Pension vs ISA &Tax implications

Katosav

Hi,

I’m new to this forum.

I have some queries related to tax benefits of pensions over ISA or vice versa.

Since having kids I have buried my head in the sand as I knew that being a stay at home mum meant I was not contributing to my pension & didn’t want to know or think about what that meant for me in retirement. I know a lot of women who have done this also.

A couple of years ago something in me shifted & I decided to be brave & face it. To my surprise & relief my tiny old work pension pots that I had only minimally contributed to in my past were doing really well. This has given me to confidence to really start looking at my retirement & I’ve been doing lots of research, saving hard now in a Sipp & ISA’s.

i have also been playing around with the pension tool in guiid, which is amazing. I’ve noticed that it will use the most tax efficient way possible to use up my pots for retirement, so make full use of any tax free allowance the is by drawing down my pension & using savings fund (ISA & other) to make up the shortfall. Only when these savings run out does it switch to drawing down the pension. Up to this point the tax is minimal. 

This has started me thinking if there ever comes a point when I’m squirrelling away money that it’s more advantageous to be adding money into savings (ISA’s etc) than pension? I know that when I’m adding money to my Sipp I’m getting tax benefits, but at some point I guess this will be paid back when I draw it down?

My husband is in a slightly different situation where he now facing a scenario where he has reached the threshold for his pension contributions & it’s being tapered. It looks like he has over contributed this year & will need to pay the tax back. As he gets matched contributions from his employers, he believes it’s still advantageous for him to continue to contribute at this level & pay tax back in his tax return, but I’m wondering if this really is the case as he’ll be paying tax twice, once when he puts money in to his pension & the other when takes it out again. Is it better in this situation to pay the max tapered contribution to his employers pension scheme or put the rest into ISA/ savings/ investments?

thanks in advance for advice.

NoMore

If you need access before Minimum Pension Access age or if you are going to withdraw pension at a higher tax rate than you contributed at, ISA wins, other than that I believe Pension is better up to the tax free lump sum limit (so just over a million in Pensions).

This is due to the 25% tax free available from Pensions, which are truly tax free, having never paid tax on contribution or withdrawal. ISA comes from taxed income, Pensions beyond the 25% are taxed on withdrawal.

Dazed_and_C0nfused

Pension beats ISA for most people.

Ignoring investment returns and provider fees £1,000 paid into an ISA gives you £1,000 tax exempt income when taken out.

£1,000 paid into a relief at source pension (SIPP or personal pension) becomes £1,250 when the tax relief is added.

£1,250 taken out is £312.50 TFLS and £937.50 taxable income.  Which is £750 after basic rate tax.

End result is £1,000 paid over and £1,062.50 received back.