S&S ISA > Pension?

Zola.

I invest in both a pension with work, and also a S&S ISA every month.

Just curious, does anyone invest in their ISA more than their pension?

I guess the benefits with the pension is that its locked away, and the government add a bit (yet they tax you on the other side after the first 25%).

As a 33 year old, conscious of the constant moving of goal posts (with when you can access your money), it concerns me.

Does anyone feel the ISA route is better?

- Yours to access anytime if really needed
- No government tax on gains if investing within 25k limit each year

Just interested to hear your thoughts.

Drp8713

Yes, I do.

I am 30 and thinking about early retirement.

I pay into the LGPS where my pension is circa £5k per year. I am accruing just over £1k pension per annum. I also have £7k in a SIPP/AVC which I add £80 a month. These tick the age 68 onwards income(lgps and avc), personal alowance between 55-67 boxes (SIPP). The contributions also keep me out of higher rate tax and in child benefit. I will increase the SIPP contributions to ensure I pay no 40%. If the state pension is still about that will supplement the LGPS.

I max the LISA which sorts the age. 60-67 period.

So really need the period 50-55/60 sorted and put £700 per month into the S&S ISA for that.

Paul_Herring

Just curious, does anyone invest in their ISA more than their pension?

Well not quite more (currently 32% of gross into pension, 23% into ISA,) but I'll be using the ISA to fund retirement in the years before I can legally get my hands on my retirement pot, if I do retire early.

MEM62

Zola. wrote: »

I guess the benefits with the pension is that its locked away, and the government add a bit (yet they tax you on the other side after the first 25%).

The difference adds up to a lot more than they just 'add a bit'. Everything that goes into your pension goes in Tax Free, what you put into an ISA goes in post-income tax.

Therefore, stick £100 of your gross salary in your pension and £100 goes in. Stick £100 of your gross salary in an ISA and £80 goes in - or even £60 if you are a 40% tax payer.

ColdIron

Zola. wrote: »

Just curious, does anyone invest in their ISA more than their pension?

I do as I am in drawdown but for the last 10 years of employment I prioritised my pension contributions over my ISA

If you pay higher rate tax it's a no brainer in my view. You have the choice of giving 40% of your earnings, taxed at the higher rate, to HMRC or putting all of it into a pension. If you are a basic rate taxpayer but expect to be at the higher rate later on in your career (something we should all aspire to) there may be a case for prioritising your ISA in the early years and when you reach the higher rate band use your ISA to fund your pension contributions to maximise tax relief. Obviously you won't be able to do this if you've already raided your ISA, locking away your money is an attraction and not a disincentive

The other very important factor to consider is change in pension regulations. Pension tax relief is generous and a big juicy low lying fruit for Chancellors of all stripes. They could reduce the rate of relief, reduce the annual allowance and reduce the lifetime limit. If I was 33 I'd be making hay while the sun shines because this will not stay unchanged for the next 30 years

I guess the benefits with the pension is that its locked away, and the government add a bit

It's a little more than a bit, £400 for every £1,000 earned to a higher rate tax payer

(yet they tax you on the other side after the first 25%).

Not necessarily. The payments are liable for tax but you still have your Personal Allowance so depending upon your withdrawal rate you may pay little or no tax if planned properly. This is especially relevant if you retire early as I have just done. I have a bit under 10 years until my state pension and do not expect to pay income tax at all on my withdrawals until then

- No government tax on gains if investing within 25k limit each year

Do you mean the £20,000 ISA contribution limit? I hope this is in investments and not cash

Zola.

Food for thought! Thanks...

@ColdIron I didn't know that the money withdrawn after your '25% tax free lump', was only subjected to tax, depending on how much you withdraw, thats interesting! Say you don't blow it all and die before its spent, does the remainder go to partner / dependents?


I have 16% of my monthly pay going in to a pension (10% from me via salary sacrifice, and 6% from work).

My wife pays substantially less in her pension at the moment, but we invest £500 a month between us in Vanguard Life Strategy 80% Acc, and hope to build that up to a substantial level over time.

ColdIron

Zola. wrote: »

@ColdIron I didn't know that the money withdrawn after your '25% tax free lump', was only subjected to tax, depending on how much you withdraw, thats interesting! Say you don't blow it all and die before its spent, does the remainder go to partner / dependents?

Pension income has much the same income tax treatment as earned income, same allowance, rate etc. Obviously there are no NICs. If you take large amounts, the portion above your personal allowance will be taxed, but if your annual withdrawals (including other sources of income) are below they will not be taxed at all, just like earned income

Assuming that you have a defined contribution pension, you can usually name one or more beneficiaries, could be your spouse, a charity, or even your drinking buddy down the pub. In many cases this can be done tax efficiently if you die before 75 and may not form part of your estate for inheritance tax purposes

Paul_Herring

MEM62 wrote: »

The difference adds up to a lot more than they just 'add a bit'. Everything that goes into your pension goes in Tax Free, what you put into an ISA goes in post-income tax.

Therefore, stick £100 of your gross salary in your pension and £100 goes in. Stick £100 of your gross salary in an ISA and £80 goes in - or even £60 if you are a 40% tax payer.

And, simplistically, £100 comes out of your pension and it gets taxed at 20%, £80 comes out of your ISA, it doesn't get taxed.

Caveats, of course, include any NI savings going in, and the TFLS and any remainder of personal allowance coming out of the pension which still make the pension preferable if you can wait until 55.

MK62

For most people saving for retirement, a pension will win out over an ISA nearly every time.

While it's true that pension income is taxed, whereas ISA income is not, in most cases that tax is only levied against 75% of the pension pot (due to the 25% tax free PCLS) - or if using UFPLS, against 75% of each withdrawal.
Then you add in the fact that with pension income the first £11850pa is tax free too (assuming a standard full PA)...


Of course, there are always corner cases.....such as being in a higher tax bracket in retirement than you were when working....but if most people did the maths, they'd find that a pension will come out on top in the large majority of cases.

ISAs do have other benefits of course.....such as no age restrictions on withdrawal (not inc LISAs), for one, and often lower charges....to name just a couple off the top of my head.

kidmugsy

MEM62 wrote: »

The difference adds up to a lot more than they just 'add a bit'. Everything that goes into your pension goes in Tax Free, what you put into an ISA goes in post-income tax.

That's a hopelessly limited way to look at it. Every penny goes in free of income tax, true. But depending on the detail of an individual's case, 75% of it will be taxed on the way out, at an income tax rate which could be - for all anyone knows - higher than the current basic rate.

In other words, a pension defers tax rather than simply avoiding tax.

kidmugsy

Zola. wrote: »

My wife pays substantially less in her pension at the moment, but we invest £500 a month between us in Vanguard Life Strategy 80% Acc.

For many people who pay basic rate tax an attractive scheme is to use an ISA at present, and then switch some of the money into a pension when they become higher rate taxpayers.