Pension v ISA over 10 years (earnings below £50k). Plus review my retirement plan.

Retired_Minky

A little about me:
I already have a pension pot worth approx. £160k at the moment.

I have a separate income from property of approx £25k pre tax per year. In addition to this I have a working income of approx £55k. Total income of approx £80k per year.

I’m 45. My thoughts are to stop working at 50 and to live off the income from the property for 5 years (i.e. try to live off less than £25k pre tax per year when I’m 50 as I’d loose my £55k income).

When I eventually hit 55 I’d look to draw down on my pension to supplement my property income. This would add another £10k ish to my annual earnings (depending on size of pension at that time).

As it stands I put anything I earn over £50k in the pension for the 40% tax relief which I believe is a no brainer.

However what’s best for what I earn below the £50k threshold?

As I understand it if I put this in to a pension I still get relief at 20% but will pay tax on withdrawals when I retire at 55.

If I put this in to an ISA I get no tax relief on the initial amount but anything I draw down in retirement will be tax free. The added advantage to this is I could draw down at 50 and not have to wait until 55.

Q- If I plan to retire as per the plan above (i.e. and draw pension income in 10 years) which option is best. Pension or ISA? I’m guessing pension as it allows you to compound the tax saving on the investment but not sure as it’s only over a 10 year period.

Q - Is the above a good plan? Has anyone else got any feedback from doing something similar e.g. retire without pension and live off other money until the pension kicks in.

dunstonh

Ignoring all other issues and purely looking at tax efficiency for income tax, pension beats ISA if you are a basic rate or higher rate taxpayer who will be a basic rate taxpayer in retirement. Pension also beats ISA for estate planning.

ChopperST

dunstonh wrote: »

Ignoring all other issues and purely looking at tax efficiency for income tax, pension beats ISA if you are a basic rate or higher rate taxpayer who will be a basic rate taxpayer in retirement. Pension also beats ISA for estate planning.

Bit late for the OP due to his age, but once one has maxed out their higher rate tax relief would a LISA (up to £4k with £1k government uplift) also be an alternative to SIPP contributions? Acknowledging that this does have an impact on benefits / estate planning etc.

Albermarle

Even for a basic rate taxpayer , a pension has a 6.25% clear advantage , due to the 25% tax free cash you can take from a pension..
.

I’m guessing pension as it allows you to compound the tax saving on the investment

If you do the maths it does not work like this as you pay more tax on the larger sum , the advantage is just the 6.25%

Tom99

ChopperST wrote: »

Bit late for the OP due to his age, but once one has maxed out their higher rate tax relief would a LISA (up to £4k with £1k government uplift) also be an alternative to SIPP contributions? Acknowledging that this does have an impact on benefits / estate planning etc.

I would be interested to know the answer to that, say for a 35-39yr old. Would it be better than a SIPP because there is no tax on withdrawals and better than an ISA because there is a 25% uplift.
That leave the only downside being unable to withdraw without penalty before age 60?

dunstonh

That leave the only downside being unable to withdraw without penalty before age 60?

Not the only downside.

Pensions are outside of your estate. LISAs are not.
Pensions are not included in the means test for benefits prior to retirement. LISAs are.
LISA is includedd as a bankruptcy asset. Pensions are not normally.

There are some other less common but differences as well.

tin586

It’s a tough one to call, because, to some extent, you have to take a view on changes a future government of whatever hue will make to ISAs and pensions (I deliberately say “will” rather than “might”!).

On ISAs, one can imagine a Corbyn government will, for example, lower the annual allowance or cap the overall pot size one can accumulate. This would be gesture politics, because there would be no immediate benefit to the Exchequer (as ISA money has already been taxed). A Tory government can equally play gesture politics by freezing allowances.

Pensions offer politicians more room for manoeuvre, because of the upfront tax relief on offer. One can easily imagine Corbyn taking away higher rate tax relief. Equally, a Tory Chancellor might also consider tinkering.

So all of this might indicate maximising your pension allowances while you can. On the other hand, ISAs are very flexible on when you can take the money out, which is attractive, because with the ‘deferred gratification’ of pensions you are more vulnerable to future UK government ‘political risk’.

It is unimaginable that a Tory Chancellor would seek to retrospectively tax ISA pots and near-unimaginable a Labour Chancellor would (because even some Labour supporters have large ISA pots, especially if they have nice public sector pensions).

Sorry this is a lot of conjecture with no precise recommendation, but it’s a hard question (hence why you asked it, I guess).

Overall, speaking as another person who would like to retire early, I would say you look in pretty good shape from what you have described. Good luck!