Higher Pension contributions V's S&S ISA

lg13mza

I'd have thought this has been covered but after a search I didn't find anything specifically related to my circumstances.

I'm looking to retire in 10-15 years.  I've got a reasonable pension pot and making a good level of contributions between myself and my employer (circa £25-30k per year).  In a pension review a few weeks ago it was suggested I should look at putting some money into S&S ISA as well.  The reason being that when it comes to retirement I could split my income requirements between pension and ISA's.  Then reduce, or eliminate completely, any tax contributions (in today's money I reckon I would only need to draw £2k per month).

I've currently got savings (some in easy access) and expect to have a surplus every month, but nothing is currently in ISA's.  But what I'm currently debating in my head, is would it not be better to max out my pension contributions first, take the tax benefit now and just accept that I will pay some tax in retirement?  Any surplus could then go in ISA's.  I'm currently a basic rate tax payer (my pension contributions are salary sacrifice) and should remain so into retirement.

dunstonh

 The reason being that when it comes to retirement I could split my income requirements between pension and ISA's.  Then reduce, or eliminate completely, any tax contributions (in today's money I reckon I would only need to draw £2k per month).

Not necessarily a justifiable reason.   Mainly as pensions trump S&S ISAs in most scenarios.

 But what I'm currently debating in my head, is would it not be better to max out my pension contributions first, take the tax benefit now and just accept that I will pay some tax in retirement? 

As long as you are not near the Lifetime allowance and wont be a higher rate taxpayer than you currently are in retirement, then pension is better than S&S ISA.      

Pat38493

Generally, you are betting off putting it into the pension unless you are either planning to retire before 55 and need to access some of the money in advance, or you are in danger of breaching the LTA (and even then it could still be debatable depending on the exact situation).

That said, if the advice came from your IFA then they probably know your situation better than us so you'd have to post some more details to get more useful comments.

Pipthecat

I'm lurking here as I'm keen to hear all thoughts. My position is that I'm 50 and planning to work until 60.  I'm leaning more towards maintaining my pension contribution and maximising my ISA allowance.  My thoughts are that growing a substantial ISA pot would give me more flexibility should my health or job situation change or give more tax options in retirement as you suggest.

lg13mza

Thanks both.  I won't be anywhere near the lifetime allowance.  I'm not going to be in a position to retire before 55.  I'm 47 at the minute.  Depending on whether my kids have left home  I'd hope for 58 - 60 as a target.

lisyloo

with salary sacrifice you will save employee national insurance contributions.
You employer may or may not pass on employer NI contribtions.
For tax you'll still get 25% tax free.
So there's both tax and NI benefits.

The downside to pension is that you are tying up your money until 55 (at least).

lg13mza

lisyloo said:

with salary sacrifice you will save employee national insurance contributions.
You employer may or may not pass on employer NI contribtions.
For tax you'll still get 25% tax free.
So there's both tax and NI benefits.

The downside to pension is that you are tying up your money until 55 (at least).

Yes, they do pass on the NI contributions.  The ISA recommendation maybe why it was suggested, so not to tie up the funds.

dunstonh

  My thoughts are that growing a substantial ISA pot would give me more flexibility should my health or job situation change or give more tax options in retirement as you suggest.

Pension would give you more money than ISA on a like-for-like basis.   So, how much do you value this so-called flexibility?
The S&S ISA wrapper only offer advantages over the pension wrappers if you need to access the money before retirement.

So, it really comes down to when you want to access the money.

lisyloo

On the tax front I think it's a no-brainer.
12% employees NI saved, 13.8% employers NI saved.
When you drawdown you'll get 25% tax free, so there's an income tax savings as well.

I'm not understanding your IFA's argument about tax.

When you say "maybe", why are you unclear on the reasons behind your IFA's recommendation. This is what they are paid to do, so they should be clear on why they are recommending that route. If they are not then there is something very lacking in the advice service they are offering.

So the only reason I see is access to the money before you retire.
You can only get money out of pension in 3 circumstances (and 2 aren't good) - retirement (min age 55), death or terminal illness that's certified by multiple doctors (less than 12 months to live I think). If you fall on hard times and have a million quid in your pension you can't touch it.

ader42

The pension Tax Relief uplift means your investments get a step up immediately so you end up a bigger pot.

Investing £25k a year for 15 years, getting a 9.5% return (such as historical return from S&P500 Index) will result in a pot of £1million. Putting the same into an ISA (no Tax Relief) with the same return will give you about £830k.

So you do need to be of mind of the LTA and that will be why the suggestion of an ISA also.

Making sure you invest in the right places irrespective of wrapper (pension or isa) is most important of course.

lg13mza

ader42 said:

The pension Tax Relief uplift means your investments get a step up immediately so you end up a bigger pot.

Investing £25k a year for 15 years, getting a 9.5% return (such as historical return from S&P500 Index) will result in a pot of £1million. Putting the same into an ISA (no Tax Relief) with the same return will give you about £830k.

So you do need to be of mind of the LTA and that will be why the suggestion of an ISA also.

Making sure you invest in the right places irrespective of wrapper (pension or isa) is most important of course.

So the LTA is not the contributions made, but the total value of the pot (including growth)?