Pension vs S&S ISA

rjmachin

Hi,
I am 39 (40 in Feb 2021)
I plan on opening a S&S Lisa in shortly, contributing the full £4k until 50 for use at 60 as pension.
I have a workplace pension with "The Peoples Pension" (https://www.trustnet.com/factsheets/p/kovu/bce-the-peoples-pension-global-investments-up-to-85-shares-0.5-pn)
I also have an existing workplace Stakeholder pension with Aegon (which was replaced by the one above) (https://www.trustnet.com/factsheets/p/az32/universal-balanced-collection-pn)

The Peoples Pension
Current value is £5,583
My employer pays the 3% (avg £67) and I may 5% (avg £112)
Annoyingly, this years statement has not been produced yet, I usually have a statement to the end of February, but only the 18/19 statement is showing.
2019 statement shows value as £2,695.
It does not show a breakdown of the fees, but does say the AMC is 0.5%

Aegon Pension
Current value is £16,837 (total contributions £11,835)
My employer still pay £30 per month in to this pension, even though it is no longer the main pension and I do not contribute to it via PAYE/Salary.
However, I have still been paying in directly myself via Direct Debit, and increased this last year to £150 (£187.50 gross) per month from £50 per month.
Last statement from Feb 2020 had a value of £16,719, and plan charges of £137.85

My question is.. regarding the Aegon pension, would there be any advantage is reducing my payments to say £30 or £50, and paying £100 or £120 in to a S&S ISA like Vanguard LifeStrategy 80 via the AJ Bell YouInvest website?

I was thinking that with the pension, I would have to pay Tax to draw down in retirement, but the S&S ISA I don't think would.   
But the pension gets the £37.50 tax relief, which I guess the S&S ISA would not.

Is this going to get some split advice?  
Any thoughts welcome

dunstonh

I was thinking that with the pension, I would have to pay Tax to draw down in retirement, but the S&S ISA I don't think would.   

Almost correct.

Your personal allowance is greater than the state pension.  So, you can get several thousands of pounds of tax free income in retirement from the pension.     

Plus, you get tax relief in the pension.  Assuming basic rate (given the low figures used), you get 20% relief on the contribution.   So, £100pm into the pension has cost you £80.    When you draw the pension.  The amount above your personal allowance is taxed at an effective rate of 15% (25% tax free, 75% taxable).    Whereas the ISA is tax free.   So, pension beats ISA for basic rate.   Its even more if you are a higher rate taxpayer during working life and basic rate in retirement.

Is this going to get some split advice?  

We are lacking your objectives etc but assuming you are a basic rate taxpayer in retirement and access is only required after age 57 then pension trumps ISA.

Albermarle

Your facts are correct . The pension gets tax relief on the way in and you pay tax on the way out . However 25% is tax free.
If you are a basic rate taxpayer now and a basic rate taxpayer when you take the pension the minimum benefit is 6.25% .
If you ever pay higher rate tax and get relief on that and /or pay no tax when you take the pensions , then the benefit is much greater.
The downside to the pension is that you can not access before age 55 ( will be later when you get to that age range)
So assuming the investments in the pension and S&S ISA are the same/similar, that is the trade off - tax benefit vs accessibility.
However you should always pay enough into the pension to make sure you get the max employer contributions possible ,as an absolute minimum. 

El_Torro

Yes, if the money is for retirement then the biggest benefit to you is to put as much as possible in a pension rather than an ISA.

Personally I contribute to both. I pay enough into my pension to get me below the 40% tax bracket, any extra I invest in an ISA. The benefit of an ISA is that you can access it whenever you want, I value that flexibility more than the extra 6.25% benefit I would have from having the money in a pension.

rjmachin

Thanks all, I will continue with the pension contributions as are for now then and as planned open the LISA as soon as possible.

@dunstonh - I am a basic rate tax payer, earning around £33k per year.  My objectives (based on current retirement age):
Have mortgage paid off in the next 10-15 years, then pay monthly amount in to savings/pension/isa afterward that would otherwise have been paying the mortgage.
Hopefully retire at 55 years old (15.5 years from now) living off savings accumulated in the next 15 years (currently £6k, saving £550 per month)
From 60 years old, use LISA S&S to live off once savings go low
From 68 years old, live off state pension and topping up from estimated £110k (based on current contributions) pension drawdown to around £12-14k a year including state pension

Should have contributed £55k (inc 25% bonus) to the LISA
Should have savings of £72k by age of 55
Current estimate of two pensions at retirement age is £110k

However, I realise anything can happen in the future.  I could lose my job, and not be able to save as planned.  I just have to try my best as I can

dunstonh

Have mortgage paid off in the next 10-15 years, then pay monthly amount in to savings/pension/isa afterward that would otherwise have been paying the mortgage.

Don't be in a rush to clear your mortgage before anything else.    Investment returns on a medium risk spread would be around 5-7% a year.    What interest are you paying on your mortgage - 2%ish?      There is the warm feeling of clearing your mortgage but its not the best financial option when interest rates are low.

Hopefully retire at 55 years old (15.5 years from now) living off savings accumulated in the next 15 years (currently £6k, saving £550 per month)

In which case, you will need investments outside of the pension wrapper to fund the gap from 55 to 57 as you cant use the pension until age 57.

From 60 years old, use LISA S&S to live off once savings go low

Pension would be better to use in that period and save the LISA until later.   It would be wasteful to not use your personal allowance from the pension and waste tax free money from the LISA that would be better used in the next phase.

You need to factor inflation.  Your figures (without looking in depth) seem low for someone wanting to fund the gap from 55 to 68.

Albermarle

Your figures (without looking in depth) seem low for someone wanting to fund the gap from 55 to 68.

This was also my first impression. Funding a decent retirement income means building up a big pot and the current figures look very much on the low side for the OP .

rjmachin

Thanks for the further input all.

My current mortgage is 3.04% fixed until October 2023 with around £77k remaining on a £165k property.

I did have the second thought after writing the previous post about using the LISA first and to use the Pension first so that I can get more tax free before the state pension starts, so that makes more sense.

My current income is £2k per month after tax.
Of this, £550 is being put in to savings accounts and £475 is going on the mortgage and £150 going in to my Aegon pension.
My current monthly spend excluding the above is about £670 including food, gas, electric and council tax.  With 2% inflation each year, I expect this to reach around £900 per month by 2035, however, I always try to get the best deals on electric, gas, broadband etc, so hopefully it will be lower than this.

This does not take into account house maintenance, holidays etc however.

Albermarle

rjmachin said:

Thanks for the further input all.

My current mortgage is 3.04% fixed until October 2023 with around £77k remaining on a £165k property.

I did have the second thought after writing the previous post about using the LISA first and to use the Pension first so that I can get more tax free before the state pension starts, so that makes more sense.

My current income is £2k per month after tax.
Of this, £550 is being put in to savings accounts and £475 is going on the mortgage and £150 going in to my Aegon pension.
My current monthly spend excluding the above is about £670 including food, gas, electric and council tax.  With 2% inflation each year, I expect this to reach around £900 per month by 2035, however, I always try to get the best deals on electric, gas, broadband etc, so hopefully it will be lower than this.

This does not take into account house maintenance, holidays etc however.

I am sure you are watching your expenditure closely . I think the point Dunston and I were trying to make is that many posters on the forum have a disconnect between their ambitions to retire early, and/or have a decent retirement income, and the money they are accumulating in their various retirement pots.
Often the amount of money that needs to be accumulated is underestimated .

Bobziz

If I were you I'd pay the erc to switch to a better mortgage deal and max out my pension.

rjmachin

My current mortgage is with the Halifax.  If I wait until the 1st November, then the ERC would be 3%, so approx £2,310.
Halifax have a 3 year fix at 2.48% and a 5 year fix at 2.59% fix
The MSE Ditch calculator says it's better to fix if the rate is 2.04% or lower.

If I switch to another provider, then I would have the unknown costs of valuations, solicitor fees, product fees etc on top of the ERC.

I could increase my Aegon pension though.   I want to get savings of 6 months income first though as a safety net.

On my income and spending, I have no chance of maxing out my pension, but could certainly increase it.