Increase Pension Contributions OR Invest More Regulary into S/S ISA

Trundley27

I would like your views please, simple if possible..

I currently pay 7% Pension contributions from my salary and I am thinking of increasing to 8% (maybe 9%).
I get 5% employer contribution also.
Total currently combined - 12%

This year I started regularly investing in a S/S Isa (Vanguard LS 80% Equities) for the long term 25 to 30 years all being well, i hope.
My question is should I increase my Pension Contributions to the above stated or pay the difference between the 7 to 8% (or 7% to 9%) extra into my S/S ISA instead?

Thank you hope this is clear.

p00hsticks

A lot of it depends on what your tax position is now and how you see it in retirement.

In a pension you get tax relief on the way in, but 75% your pension is taxable on the way out, with 25% tax free.

You'll be paying into an ISA with income that's already been taxed, but (barring any government changes~) will be tax fee on the way out.

In general, a pension is more tax efficient, especially if you're currently a higher rate tax payer but don't expect being so when you retire. But you are locking away the money until you are at least 55, maybe later if the rules change.

However a S&S ISA is more flexible as you can access it whenever you want and so can be useful to provide income prior to drawing your pension if you wish retire early and your works pension applies deductions for taking it at an earlier date.

Trundley27

I am thinking opinions will be in favour of Pension Contributions also I am not a higher rate tax payer.

eskbanker

If you're under 40, it may be worth considering a Lifetime ISA, which isn't accessible without penalty until 60 (if not using for a first-time property purchase) but boosts your contributions by 25% with free government money and can be invested in similar products to a standard S&S ISA.

Trundley27

I am 30, with a mortgage and have been contributing to my pension since 20 years old, but thought increasing contributions now would be a good idea. I increased 2% this year also and I am thinking another 2% (hopefully) again.

eskbanker

Trundley27 wrote: »

I am 30, with a mortgage and have been contributing to my pension since 20 years old, but thought increasing contributions now would be a good idea. I increased 2% this year also and I am thinking another 2% (hopefully) again.

My point was that using a LISA may be better than increasing pension contributions, based on logic along the lines of:

If you reduce your net monthly income by, say, £100 by paying into a pension, this would credit your pension pot by £125, but would probably be taxed at basic rate on the way back out, taking it back to £100.

Putting that same net £100 into a LISA, it would also be boosted to £125 but that could then be withdrawn (after 60) without further taxation, thereby beating a pension.

There are a number of additional factors that would need to be applied to make a completely valid like-for-like comparison, as explained in the MSE article linked above - in the pension scenario, it may be possible that some or all of the additional contributions form part of an initial 25% tax-free lump sum and NI savings may adjust the maths if offered by your employer. The comparison also ignores any differences in investment growth between pension and LISA, and assumes that your employer won't increase their contribution to match you doing so.

Not saying it's the right answer by any means but IMHO worth exploring in more detail....

kidmugsy

Trundley27 wrote: »

I am 30, with a mortgage and have been contributing to my pension since 20 years old

Do you do it via salary sacrifice? If not, for a 20% taxpayer who has already maximised his employer's contributions I don't see the point of pouring more into pensions. The extra reward you'd be getting to compensate for loss of access to the funds is miserable.

Use ISAs, and perhaps LISAs, for now: you can always shift that money into pensions from age 55 or age 60.

Alexland

If you are happy to (almost) tie the money up until 60 then contributing into a S&S Lifetime ISA for a 25% bonus should work out better than making basic rate unmatched contributions into your pension. Unless you get salary sacrifice to save the NI in which case it's about even.

Good LISA platforms include AJ Bell (for occasional lump sums) and HL (for regular or smaller contributions) and good mixed asset fund series include Vanguard LifeStrategy, Blackrock Consensus (discounted on HL) and HSBC Global Strategy.

These LISA platform percentage fees are a bit higher than Vanguard Investor but after a few years once you get enough into the account they are capped if you switch from funds to ETFs or ITs.

Alex.

Trundley27

Oh dear I feel like I have opened a can of worms here and I am getting a wee bit confused.

So I have a defined benefit contribution scheme pension, not salary sacrifice. Which as stated above I pay currently 7% of my salary into plus 5% Employer contribution. 10 Years paying into this. I also opened a S/S ISA this year (Alexland I remember you pointing me in the right direction for this). The S/S ISA is Lifestrategy 80% Equities Acc. Which i will hopefully keep contributing to on a monthly basis for 30 Years.

Now i have a pay rise and i am unsure to increase contibutions to 9% from 7% or use this difference in money to either go back into S/S Isa or pension contributions.


Its not a huge amount of money, i just want to know were it is better placed?

And now you mention this LISA?


I appreciate all your answers, i need a basic answer something not to technical if yous dont mind..
I currently have a 'emergency fund' incase of job loss etc etc.

AlanP_2

You have a Defined Contribution (DC) scheme with no defined Benefit (DB) element just to clarify that for you.

Pension, ISA and LISA are tax wrappers, each with different rules on what can be paid in, how much per tax year ad when they can be accessed.

ISA is the least restrictive - up to £20k per year in, access it whenever you need to.

LISA - Max £4k per year and HMRC will top it up by 25% (good) but can only be accessed for 1st residential property purchase or at age 60 (not so good).

Pension - Various limits but the most applicable are Annual Salary or £40k whichever is greater (a bit more complicated for those earning £40k+ in reality but never mind). HMRC allow tax relief at 30/40% as appropriate but can't be accessed until at least 55 and that is forecast to increase (State Pension age - 10 years has been discussed).

So, as to what you need to do - What are you investing for, over what time period and how easy does access need to be as a starting point to help you think it through?

You could always go 1% on Pension as you won't miss what was never in your bank account and put the other part into ISA / LISA as appropriate.

BTW - As LISA needs to be opened before you turn 40 I would open one anyway just in case you want to use it later, even if only with £100 in there.

Prism

Trundley27 wrote: »

Its not a huge amount of money, i just want to know were it is better placed?

You should get about the same return if its in an ISA or a Pension, assuming you use similar funds in either.

If you don't need this money for many years (retirement) use use the pension - it will save you a bit on tax. If you might need the money before then use an ISA. You will pay a bit more tax but can take the money back out when you want.