Contribute further to pension or S&S ISA?

waveydavey48

Does it make more sense to make further contributions to my deferred DC pension pot or invest the cash in a S&S ISA, eg VLS?

I am 57, have a deferred DC pension in a staff scheme managed by fidelity and a DB pension which starts at age 60 which we can live on.

We have substantial savings all in cash (long story, we just never thought we had the long term investing horizon necessary to make investing in equities sensible), but it's clear that we can safely invest for 5+years so want to invest some of our cash in equities.

I was all set to start feeding money into, say VLS40 or 60 in a S&S ISA but a forum member on another thread (thanks btw) raised the point of continuing to make pension contributions. Am I right in thinking the benefit of that is 25% added by the government? However given that my DB pension means I will have no tax free personal allowance I will presumably be paying 20% tax on whatever I take from the DC pension (apart from the 25% TFLS).

I hope that makes sense. Thanks folks.

AnotherJoe

Are you a high rate taxpayer now? Presumably not in retirement?

Could you defer your DB back from age 60 and get more later? If so then you can take those pension contributions back out with much less tax.

Even if you will pay the tax on all the pension withdrawals you'll still be 6.25% better off than with an ISA.
You'd have to give all the numbers for people to make a proper analysis.

waveydavey48

Thanks Joe, I have asked my DB pension administrators whether I can defer for an increased pension and am awaiting an answer. I will post again when I know.

I will be a basic rate taxpayer when DB starts, at present I pay no tax as I earn a very modest salary in my 16 hour per week job. I downshifted a few years ago. I suppose I will also have to ask fidelity whether I can make further contributions given the DC scheme is a staff one and I left the employer (Direct Line) in 2014.

jamesd

Assuming it's all happening at basic rate you make 6.25% tax gain by using the pension first. So do pension then withdraw to fund ISA if you like. £2,880 in, add 25% to get to £3,600. Take out £900 tax free and pay 20% tax on the other £2,700 so it's £2,160 after tax and £3,060 total out. £180 gain.

If gross pay in the 16 hour job is more than £3,600 you can use the higher amount.

If not auto-enrolled in the work scheme you can ask to be enrolled to get the employer contributions. If it uses salary sacrifice or isn't a relief at source scheme you won't get an income tax benefit because the pay is low but the employer contributions should compensate.

Others might find things in Could I have a tax-free retirement with my SIPP and S&S ISA? useful. The answer is yes.

waveydavey48

Thank you James, I appreciate your help.