Pension or ISA?

El_Torro

I know, I should know better than to ask this well trodden question here. I like to think I know the pros and cons of both options but I would still like to get some views on this. Like many regular posters I don't normally like to give too many details of my financial situation, but for the purpose of this thread I think it's relevant so I'll break that rule on this occasion:

Age: 41
Single with no dependents
Pension: Roughly £250k. Paying in £3k a month via salary sacrifice.
S&S ISA: Roughly £50k. I should be able to pay in about £12k a year, even if / when I go back to taking expensive holidays every year.
LISA: Was (un)clever enough not to get one when I was young enough, now it's too late.
Emergency fund: I have enough cash to be comfortable with the amount. Will probably want to build this up before I retire.
Other income: 1 Buy to Let property. 
Spending: Not including my Buy to Let income I'm happy spending about £2k a month, including holidays, etc... This is what I'm targeting for my retirement income too, including state pension when I finally get it.


So as shown I am currently putting a lot of money in to my pension and less into my S&S ISA.

I understand a lot of the arguments in favour of keeping my pension contributions as high as they are:
Make hay while the sun shines, we don't known when / if the salary sacrifice benefits I currently receive will be taken away
Compound returns: Better to let the pension investments grow now than pay more into my pension in future (the same can be said about S&S ISA investments though)
Tax efficiency
Investment returns in the future might not be as generous as in the recent past

One of my concerns is that the Lifetime Allowance is currently only just over £1 million and how / when it will grow is unclear. I could hit the limit well before I hit my 60th birthday. Of course that assumes returns on investments continue to be good, my life circumstances don't significantly change, I stay in my current or equivalently paid job, etc..


The crux of my question is: Should I reduce my pension contributions and pay more into my ISA?

My current plan is to keep putting close to £40k a year into my pension until I'm 50 or so. I keep having that nagging feeling that I should reduce it somewhat and put the maximum £20k a year into a S&S ISA though.


Financially my goal is to be independent as soon as possible, by that I mean not need to work. My retirement goal is 60, though who knows if the reality will be earlier or later than that.

Alexland

Am a similar age with twice as much in pensions (but no BTL, and with wife/kids) and assuming the LTA starts getting inflation adjusted from 2026 onwards and a 2.5% annual investment return above inflation then I can keep making heavy pension contributions for a couple more years before being likely to hit the LTA at scheme access ages of 55 and 57. In your position I would keep going for now but limit contributions to higher rate income only.
What's the plan for the BTL? Would you consider releasing equity or selling it to support an early retirement before your pension scheme access age(s)?
In a strange way you might have been lucky to miss out on LISAs as we have been filling ours since launch and it's such a good deal that it distracts us from making higher S&S ISA contributions towards an even earlier retirement. We are unlikely to spend the LISAs they will probably just get gifted to the kids.

El_Torro

Alexland said:

Am a similar age with twice as much in pensions (but no BTL, and with wife/kids) and assuming the LTA starts getting inflation adjusted from 2026 onwards and a 2.5% annual investment return above inflation then I can keep making heavy pension contributions for a couple more years before being likely to hit the LTA at scheme access ages of 55 and 57. In your position I would keep going for now but limit contributions to higher rate income only.
What's the plan for the BTL? Would you consider releasing equity or selling it to support an early retirement before your pension scheme access age(s)?
In a strange way you might have been lucky to miss out on LISAs as we have been filling ours since launch and it's such a good deal that it distracts us from making higher S&S ISA contributions towards an even earlier retirement. We are unlikely to spend the LISAs they will probably just get gifted to the kids.

All my pension contributions currently are in the higher rate bracket, so if I were to reduce my contributions any extra income I get would be taxed at 40% income tax (plus at least some NI I guess). 

Regarding my BTL, I plan to keep it for the foreseeable future. Releasing equity is definitely an option, rather than go into too much detail I'll just link an old thread I made. Plan remains the same: https://forums.moneysavingexpert.com/discussion/6228952/leveraging-property-to-invest

Regarding LISAs, I'm not too concerned that I missed out on the opportunity to open one. I like the flexibility of ISAs, and LISAs are a lot less flexible.

Thanks for your answer to the original question: Keep things as they are for now. Part of me thinks I should stick to my original plan, still a bit conflicted though. 

Alexland

Yeah I wouldn't worry too much about missing out on the LISA as it doesn't sound like you need it. Even with capped charges for holding an ETF the first year's bonus including growth is wasted on the additional platform charges for having another account to manage over 20+ years.
I remember your previous thread - doesn't time fly? Whenever I am tempted to reduce my pension contributions and pay a bit of higher rate tax and NI then I am disappointed by how little it would enable me to contribute into the S&S ISAs especially in our case with the child benefit clawback.

Thrugelmir

El_Torro said:

Pension: Roughly £250k. Paying in £3k a month via salary sacrifice.

Far too early to be concerned with LTA.  When investing never assume. A lot can happen in the next 19 years. Better to focus on what you can control. 

enthusiasticsaver

Pension contributions are tax efficient on the way in but S and S ISAs tax free on way out. If you have another 20 years of paying in around £40k a year you will hit the LTA unless it is increased significantly. I think it makes sense to carry on as you are for now but maybe lean more towards the ISAs the closer to retirement you get. 

Alexland

The other consideration if you own a couple of properties is your inheritance tax position as that allowance is also frozen until 2026. Our family home and various ISAs already use most of the couple's allowance so making pension contributions is a good way to keep money outside of the estate which is why we are contributing nearly 100% of my wife's earnings into her pension as she might retire even younger than me and we are hoping to eventually get her somewhere towards LTA too. Another distraction from making S&S ISA contributions for earlier retirement...

Albermarle

As a higher rate taxpayer and with SS , you are gaining 42% on your pension contributions .
Assuming you would be a basic rate taxpayer when taking the pension , then even if you go over the LTA , then you will be paying 40% if you take the pension as income . So you are just ahead of the tax position with the S&S ISA.
However the latter has the benefit of being more flexible when you can take it .
Another point is that at a later stage you can skew your portfolio , with riskier /hopefully high growth investments in the ISA and a 'safer ' mix in your SIPP . As you approach LTA it does not really make sense to have a risky  SIPP portfolio aimed at high growth . If markets tank you lose and if markets shoot up you also lose ( sort of ) 

El_Torro

enthusiasticsaver said:

Pension contributions are tax efficient on the way in but S and S ISAs tax free on way out. If you have another 20 years of paying in around £40k a year you will hit the LTA unless it is increased significantly. I think it makes sense to carry on as you are for now but maybe lean more towards the ISAs the closer to retirement you get. 

Yes, that is / was my thinking too. One of the reasons I have doubts is that every year I don’t put £20k into my ISAs is a year when I don’t take full benefit. 

To give some context, if I were to reduce my pension contributions as much as possible, while still getting the maximum contribution from my employer, I would be putting about £800 in my pension every month. Even if I switch from £3k a month to £800 a month when I’m 50 there’s no guarantee I won’t hit the LTA (no guarantee I will hit it either of course). Also my take home pay will be such that I will be putting £20k a year in my ISA, with money left over. Money I can either invest unwrapped or putting towards paying off my BTL mortgage.

All things considered I’m probably overthinking it, especially since my pension is only worth £250k today. Maybe something to worry about when it’s more like £500k or £600k.

To address some of the other posts:

Good point on the inheritance tax. Not really high on my priority list seeing as I don’t have kids (and hopefully never will). Still worth considering though.

Also a good point on the fact that hitting the LTA is not that big a deal anyway, for a higher rate tax payer who pays in via salary sacrifice. My little brain finds that point a bit harder to reconcile, but the logic is there (assuming the rules don’t change).

Scrudgy

Simply

Pension
You say you can invest £36k per year - effectively all hopefully enjoying growth.
or 
ISA, take the equivalent £36k, pay roughly 1/3 in tax, means £24k hopefully enjoying growth.

Multiply this by several years and the pension method is much better for your pot.

If you get close to LTA, that would be the time to flip over.

NoMore

El_Torro said:

All things considered I’m probably overthinking it, especially since my pension is only worth £250k today. Maybe something to worry about when it’s more like £500k or £600k.

This is the correct answer