Pension increase or ISA

dunstonh

jamesd wrote: »

dunstonh, your comparison here seems unreasonable since you're comparing drawdown with capital preserved from ISA with the capital spent for extra income in the pension. Should be the same for both: each drawdown or each annuity purchase.

Im not comparing drawdown. Just annuity purchase against an ISA paying 5%.

You cannot do an exact like for like because the ISA and pension are different. All I am doing is comparing the net cost and what income both options would provide.

Capital retention is an advantage of ISAs but you cannot do anything with that capital because if you do, your income goes down. So, in effect, the money is stuck there anyway.

The aim here is to show that purely looking at income requirements only, the net cost of the pension means that it will provide a higher income than the net cost of the ISA. If you are buying the pension it will cost you £1908 at the end of the process. So, its only right to compare that against £1908 in an ISA.

EdInvestor

dunstonh wrote: »

Im not comparing drawdown. Just annuity purchase against an ISA paying 5%.

Of course you can withdraw any amount from your ISA - you're not restricted to 5% (per haps you were thinking of an investment bond?) .

Experience with pension income drawdown which would equally apply with a pension, suggests that as long as you maintain strict control of costs and have a well targeted investment plan, you can withdraw 120% of the annuity rate and still maintain, indeed grow, your capital long term.

Capital retention is an advantage of ISAs but you cannot do anything with that capital because if you do, your income goes down.

Does it? That's not necessarily so at all.

dunstonh

Of course you can withdraw any amount from your ISA - you're not restricted to 5% (per haps you were thinking of an investment bond?) .

You can draw more but if you eat the capital, you start a spiral downwards and you can end up running out of money. Investment bonds are not restricted to 5%.

Experience with pension income drawdown which would equally apply with a pension, suggests that as long as you maintain strict control of costs and have a well targeted investment plan, you can withdraw 120% of the annuity rate and still maintain, indeed grow, your capital long term.

And what is your experience with income drawdown?

What would the FSA think of an adviser making that sort of comment without any of the risk warnings?

Does it? That's not necessarily so at all.

Please tell us how you can spend the capital on the ISA without it having an impact on the income?

EdInvestor

dunstonh wrote: »

You can draw more but if you eat the capital, you start a spiral downwards and you can end up running out of money.

Yes but if the capital and income grow well, this shouldn't happen.

And what is your experience with income drawdown?What would the FSA think of an adviser making that sort of comment without any of the risk warnings?

My experience of drawdown is as above.Much of the risk of drawdown is removed if you don't have to pay excessive fees to fund managers and advisors.

Please tell us how you can spend the capital on the ISA without it having an impact on the income?

If you are taking income from dividends in your income you will usually find that the dividends rise every year by around 10-15%. So even if you cashed in some shares you could still maintain your dividend income.

You can also cash in some of your capital gains from non-dividend paying shares.You seem to think the capital remains static, but of course in the long term it grows (assuming it's not being eaten away by high charges).

jamesd

dunstonh, OK, I'll compare. The value of the 197.37 pension is 157.90 a year after basic rate tax. At 6% return after fees and inflation the £1908 ISA can produce that after tax income for 21 years before the money runs out, at age 86, roughly the current life expectancy for a 65 year old male. If you weren't using RPI protection at say 3% the resulting 9% return on the invested ISA means the ISA capital value grows and lasts indefinitely with capital to be inherited. 8% is the return after fees (and possibly after inflation) for the money to last indefinitely and that's eminently achievable at medium or even lower risk. This is with 100% spouse income after death.

What inflation protection did you use for the pension annuity? Doesn't look as though you were using a dual life annuity, while the ISA is inherently dual life.

How does the pension annuity compare after tax with RPI inflation protection and dual life cover at 65 male/60 female spouse? At 60 male/55 female spouse? 75 male/70 female spouse?

The pension annuity does have the advantage of certainty and has a tax advantage if the personal and age allowances aren't yet being used by other income.

Wenglish_2

My wife has a bigger pension than me as I have worked for serveral companies without a company pension, while she had a company pension plan for 25years. My pension is a personal one to which my employer contributes the same as me. I also have 2 other plans which are closed (Not sure of the correct terminology)