Where to begin with S&S ISA's

eskbanker

Cruixer wrote: »

Are there any other considerations?

There are many considerations when comparing pensions and ISAs!

Although I appreciate you're using £100K for ease of maths, there are (different but in both cases lower than £100K) contribution limits on both pensions and ISAs, which may come into play when real numbers are substituted in.

As already discussed above, using pension contributions can reduce higher tax liability - if you chose not to do that then at least some of your income that ultimately went to an ISA would have been taxed at 40% rather than 20%, which would obviously affect your numbers.

Does your employer offer salary sacrifice arrangements that would also result in NI savings when diverting income to pension?

Using the ISA route leaves you with a higher income and higher accessible savings, which may affect benefits or care costs in later life, or sooner than that (child benefit for example, as Alex mentions).

Thrugelmir

Cruixer wrote: »

A quick look at the past performance on the vangaurd site seems to indicate roughly around a 9% return over the last 5 years, versus inflation of around 3%, if I am reading this right.

Correspondingly if the return had been 2% with inflation at 3%. Would you have immediately discarded the option of investing?

Cruixer

Alexland wrote: »

Yes basic rate pension contributions are slightly better but you are locking the money away and if you hit the LTA due to the higher rate tax avoidance you may find you pay a penalty withdrawing those extra contributions you made from basic rate income. Risk of hitting LTA is why I only pay enough to avoid higher rate tax.

If you have access to a DB pension scheme that makes things interesting as there may be more than just tax benefits to making additional contributions. Also you may choose to make contributions to a money purchase scheme (such as a SIPP) in parallel which would go to your beneficiaries.

https://www.youinvest.co.uk/pensions-and-retirement/accessing-your-pension/sipps-and-death

Alex

My work pension was a defined benefit final salary scheme up until a few years ago, when it was changed to a career average, but still good. There is also an investment builder, and I can do salary sacrifice into this. This is what I was referring to regarding my additional contributions.


The scheme includes life insurance, where my wife would get my pension in the event of my death, but I believe that the spin side of this is that the investment builder amount defaults back to the scheme.



I'm not sure how the LTA works in relation to the defined benefit part, so I would need to figure this out. I'm not sure if this only applies to the lump sum, if it does then I am likely to be well within, but if it applies to the annual pension as well then that might change things.

Cruixer

eskbanker wrote: »

As already discussed above, using pension contributions can reduce higher tax liability - if you chose not to do that then at least some of your income that ultimately went to an ISA would have been taxed at 40% rather than 20%, which would obviously affect your numbers.

Sorry, I should have been clearer. I have already decided to use the pension to bring me into the lower tax bracket, which is why I was using the 20% range. I am actually not that far into the higher tax bracket. I was trying to compare ISA and pension for what I do after I have dropped down to the 20% bracket.

eskbanker wrote: »

Does your employer offer salary sacrifice arrangements that would also result in NI savings when diverting income to pension?

Yes, I have salary sacrifice, and that's what I am using to contribute to the investment builder in my pension, so yes there are also savings on NI.

eskbanker wrote: »

Using the ISA route leaves you with a higher income and higher accessible savings, which may affect benefits or care costs in later life

I didn't know about that. So once you are retired, are you saying that savings in an ISA will affect this but pensions do not, even though once you are retired you can access the pension lump sum just the same as you can access an ISA?

Cruixer

Thrugelmir wrote: »

Correspondingly if the return had been 2% with inflation at 3%. Would you have immediately discarded the option of investing?

I'm not really discarding any options, but if the return was only likely to be 2% and I can get 1.5% in the bank, then it might not be worth the risk of investing. Maybe if investment returns were only 2% then interest rates would be lower too though.



I am actually trying to consider all options, and one of the options I am considering is actually to reduce my hours now and enjoy life, spend time with the little one etc, rather than work towards a pension that I might never see! All options are on the table, and part of that is trying to figure out how much I should put away before considering reducing hours. All options are on the table!

Alexland

With salary sacrifice on basic rate contributions then there is greater advantage to putting the extra money in your pension. However there is still the risk of the LTA to consider however that depends on how much you have accumulated so far, how much the DC element will grow, future contributions and your retirement income strategy.

Alex.

eskbanker

Cruixer wrote: »

eskbanker wrote: »

Using the ISA route leaves you with a higher income and higher accessible savings, which may affect benefits or care costs in later life

I didn't know about that. So once you are retired, are you saying that savings in an ISA will affect this but pensions do not, even though once you are retired you can access the pension lump sum just the same as you can access an ISA?

See https://www.pensionwise.gov.uk/en/care-costs for information on this, but I think it's fair to say that there will be various permutations rather than a definitive one-size-fits-all answer, and obviously rules can change between now and your retirement anyway!

There are a number of comparative articles to be found by Googling 'pension versus isa' - at least one of these also highlights different treatment in the context of estates and inheritance tax planning too....

Cruixer

Just wanted to correct something I repeated a couple of times in the thread. I had said that the voluntary contributions made to the investment builder in my pension were forfeit to the fund, instead of going to my beneficiary in the event of my death. I had misunderstood this, and its actually only the employer contributions or matches to this that are forfeit and any funds built up as a result of my contributions are returned to my beneficiary.


With this now clarified it seems that the pension, with salary sacrifice, is easily the way to go for the medium term at least. I'm no where near the lifetime allowance, maybe 10 years away being optimistic, but it is something to look out for in the future. To be honest if I got anywhere near the lifetime allowance I would probably go part time or retire, as this would be way above my likely income needs.



I think I might still put some of the money from the savings account into S&S ISA, as its obviously too late to put this towards the pension fund now, as a bit of diversification. The Vanguard/iweb suggested by Alex looks like a good option.



Thanks all for the help.


Have a great Christmas and New Year everyone.

RoTe

Bought a lifetime ISA in March 2018 ie previous tax year (2017-2018) , paid in full £4000.00 government bonus received Ok, but as I have now found my perfect house, and will need to withdraw the funds (tax year 2018-2019) - will I loose the bonus and have to return 25% to the government ?

eskbanker

RoTe wrote: »

Bought a lifetime ISA in March 2018 ie previous tax year (2017-2018) , paid in full £4000.00 government bonus received Ok, but as I have now found my perfect house, and will need to withdraw the funds (tax year 2018-2019) - will I loose the bonus and have to return 25% to the government ?

The significance is date of opening rather than tax years, so if you withdraw LISA money within 12 months of the account being opened then you have to pay a penalty of 25% of the amount withdrawn, i.e. if you paid in £4,000 and had that boosted to £5,000 with the bonus, you'll get £3,750 back if you sought to withdraw it all (ignoring the effects of interest or investment growth as applicable, depending on which type of LISA you have).