Really late retirement plan...

Steve_GP220

Hi Guys

I'm sorry if my questions are pretty basic but I am new to this - completely!

I've left saving for retirement very late and i have to do something about it. I have 12 yrs to go and so am going to max out on saving right through to then.

Please tell me though - a basic cash ISA is like a savings account and I wont pay tax on the interest? I pretty much understand that.

But a more complex ISA with low medium and high risk investment obviously (can) make money (as well as lose money). For instance, if the Standard Life calculator is to be believed, investing £750 per month for 12 yrs shows a return of £147,105 - give or take, that's more or less a £47-48k profit on the total original investment with the medium 5% growth. Obviously it could be more or less depending what happens. It could even be less than the original investment. I know this.

My questions are - is Tax then payable on the profits? And if Tax is payable, is it even worth the risk over a normal Cash ISA. I mean a straight cash ISA will pay interest, small yes but something, the original investment is safe and there is no tax. In other words why would I take the risk? Also, just as a matter of interest, can anyone answer what percentage of the more complex ISA's actually LOSE the investor money?

Sorry in advance if this post is a bit mish mash!

ColdIron

An investment ISA is just like a cash ISA in that any gains within it (capital, dividends, interest) are tax free. But if this is for retirement why not use a pension or SIPP? They can hold the same investments as an ISA and the tax protection is the same but you get a useful tax rebate on any contributions. From 55 you can then take 25% out entirely tax free and may pay little or no tax when you take the rest out over the years depending upon your other income. You need to do the sums but forget cash ISAs for retirement and it would be short sighted to overlook pensions

xylophone

Have you checked your state pension position?

https://www.gov.uk/check-state-pension

Do you have any other pension provision at all/old employer/current employer/private pension etc?

dunstonh

Why are you looking at ISAs and not pensions?

In most cases, pensions trump ISAs in terms of benefit vs money paid in.

Also, just as a matter of interest, can anyone answer what percentage of the more complex ISA's actually LOSE the investor money?

Risk is a sliding scale. It is not on/off. Every option has risks. Including Cash ISAs. Indeed, for retirement income provision, a cash ISA is likely to be higher risk than a medium risk investment option when you consider all risks.

It is about taking appropriate risk.

Steve_GP220

Ah, this is why I posted here, because I have no idea. I had pretty much tossed the cash ISA into touch. I re-iterate, I have left it really late. I'm 58 now and will retire at 70 because I am in a job that is safe and not manual. And I am pretty fit and with no health issues. I just did years of spending much more than thinking of the future. And now here we are. I did have 10 years worth of pension with my last company but guess what, I just cashed it in and blew it a few years ago. I know I know..... I wonder how many more like me there are out there!

With all that in mind and with it being only 12 years, I'm kind of not wanting to go any complex route. I mean if the difference in what I choose to do amounts to A LOT of money then obviously the right decision has to be made. Otherwise building up complex portfolios etc etc doesn't appeal to me. I'm not even sure what an SIPP is - and obviously pension plans can be compared. At this point I am open to all suggestions and advice. Obviously I get the 'doing the sums' bit but with investments and no telling how things go over 12 yrs or more, is doing accurate sums not pretty much impossible?

The company I am with and will remain with now pay the minimum into a pension and that's about it. I could kick myself now. Its one of those things where you wake up one morning and think ****!

Steve_GP220

Indeed I AM looking at pensions now! I'd be silly not to

With regard to the risk, I was referring mainly to the fact that at least with a cash ISA your capital is not at risk. The returns are rubbish to start with and obviously interest rates could go down further, but your initial investment is safe. I think that is what I would be gutted about - losing some or a lot of the initial investment!

I think I'm really showing my naive side here so am hoping to learn a bit from you guys before I do that 'plunge' thing.

bowlhead99

Steve_GP220 wrote: »

With regard to the risk, I was referring mainly to the fact that at least with a cash ISA your capital is not at risk. The returns are rubbish to start with and obviously interest rates could go down further, but your initial investment is safe.

The point made by Dunstonh above is that it is not very 'safe' as a method of building money for a 12 year period because it will be eroded by inflation faster than the interest received will top it up, so it will not grow in real terms and almost certainly fall short of your objective which is to grow your assets between age 58 and 70 and then (presumably) keep part of the money invested to allow you to draw from it over a further 20-30 years of retirement.

Whereas a 'higher investment risk' investment product is something that wobbles around in value from month to month or even minute to minute and at some point an individual pound of invested capital might well be worth 25% less than you put in, but will have a broad trend of growing overall when all the ups and downs are averaged over, say, 12 to 30+ years which is the timeline you're looking at.

I think that is what I would be gutted about - losing some or a lot of the initial investment!

The 'initial' investment is just £750. Let's say you invest that in investment funds tomorrow but over the next year there is a market crash and it falls in value so each £1 is only worth 67p and that first piece of capital falls in value by 33% to £500. OK, on paper you have 'lost' £250 but presumably the loss of £250 is not going to stop you retiring. If the investments are well diversified (different types of investments all around the world) they will recover over time (they may have another 12-30 years to do that before you are spending that particular pound.

Meanwhile, you will still be investing new money each month and not all the investment funds units will have cost you as much as your day one units. If the market is falling downwards, maybe the units you buy in 6 months time only cost 80p and in 10 months time they only cost 75p, and the new investment funds units you are buying with your £750pm in a year's time, if the markets have fallen 33%, will only be costing you 67p each. So when the 'ups and downs of the market' help the price to go back up to 100p and beyond (i.e. the same price or higher than today) they would grow substantially.

So, any drops of value are 'averaged out' a bit and if you are buying into a fund that could lose 33% from its peak you will not be losing 33% on every pound you put in for the next 12 years because you will not have bought all those fund units at their peak. When you look back in 12 years the overall pot will be more likely to have gone up than down.

However, as you get closer to needing part of the money, you can use a more and more cautious fund rather than a riskier and riskier one. The ups and downs of your fund value will be more pronounced with the ones that have the highest growth potential. If you are likely to need some of the money back in 12 years and are a cautious and new investor, you will not be investing in the highest risk stuff, but everything is OK in moderation if you have time to wait out the natural ups and downs.

Steve_GP220

Good response! The detail you've gone into a eye watering! I have this 'thing' about pensions. The pension I eluded to in my original post I cashed in. I took the 25% tax free and the rest some months later on which I paid 40% tax. This was based on a pension that I barely contributed to but which my employer paid very generously into every month for 10 years. I kind of looked at it like 'well I didn't put that money in in the first place, that was my employer so ok, I paid tax on it'. But if I am paying £750 a month in to a pension from money I have already paid tax on, and then get heavily taxed when it comes to cashing in.

I expect I am missing something in this. I find the whole tax debate a daunting one.

dunstonh

But if I am paying £750 a month in to a pension from money I have already paid tax on, and then get heavily taxed when it comes to cashing in.

You pay emergency tax on cashing in a pension. However, you claim back the over payment by filling in the appropriate P5x form. Pension lump sums like that use the PAYE system and its similar to being paid a single large amount from an employer.

Pensions are meant to be used for income provision in retirement. Cashing in a tax free pension that could have used more of your personal allowance in retirement when you already know your retirement planning is poor, does not seem a very good thing to have done.

I expect I am missing something in this.

You are. Instead of taking your pension as a monthly income and having it taxed on an annual basis, you took it all in one go and had it paid in one tax year.

e.g. if you had a pension fund of £100,000, you could draw £5,000 a year. That £5,000 is income and taxed with income tax. However, you also have your personal allowance which means you can earn £11k a year tax free.

You dont say the size of the pension in your case but in the above example, you did the equivalent of taking that £100k all in one go. and getting taxed as if you had £75k of income (as first 25% is tax free - so 75% taxable).

Cashing in pensions is usually an option of last resort (unless it is a trivial amount or part of a tax planning exercise where you cash in chunks over multiple years to use personal allowance).

EdSwippet

Steve_GP220 wrote: »

The pension I eluded to in my original post I cashed in. I took the 25% tax free and the rest some months later on which I paid 40% tax. ... But if I am paying £750 a month in to a pension from money I have already paid tax on, and then get heavily taxed when it comes to cashing in.

At this point it seems appropriate to invoke the spectre of the current political football known as the 'Money Purchase Annual Allowance'.

£750/month is £9,000/year and would have been okay in the past, but unfortunately this is now far in excess of the new £4,000/year limit.

Steve_GP220

So would the fact that I paid emergency tax not be put right via a rebate at the end of the tax year then - since you mention its treated as PAYE? I mean rather than filling in the P5x form?

The tax free lump was something like £8-9k so the 40% tax was on the remaining £27k ish! Oh I've already asked how stupid am I? But there we go! Now I have to use this last 12 years wisely - hence my original post. I suppose I could always save my £750 a month and then decide in months rather than days, how to invest it. the more I learn here taken into consideration.