Pension vs ISA - Top rate tax payer

Firefly12345

Hi all,

Question:

Does the board think there is ever a scenario where someone making pension contributions at top rate tax (45%) should use ISA instead of pension? To be clear all of the contribution I make is saving 45% income tax + 2% NI via Sal Sac. (and my firm add 5% to my contribution to share their emp contribution saving)

As this seems like a no brainer my liquid savings are skewed almost 100% towards pension. Even if I take 70k p/a out of pension in draw down I'll be saving so much on the way out that using an ISA just feels mathematically wrong.

Do people think there some point where political risk means that I should start to build the ISA more aggressively?

For clarity I have 10 years left to work and have 800k in pension (adding 35k p/a) and 20k (adding 6k p/a) in ISA? 

Firefly 

MallyGirl

there will likely come a point where you have exceeded the max 25% tax free so all you are saving is the 2% NI if you pay the same rate tax on the way out as you saved on the way in.

Sarahspangles

When you say you have ten years left to work, is that to 57 when you could first access a pension, or to 67 meaning you could access your pension now if you needed to stop work for some reason, or are you planning on working to some other point?

I think I’d want a bit more in a rainy day fund either way, but maybe you have that provided for outside ISAs.

Firefly12345

MallyGirl said:

there will likely come a point where you have exceeded the max 25% tax free so all you are saving is the 2% NI if you pay the same rate tax on the way out as you saved on the way in.

Once the tax free is used up I think I'm still saving. I'm saving 47% on the way in and will be paying the mix of the 0/20/40 tax bands on the way out. Probably about 25% tax rate if I draw out 80k p/a . 

Firefly12345

Sarahspangles said:

When you say you have ten years left to work, is that to 57 when you could first access a pension, or to 67 meaning you could access your pension now if you needed to stop work for some reason, or are you planning on working to some other point?

I think I’d want a bit more in a rainy day fund either way, but maybe you have that provided for outside ISAs.

57. Obviously I can work longer if needed.

Sarahspangles

Firefly12345 said:

Sarahspangles said:

When you say you have ten years left to work, is that to 57 when you could first access a pension, or to 67 meaning you could access your pension now if you needed to stop work for some reason, or are you planning on working to some other point?

I think I’d want a bit more in a rainy day fund either way, but maybe you have that provided for outside ISAs.

57. Obviously I can work longer if needed.

I’m on the point of retiring at 57 We’ve had high enough earnings over the last few years that we could weather rainy days, I had a few months between contracts at the height of the pandemic but didn’t need to dip into savings (it’s not like you could go anywhere!). The thing that’s been challenging is inheritance, from a tax point of view. OH in particular is paying tax on interest because he’s already retired, so his scope to pay into a SIPP is limited. I don’t think there’s a way to mitigate that in advance.

You really asked about political risk, there’s a pension review underway now and potentially another change of Government in your timescale. I personally think ISAs are less likely to be tinkered with than SIPPs simply because more people have them.

squirrelpie

Sarahspangles said:

I personally think ISAs are less likely to be tinkered with than SIPPs simply because more people have them.

But surely it's the rules of pensions rather than SIPPs particularly that are subject to political risk, and many more people have pensions than ISAs or SIPPs?

MallyGirl

Firefly12345 said:

MallyGirl said:

there will likely come a point where you have exceeded the max 25% tax free so all you are saving is the 2% NI if you pay the same rate tax on the way out as you saved on the way in.

Once the tax free is used up I think I'm still saving. I'm saving 47% on the way in and will be paying the mix of the 0/20/40 tax bands on the way out. Probably about 25% tax rate if I draw out 80k p/a . 

I was thinking specifically about your contributions from now on - what you have in pensions already will use the 0/20 tax bands so you are into the 40 when you withdraw what you contribute from this point on.

Firefly12345

MallyGirl said:

Firefly12345 said:

MallyGirl said:

there will likely come a point where you have exceeded the max 25% tax free so all you are saving is the 2% NI if you pay the same rate tax on the way out as you saved on the way in.

Once the tax free is used up I think I'm still saving. I'm saving 47% on the way in and will be paying the mix of the 0/20/40 tax bands on the way out. Probably about 25% tax rate if I draw out 80k p/a . 

I was thinking specifically about your contributions from now on - what you have in pensions already will use the 0/20 tax bands so you are into the 40 when you withdraw what you contribute from this point on.

A-ha! Now I see. I didn't think about it in this way but it makes perfect sense. I think right now I am not at an amount that will see me hitting 40% but I might do some numbers and see what this number looks like [if anyone else has done this let me know!]. I could then trim my pension contributions and add to ISA instead. So hard though as who knows what tax bands will be in 10 years, let alone over the next 40 or so whilst drawing down the money.....

Sarahspangles

Firefly12345 said:

MallyGirl said:

Firefly12345 said:

MallyGirl said:

there will likely come a point where you have exceeded the max 25% tax free so all you are saving is the 2% NI if you pay the same rate tax on the way out as you saved on the way in.

Once the tax free is used up I think I'm still saving. I'm saving 47% on the way in and will be paying the mix of the 0/20/40 tax bands on the way out. Probably about 25% tax rate if I draw out 80k p/a . 

I was thinking specifically about your contributions from now on - what you have in pensions already will use the 0/20 tax bands so you are into the 40 when you withdraw what you contribute from this point on.

A-ha! Now I see. I didn't think about it in this way but it makes perfect sense. I think right now I am not at an amount that will see me hitting 40% but I might do some numbers and see what this number looks like [if anyone else has done this let me know!]. I could then trim my pension contributions and add to ISA instead. So hard though as who knows what tax bands will be in 10 years, let alone over the next 40 or so whilst drawing down the money.....

Hasn’t the Chancellor said that after the current freeze the personal allowance will rise with inflation? I assumed the higher rate band would shift by the same amount but I haven’t looked at that bit of the report.

Sarahspangles

squirrelpie said:

Sarahspangles said:

I personally think ISAs are less likely to be tinkered with than SIPPs simply because more people have them.

But surely it's the rules of pensions rather than SIPPs particularly that are subject to political risk, and many more people have pensions than ISAs or SIPPs?

We know the second stage of the PR has only DC pensions in scope:

The second phase will start later this year and alongside investment will consider further steps to improve pension outcomes, including assessing retirement adequacy. Ongoing policy development with respect to defined benefit workplace pensions schemes will remain separate from the review.

It depends what ‘retirement adequacy’ means. I really mean that there is scope for tinkering after this Pensions Review, towards the end of the ten year period. Incoming governments are know for reversing policy changes. Whereas ISAs have recently been tweaked.