISA money to afford a £500 gross contribution.

Your only risk using the "pension later" model is tax relief being restricted to below the percentage amount you can get today. Some people prefer the "bird in the hand" approach and want to take the relief ASAP. However, if you don't feel you have the ability to commit it all to a pension just yet, the maths above shows it is not necessarily a big problem, if you are expecting lots of high rate relief capacity in the future through having lots of earnings. And if you don't have lots of earnings, you might be glad of having some cash savings and s&s investments to fund your needs.

The important thing to do if you prefer to do pension later rather than sooner is to keep up an awareness of government announcements and consultations re restrictions on higher rate relief so you don't get caught out too badly if things fundamentally change.

I've got a basic understanding of the investment types so understand that I'm largely investing in the same products just via a different vehicle. I think i'm going to split my future contributions having thought about it now. The advice on here as made me think that the "Pensions later" model is probably where I need to be now with where I am generally in life. I keep up to date with policy changes so any announcements baring an immediate change should give me enough time to move money should I want to.

Anonymous101

Pincher wrote: »

Things have been distorted by low returns, so they allow you to save all your earnings, later on in life. When I was 35, I think I could pay 9% of my salary into my final salary scheme, which gets employer contribution, plus ~6% AVC, which only gets tax rebate.

I look for Black Swans, so consider UNLIKELY scenarios that trip you up, so don't take the following too seriously.

Robert Maxwell stole from the Mirror Group pension fund, Phillip Green under funded the BHS pension scheme. Pension Protection could mean 50% hair cut of your pension benefits, now, so what happens when they (CEOs, owners) all try the same trick: 70% hair cut? The BHS employees who put their retirement plan eggs in one basket certainly have eggs on their faces.

I have five years worth of a legacy Final Salary pension, which is closed to new comers, chronically under funded, and run by Equitable Life! Think a 90 year old on life support.

Believe it or not, I was 35, and based on the same salary, which enabled a mortgage, when I started on the property game. Now the pension fiasco is an irrelevance.

So, do you feel your company pension is the one that will run true to the end? Money purchase schemes should be relatively immune to deliberate corporate pension malpractice, as you have your own pot of money.

There's a Chinese saying, a cunning rabbit has three warrens.
Your instinct for spreading your money is entirely sensible.

Certainly worth considering all possibilities. I often consider the "what if's" too.

My pension is a money purchase scheme so I feel relatively comfortable with the malpractice possibility. I agree that a one dimensional approach is never truly robust though so more added weight to me building the S&S ISA pot in addition to increase pension contributions.

ColdIron

The problem as I see it with deferring pension contributions is the annual allowance. At 20% of your salary pa, ignoring salary increases and growth, you could squirrel away £300K by 65. You are unlikely to be able to tuck that away in a short period even with carry forward. I think there is a lot to be said for a bird in the hand

bowlhead99

True, but for example at the moment the limit is 40kpa of allowance with carry forward allowed if you don't use it, assuming you have enough income in the year when you do want to use it. So someone who with cash and car allowances was on (say) £65k next year would be able to put away 20% of that year's remuneration and still have a good chunk of capacity to make "should have done this earlier" contributions within the 40% bracket.

In theory they could put the whole £65k in next year, if they only put £10-15k in this year, but of course they wouldn't get higher rate relief on it all, most of the relief would only be at 20%, which would represent a missed opportunity to grab the 40% this year.

Really the point of my posts was not instructions or recommendations, just advice on what *could* be done, especially if we are only talking about a few thousand here and there. (OP was considering upping contributions by 4% to get to 20%, and 4% is only £2k gross). The "standard" answer says maximise your tax relief wherever you can, but if money outside a pension is useful from a practical point of view over the coming decades, one should not let the tail wag the dog (ie tax minimization is one useful goal but shouldn't be the only focus)

SpeedSouth

I was thinking about posting a very similar question with regards to my situation as well. I'm 35 and earn £45k, so at present only a very small portion is liable for 40% tax, and from next year it will be none with the HRT threshold limit.

Currently I pay 13% into my pension via SS, so I get that NI bump too. I also pay 18% into a S&S ISA so with employers cont both pots get 18% of my gross salary each month. My pension pot is not as large as yours but with my ISA, and cash savings it's a very similar amount.

I was questioning my plan of paying so much into the ISA, given I've come to realise there is very little chance I'll be able to retire much before 57,58 or whatever it be when I can access my pension so unlikely to need the ISA to bridge any gap.

My initial thoughts were to have accessible cash for kids, when they get older, or the small niggle that we might want another (read more expensive) house in the future.

Any pay rises will all go to the pension but after reading various articles I was leaning towards upping the pension %, but the fact I can drop money into the pension when ever I choose and still get my nominal rate of 20% relief it is less of a concern. It's at present the 12% SS really that makes the pension matter the most tax efficient but not necessarily most flexible and suited to the next 10-15 years of my life...

Anonymous101

adam81 wrote: »

I was thinking about posting a very similar question with regards to my situation as well. I'm 35 and earn £45k, so at present only a very small portion is liable for 40% tax, and from next year it will be none with the HRT threshold limit.

Currently I pay 13% into my pension via SS, so I get that NI bump too. I also pay 18% into a S&S ISA so with employers cont both pots get 18% of my gross salary each month. My pension pot is not as large as yours but with my ISA, and cash savings it's a very similar amount.

I was questioning my plan of paying so much into the ISA, given I've come to realise there is very little chance I'll be able to retire much before 57,58 or whatever it be when I can access my pension so unlikely to need the ISA to bridge any gap.

My initial thoughts were to have accessible cash for kids, when they get older, or the small niggle that we might want another (read more expensive) house in the future.

Any pay rises will all go to the pension but after reading various articles I was leaning towards upping the pension %, but the fact I can drop money into the pension when ever I choose and still get my nominal rate of 20% relief it is less of a concern. It's at present the 12% SS really that makes the pension matter the most tax efficient but not necessarily most flexible and suited to the next 10-15 years of my life...

I think you've a much better balance to your portfolio. I'll be trying to achieve something similar over the coming years perhaps with a 20% pension and 10-15% S&S allocations.

Its looking likely that i'll be well into the 40% bracket from next year so I think it'll be prudent for me to maximise my pension contributions to gain the tax relief. But this thread has certainly opened my eyes to a few other possibilities.

RuleTheWorld

I dont spend any time thinking about the carry forward allowance because imo only your 40% tax is where the debate is.

For 20% tax it is NOT a no brainer to make AVC's unless close to retirement is my opinion. Worth a thought but not a no brainer

ArmyDilllo

May I suggest, rather than AVC's, you might also consider another option;
Continuing to pay into your company scheme to get their maximum contribution and starting a personal scheme for your AVC's (unless, of course, your company scheme will give you a better return).

I lost one [small] company pension early on and vowed to never do it again.
I started one of my own and took over another later on.
Luckily I have not found myself in that position again.

There is also a maximum benefit you can draw from your pension* before it starts working against you (tax-wise).
Being still of a reasonably young age (lucky s.o.b.) you are likely to hit it sooner rather than later, with your level of contributions and the effect of compound interest.
So it may be wise to think about directing some towards ISA's as well.
You won't get the tax benefit immediately but, if they perform well, you will get the benefit later.

By this I mean that, in my experience (obviously "may go up/down", etc etc blah blah), my pensions have grown at a slower rate than other investments.
If you were doing the same as me over the period you're looking at, the improved growth of an ISA might outperform the tax saving you might expect from a pension contribution (take some advice on that).
Had I invested my pension contributions into ISA's when I began investing I would be considerably wealthier than I am now.

I would advocate a mix between the two so you can arrive at your max pension later and use the interim payments for ISA's (also being tax-free the ongoing value of these in retirement can be considerable and put you beyond what you might draw from a pension, which is still subject to normal income tax rules.

[*http://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-limetime-allowance]

darkidoe

ArmyDilllo wrote: »

I lost one [small] company pension early on and vowed to never do it again.
I started one of my own and took over another later on.
Luckily I have not found myself in that position again.

There is also a maximum benefit you can draw from your pension* before it starts working against you (tax-wise).
Being still of a reasonably young age (lucky s.o.b.) you are likely to hit it sooner rather than later, with your level of contributions and the effect of compound interest.
So it may be wise to think about directing some towards ISA's as well.
You won't get the tax benefit immediately but, if they perform well, you will get the benefit later.

By this I mean that, in my experience (obviously "may go up/down", etc etc blah blah), my pensions have grown at a slower rate than other investments.
If you were doing the same as me over the period you're looking at, the improved growth of an ISA might outperform the tax saving you might expect from a pension contribution (take some advice on that).
Had I invested my pension contributions into ISA's when I began investing I would be considerably wealthier than I am now.

What kind of company pension do you have? DB, DC?? Isn't the performance of the ISA/pension dependant on the underlying investment, and not whether it is in the ISA wrapper or pension wrapper? I think SIPPs might work this way.

The way I have looked at it is, for some government backed DB schemes according to how I understand it works, it gets you a certain amount of guaranteed pension based on your contributions rather than how the underlying pension investment is performing? I am not sure if company pensions are similar.