Looking to increase my long term invesents, is my pension the best way to do this?

Kasabian83

Hi,

I'm looking for some advice before I I increase the amount that I invest in my long term future.

I earn £46k pa in Scotland which means I pay 42% income tax, on anything over £43.5k.

I currently pay 10% into my employers pension scheme through salary sacrifice, and they add in 16%, so I'm really happy with the 26% that I am putting into my pension each month.

However, I'm looking to increase what I put away for my future. 

I have two options I am considering, a stocks and shares ISA with a really low risk investment strategy that I hope will return me around 7%. The intention is to leave this investment to grow, or do I just increase my contributions to my pension.

I'm struggling with which one of these will give the beat return.

Any help is greatly appreciated.

RacingDriver

It probably depends on your age and when you will need access to the funds.  If after pension access age then adding funds to the pension makes sense due to the tax relief, for funds needed before pension access age then use the ISA.

You say you are considering a "really low risk" investment strategy.  I think the returns of 7% are too high for such a strategy.

The return of pension vs ISA will also be dependant on what each is invested in.

Dazed_and_C0nfused

Kasabian83 said:

Hi,

I'm looking for some advice before I I increase the amount that I invest in my long term future.

I earn £46k pa in Scotland which means I pay 42% income tax, on anything over £43.5k.

I currently pay 10% into my employers pension scheme through salary sacrifice, and they add in 16%, so I'm really happy with the 26% that I am putting into my pension each month.

However, I'm looking to increase what I put away for my future. 

I have two options I am considering, a stocks and shares ISA with a really low risk investment strategy that I hope will return me around 7%. The intention is to leave this investment to grow, or do I just increase my contributions to my pension.

I'm struggling with which one of these will give the beat return.

Any help is greatly appreciated.

Given that you can virtually all investments which can be selected in an ISA will also be available in a pension wrapper then except in niche scenarios the pension will always win.

You add £100 to an ISA and have £100 to invest.  And can then be taken out tax free so, ignoring investment return you get £100 back

If you add £100 to a relief at source (RAS) pension then you end up with £125 after tax relief is added.  When you take that out 25% is tax free and 75% is taxable.  After basic rate tax you get a total of 85% (25% + 60%).  85% of £125 is £106.25, a 6.25% improvement on the ISA option.

If you get higher rate relief even better.  If you don't contribute but use salary sacrifice for additional employer contributions the sums are different bet usually an even better outcome due to the NI saving.

Do you actually earn £50k+ and sacrifice down to £46k or is the £46k pre sacrifice, on which case you presumably aren't a higher rate PAYE.

Albermarle

I have two options I am considering, a stocks and shares ISA with a really low risk investment strategy that I hope will return me around 7%.

In the last 18 months low risk investments fell by a lot more than high risk. Ok this is not normal, but I think you need to understand better what risk means in an investment context. In fact higher risk investments have been recovering recently.

In reality high risk is better described as high volatility. Very high risk ( such as Crypto, unregulated investments) are not normally available in ISA's and pensions.

Also as said be clear that your pension is also invested. Are you happy with those investments?

Audaxer

Kasabian83 said:

Hi,

I'm looking for some advice before I I increase the amount that I invest in my long term future.

I earn £46k pa in Scotland which means I pay 42% income tax, on anything over £43.5k.

I currently pay 10% into my employers pension scheme through salary sacrifice, and they add in 16%, so I'm really happy with the 26% that I am putting into my pension each month.

However, I'm looking to increase what I put away for my future. 

I have two options I am considering, a stocks and shares ISA with a really low risk investment strategy that I hope will return me around 7%. The intention is to leave this investment to grow, or do I just increase my contributions to my pension.

I'm struggling with which one of these will give the beat return.

Any help is greatly appreciated.

A low risk investment returning an average of 7% per year is very optimistic. If you intend leaving it to grow until pension age, and maybe keep it invested thereafter, why not invest it at the same risk level as your pension?

For the wrapper, an S&S ISA is fine if you may want access to the money before pension age, but increasing contributions to your pension is probably a better option if you definitely won't need access to it before you are eligible to draw from a pension.

Kasabian83

RacingDriver said:

It probably depends on your age and when you will need access to the funds.  If after pension access age then adding funds to the pension makes sense due to the tax relief, for funds needed before pension access age then use the ISA.

You say you are considering a "really low risk" investment strategy.  I think the returns of 7% are too high for such a strategy.

The return of pension vs ISA will also be dependant on what each is invested in.

Thanks for the advice.

Yes, my intention is to leave the funds till retirement. 

I have some savings that I can get access to.

I've had a look into what funds my pension is invested in and the returns look pretty good so I think this may be my best option.

Thanks for the advice on the investment strategy being too high risk. I was offered advice on a type of portfolio I could build that should return about 7% over the long term.

Kasabian83

Do you actually earn £50k+ and sacrifice down to £46k or is the £46k pre sacrifice, on which case you presumably aren't a higher rate PAYE.

Thanks for the advice.

No I don't earn over 50k, so my pension contributions will be taking me under the 46k, and out of the higher tax bracket. I only recently received a rise that took me to that salary and hadn't fully considered my true salary once the pension contribution was removed. Thanks.