Savings or Pension?

winkowinko

After a bit of advice here guys.

I have £75k in fixed ISA (1 year)
Around £20k in various savings accounts, mixture of 6 month/12month and easy access.
£3k in work pension.

I bit of detail about my personal situation. Mid 40's, and mortgage free. I work part time-ish, and earn about £24k per year.
Was previously self-employed for 20 years, and didn't have a pension, hence only having £3k in my work one now.

Main objective is to be comfortable once I retire. I don't envisage needing much/any of my current savings before retirement age.

Should I start drip-feeding my ISA money into my pension NOW (to get the tax relief), or am I better off letting my ISA roll for a bit longer (whilst it's currently paying around 5%), and then putting into my pension a few years down the line, when interest rates drop?

I know that it makes sense for it all of it to be in my pension eventually, but I'm not sure whether I should start doing that ASAP (now)?

mark13

I don't think you are always better of in a pension. ISA"s are tax free.  When you withdraw money from your pension (other than the tax free lump sum) it is taxed as part of your income  As an example you could keep around £10k as an emergency fund. . The balance I would move to a stocks and  shares ISA. Any new money from earnings I would feed into the pension.  How has your pension performed over the last few years ?  Do yo know where it is invested?

winkowinko

My work pension is with Nest in a retirement date fund. To be honest, I'm finding it quite difficult to find how well it has performed over the last few years. Well maybe not finding it, but probably more understanding it

Compare fund performance | Nest Pensions

The simplest display of info I can find is this

If you'd invested £1 in this fund in 2017, your pot would be worth:

After 1 year: £0.96

After 2 years: £1.12

After 3 years: £1.21

After 4 years: £1.38

Today: £1.25

Not hugely helpful, as that only counts up to 2022 if started in 2017. I only started working there in 2022, so these figures don't even show me how it's performed between 2022-2024.

There are 3 other funds, which have outperformed it substantially. So do I need to switch it?

Never dabbled with stocks and shares. Again, I wouldn't know where to start, and my lack of knowledge has meant that I've stuck with cash ISA's which are straightforward.

Altior

The two elements are questions of their own really. Should you be in cash/cash equivalent or equities/bonds, and should it be in an ISA or pension wrapper. 

At your age it's not too significant, as you have plenty of time to rotate it into a pension. Pension obviously can't be accessed for years, ISA any time. Probably a good idea to start getting into the habit now, though.

Of course, legislation can change any time, and many people are anticipating changes in the space, this year. But we can't see into the future. 

NoMore

mark13 said:

I don't think you are always better of in a pension. 

For access after pension age, There's only two scenarios where I think you would be better off in ISA compared to pension, when you have enough in pension for the LSA (>£1 million) and when you expect to withdraw at a higher tax rate then you contributed at. Doubt either of those would apply to the OP.

The quick maths, we can ignore growth as it doesn't affect the maths,

£100 in a ISA is £100 on withdrawal
£100 in Pension becomes £125, on withdrawal you get 25% of that tax free (£31.25) leaving £93.75 to be taxed at 20% (£75) giving a total of £106.25 from a initial £100 contribution.

Dazed_and_C0nfused

NoMore said:

mark13 said:

I don't think you are always better of in a pension. 

For access after pension age, There's only two scenarios where I think you would be better off in ISA compared to pension, when you have enough in pension for the LSA (>£1 million) and when you expect to withdraw at a higher tax rate then you contributed at. Doubt either of those would apply to the OP.

The quick maths, we can ignore growth as it doesn't affect the maths,

£100 in a ISA is £100 on withdrawal
£100 in Pension becomes £125, on withdrawal you get 25% of that tax free (£31.25) leaving £93.75 to be taxed at 20% (£75) giving a total of £106.25 from a initial £100 contribution.

And if you get some of the pension out in year(s) where you have some unused Personal Allowance if can be even better than that.

Altior

NoMore said:

mark13 said:

I don't think you are always better of in a pension. 

For access after pension age, There's only two scenarios where I think you would be better off in ISA compared to pension, when you have enough in pension for the LSA (>£1 million) and when you expect to withdraw at a higher tax rate then you contributed at. Doubt either of those would apply to the OP.

The quick maths, we can ignore growth as it doesn't affect the maths,

£100 in a ISA is £100 on withdrawal
£100 in Pension becomes £125, on withdrawal you get 25% of that tax free (£31.25) leaving £93.75 to be taxed at 20% (£75) giving a total of £106.25 from a initial £100 contribution.

We can draw down taxable income from a pension at a 0% marginal rate, for about 10 years. At the moment. Depends upon when people 'target' giving up paid work. 

winkowinko

Dazed_and_C0nfused said:

NoMore said:

mark13 said:

I don't think you are always better of in a pension. 

For access after pension age, There's only two scenarios where I think you would be better off in ISA compared to pension, when you have enough in pension for the LSA (>£1 million) and when you expect to withdraw at a higher tax rate then you contributed at. Doubt either of those would apply to the OP.

The quick maths, we can ignore growth as it doesn't affect the maths,

£100 in a ISA is £100 on withdrawal
£100 in Pension becomes £125, on withdrawal you get 25% of that tax free (£31.25) leaving £93.75 to be taxed at 20% (£75) giving a total of £106.25 from a initial £100 contribution.

And if you get some of the pension out in year(s) where you have some unused Personal Allowance if can be even better than that.

This was going to be next question.

Do you still retain the Personal Allowance on money taken from a pension? 

Dazed_and_C0nfused

winkowinko said:

Dazed_and_C0nfused said:

NoMore said:

mark13 said:

I don't think you are always better of in a pension. 

For access after pension age, There's only two scenarios where I think you would be better off in ISA compared to pension, when you have enough in pension for the LSA (>£1 million) and when you expect to withdraw at a higher tax rate then you contributed at. Doubt either of those would apply to the OP.

The quick maths, we can ignore growth as it doesn't affect the maths,

£100 in a ISA is £100 on withdrawal
£100 in Pension becomes £125, on withdrawal you get 25% of that tax free (£31.25) leaving £93.75 to be taxed at 20% (£75) giving a total of £106.25 from a initial £100 contribution.

And if you get some of the pension out in year(s) where you have some unused Personal Allowance if can be even better than that.

This was going to be next question.

Do you still retain the Personal Allowance on money taken from a pension? 

You get the Personal Allowance each year.

It can be used against any taxable income so if your only taxable income was say a pension of £10,000 then there would be no tax to pay on that.

If it was taxable pension £10,000 and taxable earnings of £4,000 then you would pay tax on the little bit above your Personal Allowance.

dunstonh

I don't think you are always better of in a pension. ISA"s are tax free.  When you withdraw money from your pension (other than the tax free lump sum) it is taxed as part of your income  As an example you could keep around £10k as an emergency fund. . The balance I would move to a stocks and  shares ISA. Any new money from earnings I would feed into the pension.  How has your pension performed over the last few years ?  Do yo know where it is invested?

Pensions beat ISA for most people.   Yes you pay tax on 75% of the amount when you draw it out but the tax paid is lower than the tax relief received at the start.    A basic rate taxpayer paying into a pension who is a basic rate taxpayer when drawing the pension will find the pension is 6.25% better than the ISA wrapper.

If you draw the pension before state pension and not working (i.e. funding the gap due to earlier retirement) then the tax difference is even more favourable to the pension.  

Pensions and ISAs share the same investment options and charges.  So, the only differences are accessibility (i.e. don't use a pension if you want to draw the money when you are age 40) and the tax.    

Albermarle

Apart from where it is best to save for retirement ( pension usually/mainly), you need to look at what figure you are aiming to a) get your desired retirement income and b) being able to retire at a desired age.

There are some generalisations you can make.
Most people underestimate how big a fund they need to build up.
Most people underestimate how long they are likely to live.
Retiring in your Fifties means building up a much bigger pot, as you will not receive the state pension for maybe 10 years.

A lot of course depends on what you think a decent income in retirement would be. For some single people, living frugally off £15k pa is OK, whilst for others they need three times that. A critical point is housing costs. If you retire and still have a big mortgage or renting, then it can be difficult.