Pension increase or ISA

Wenglish_2

I have been informed by a friend that it is not worth putting extra money into my pension when I have only 3 years to go. He says I would be better off using an ISA.
He may be talking out of his rear but it has concerned me I have just enough time for my wife & I to both take out 3 more ISA's before I retire. As my wife cannot work due to illness I cannot afford to up my pension contribution & take out the ISA's.
Any advise would be most welcome.

dunstonh

I have been informed by a friend that it is not worth putting extra money into my pension when I have only 3 years to go. He says I would be better off using an ISA.

On what basis does he make the recommendation?

If you put the same amount into a pension and ISA over 30 years or 3 years you will still end up with the same difference in fund value between the ISA and the pension. The difference being the tax relief. Timescale has little to do with it. Indeed, since the pension rules changed allowing pensioners to pay in £3600 a year, after retirement pension contributions have become very popular.

Lets look at an ISA v pension and disregard growth as is it will be identical on the two and focus purely on income.

Pension contribution of £3600 gross = £2808 net. Take 25% tax free cash back which is £900. So, the actual cost is £1908. Annuity rate at 65 will pay £197.37 p.a. on that contribution.

The ISA contribution is £1908 (to match the net contribution on the pension and the 25% TFC returned). £1908 @ 5% = £95.40 a year.

So, pension pays an income of £197.37 p.a. and ISA pays an income of £95.40

Wenglish_2

I made a remark during a coversation about increasing my pension contirbution in my last years, that is when the remark was made. I was quite happy with my intention until my friend poo pooed it. Thanks very much for your reply.

EdInvestor

What is your likely tax position in retirement?

Remember that pension income is taxed, ISA income isn't.You need to look at the taxable pension income you are already projected to get ( including state pension) and see how it fits into the tax bands, including old age allowance, which is scheduled to rise to around 10k p.a over the next few years.

If you have no employer contribution and will pay basic rate tax on the income from the pension in retirement, then the ISA could be the better choice, particularly if the pension income will push you into a high tax band or affect your age allowance, which is clawed back on income over around 20k or more.

dunstonh

Remember that pension income is taxed, ISA income isn't.

Income is taxable. Doesnt mean it will be taxed. You have the personal allowance to use up first. With a husband and wife aged 65 or over that can be nearly £20,000 a year with no tax payable (age allowance is going upto nearly £10k over next 3 years).

Plus the pension pays more than double the ISA so even if there is 20% tax to come off, that still leaves them with 80% which is more than the ISA.

If you have no employer contribution and will pay basic rate tax on the income from the pension in retirement, then the ISA could be the better choice,

Please can you explain how the ISA can give a higher income than the pension? I am sure we would all benefit from an example on how you make the ISA income higher.

Wenglish_2

I will have a small pension plus the state pension,my employer does pay contributions. My wife has a pension of about £7000 a year to date plus she gets an annual increase and she will get a full state pension.
We already have a couple of ISA each plus about 10£ in shares which are a bit static at the moment. We were thinking of putting these into an ISA to ensure steady growth rather than the chancing the stock market.

dunstonh

stocks and shares ISAs are not all stockmarket. You can get non stockmarket funds and the stockmarket funds themselves are all different risk. So you dont need to cease the ISAs but perhaps tweak the fund selection to give you a lower risk spread. Cash is not a good long term solution. It should be part of your portfolio but you shouldnt disregard stockmarket on the basis of periodic fluctuations. Especially if you look to the lower risk end of the stockmarket.

jamesd

What is your pension? A personal or stakeholder pension? Are you considering an annuity purchase or using income drawdown with it?

Conrad

ISA every time. Generally much lower charges / commissions and your money goes to your beneficieries no matter when you die.

The packaged ISAs can be in the form of relatively save and broad Unit Trusts, some of which invest at the safer end of the scale for example in GILTS, cash, bonds and so on.

dunstonh

ISA every time. Generally much lower charges / commissions and your money goes to your beneficieries no matter when you die.

Thats not correct. Charges on pensions are either identical or lower than ISA (identical if you use unit trusts in a SIPP or fund supermarket pension or lower if you use stakeholder or personal pension).

Death benefits on an ISA are lower pre retirement but better post retirement unless you have bought capital buy back on the pension annuity.

baby_boomer

dunstonh wrote: »

Plus the pension pays more than double the ISA so even if there is 20% tax to come off, that still leaves the pension with 80% more.

Who taught you Maths? They must be turning in their grave :rotfl: .