Pay extra into pension or ISA

c5ryl

Please be gentle, my first post in this forum and I am no pension expert by any means, nor do I understand all of these acronyms that you all use! However, as a general question would it be better for me to put any extra money I have into my pension or into an ISA? I have a workplace pension whereby they contribute but when I saw my forecast last week I was pretty shocked at how low it would be! I have been paying into this scheme for 9 years now and am 40 years old. If I was to retire at 60 I would only have £27000 lump sum and then £1900 per year to live off. Doubt that would even pay for my food shopping!

squirrelpie

as a general question would it be better for me to put any extra money I have into my pension or into an ISA?

It depends on various questions about what your current tax rate is and what your longer term plans are. Others can doubtless add more detail.

SonOf

would it be better for me to put any extra money I have into my pension or into an ISA?

Returns and charges are the same on an ISA or pension. So, its only the maturity method and tax efficiency that matter.

If I was to retire at 60 I would only have £27000 lump sum and then £1900 per year to live off.

No you wouldnt.

1) the statement projections are in todays terms. Not future money terms..
2) If the tax free lump sum is £27,000 that means the remaining pot would be £81,000 A 4% income draw on that is £3240 a year.

Statement projections are pessimistic.

That said, A pot just over £100k at retirement is on the low side. So, increasing your provision does make sense. It also means that retiring at 60 is unlikely to be affordable (if that is your objective - you mentioned 60 which is quite early to retire)

c5ryl

Ok thanks. My pension statement said that if I continued to pay in the same amount, my projection would be the £27k and £1900 per year...is this actually not correct then? I’m confused!
I will have paid my mortgage off in 8 years so I am then hoping to save that money too so my plan to retire from full time work (and just continue doing ad hoc independent work at my leisure) would be achievable. Well...that’s the hope!

NoMore

The way you describe your pension it sounds like a defined benefit, so you don't have a pot, but rather a guaranteed income. This income is usually determined from your length of service and your salary, not how much you pay in

Do you work fo the NHS, Local government or a teacher perhaps ?

SonOf

My pension statement said that if I continued to pay in the same amount, my projection would be the £27k and £1900 per year...is this actually not correct then?

No. If it is a money purchase pension (invested in funds) then its just an hypothteical based on very low assumptions.

If it is a defined benefit scheme then its more accurate but its based on todays terms.

c5ryl

No I work for a private agency as a social worker and pay into the people’s pension - not sure if that makes it clearer?

loskie

remember if you pay extra into a pension that money is locked in you could NOT get access to it(till 55?) like you could with an ISA.

Although with the pension payments you will benefit on tax relief for your extra payments so for a basic rate tax payer you will add an extra 20%.
Does your pension provider, professional body or union offer such advice?

jamesd

You're being fooled by ridiculous pension forecasts.

1. they are required to use growth rates that are lower than historically
2. they assume that you throw away half of your potential income by buying an annuity instead of deferring your state pension or using income drawdown.

I'll ignore 1 for the moment and use their 108k total pot value at 60. Assuming state pension of 8.5k that's 8 years of 8.5k to bridge until age 68 state pension. 68k. Leaves 50k. Various ways of taking income but I prefer the Guyton-Klinger approach that starts at 5% of pot size variable. 2.5k.

So currently retiring at 60 on 11k looks doable.

It's very crude but each extra £10 a month gross would add around 183 a year at age 60.

Calculated this way. Regular savings calculator, 10 a month, 20 years, 4% (plus inflation) growth => 3667.7 pot. 5% of that is 183.

c5ryl

I hope I’m understating this properly...so you think they would let me take £68k to bridge the gap between 60 and 68 years? And then Following that just take an income of 2.5k per year only because I will have the state pension by then

bostonerimus

I would probably split your money between an ISA and extra pension payments. The ISA will give you a lot of flexibility and tax free growth and withdrawals. The pension contributions will have present day tax advantages, but withdrawals will be taxed.

You also need to do some research so get your latest pension statement and sit down in front of the pension website and make sure you understand everything. If you have questions the ask them on here or go to an advice bureau.