Pension increase or ISA

dunstonh

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

It wasnt the maths it was the English. My first draft had it worded as them getting 80% of it with 20% going in tax. I altered the wording but left the values unaltered, hence the error.

baby_boomer

dunstonh wrote: »

My first draft had it worded as them getting 80% of it with 20% going in tax. I altered the wording but left the values unaltered, hence the error.

You are pulling our legs, dunstonh, aren't you?

What does

80% of it with 20% going in tax

actually mean?

What is "it"?

I suspect it means another mathematical error, even when we've discombobulated your English.

Please explain the correct formula for the benefit of MSE readers who were listening to your wisdom on Pensions v ISAs and who deserve, & expect, to have this confusion resolved.

dunstonh

Not sure what you are getting at. If you have a cake of 100 portions and 20 goes to one person that leaves 80 to go to the other. It seems quite clear to me but to phrase it back in context:

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.

ffacoffipawb

dunstonh wrote: »

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

The annuity at age 65 is likely to be nearer to about £130pa, which is about £100 after tax, not vastly different to the tax free ISA. And if the age allowance withdrawal comes into the equation the ISA is better value.

Also the tax free cash may not be there in the future. However the removal of this is unlikely as there would be an uproar and the public sector scheme has tax free cash (and an 80'ths pension) as a given benefit.

Garnet_Gem

Personally, I would put the money into ISAs. You have more control over it and can pass it on if you die. Not a cheery thought but a practical one.

baby_boomer

dunstonh wrote: »

Not sure what you are getting at. If you have a cake of 100 portions and 20 goes to one person that leaves 80 to go to the other. It seems quite clear to me but to phrase it back in context:

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.

What dunstonh is struggling to say is that he thinks the pension pays 60% more income in retirement than the ISA [not the 80% he initially said] if we accept his earlier sums.

But these sums are currently being challenged by other posters.

dunstonh

The annuity at age 65 is likely to be nearer to about £130pa, which is about £100 after tax, not vastly different to the tax free ISA. And if the age allowance withdrawal comes into the equation the ISA is better value.

age 65, male single life with 5 year guarantee has an annuity rate of 7.4%.

£3600 less 900 TFC = £2700
£2700 x 7.4% (annuity rate) = £199.80

£199.80 minus 20% tax = £159.84

£159.84 is better than £95.40

baby_boomer

dunstonh wrote: »

male single life

But what about the majority of the population :rotfl:When it comes to annuities, there is a world of difference.

What proportion of your clients are men, BTW?

dunstonh

6.83% with a female age 65.

3600 less 900 TFC = £2700
£2700 x 6.83% (annuity rate) = £184.41

£184.41 minus 20% tax = £147.52

£147.52 is better than £95.40

Remember that within the next 3 years the age allowance is going to allow £10k p.a. each for couple. So, with balanced retirement planning and the spouse typically having lower retirement provision, if any, then using the spouse for these pension contributions makes a lot of sense.

baby_boomer

dunstonh wrote: »

£147.52 is better than £95.40

It's not as simple as that, since you have given up all claim on your capital for the higher income.

Perhaps you could reveal to us from the tables you show to your clients, how long men and women have to live to lose out by not taking a pension compared to if they invested the money in an ISA?

My own instinct, which I follow with my family, has been to invest in a pension for a 40% taxpayer but not for a 22% (soon to be a 20%) taxpayer [Gordon's future non-existent "tax cut :rotfl: " has significantly cut the pension benefit for the ordinary worker (while not increasing her take home pay) which increases the logic behind this approach.]