Pension or ISAs?

tickledpink1

Still wondering what the best course of action is….

I’m 59 and self-employed. Will get full state pension plus approx £110/mth from LGPS. That equals approx. £12,500/yr before tax. My pensions, as they are now, will take me up to my tax threshold.

I live frugally and will own my own house by the time I draw my pension. I want to be able to buy a small annuity on top of this £12, 500 which will give me an extra £100-£200/month. I’ve read that with a small pension it’s best to buy an annuity rather than drawdown.

I’ve seen two financial advisors and have decided I don’t want to pay over 1% for them to sort out a SIPP; I need to keep my fees low. I am cautious and don’t want to risk losing it. I’ve been reading about managing my own SIPP but decided that’s not for me. I know nothing about investing.

I can invest £500-£700 monthly for 8 years.

£600/mth x 8 yrs = £57,600

£57,600 + £14,400 tax relief = £72,000 (without the effect of compound interest)

Is it best to buy a ready-made pension (AJ Bell 0.45%): (Get tax relief; Low return of poss 3 or 4%; Will need to pay tax on it as it will take me over the threshold) or get short-term fixed-rate ISAs: (No tax relief; higher interest rate; Not classed as income so won’t pay tax)?

Is it more cost effective to get the tax relief or to keep my income below the tax threshold?

As an aside, do pension calculators automatically add on tax relief in their calculation?

Eg if I put in £600/mth it will really be £750 with tax relief. I assume the pension calculators don’t add this on.

Any info greatly appreciated.

Brie

I don't know.  But have you considered putting the money into an ISA?

Marcon

tickledpink1 said:

Still wondering what the best course of action is….

I’m 59 and self-employed. Will get full state pension plus approx £110/mth from LGPS. That equals approx. £12,500/yr before tax. My pensions, as they are now, will take me up to my tax threshold.

I live frugally and will own my own house by the time I draw my pension. I want to be able to buy a small annuity on top of this £12, 500 which will give me an extra £100-£200/month. I’ve read that with a small pension it’s best to buy an annuity rather than drawdown.

A good example of not believing all you read...

tickledpink1 said:

I’ve seen two financial advisors and have decided I don’t want to pay over 1% for them to sort out a SIPP; I need to keep my fees low. I am cautious and don’t want to risk losing it. I’ve been reading about managing my own SIPP but decided that’s not for me. I know nothing about investing.

Then why a SIPP? What's wrong with a straightforward (non-SIPP) personal pension?

tickledpink1 said:

Is it best to buy a ready-made pension (AJ Bell 0.45%): (Get tax relief; Low return of poss 3 or 4%; Will need to pay tax on it as it will take me over the threshold) or get short-term fixed-rate ISAs: (No tax relief; higher interest rate; Not classed as income so won’t pay tax)?

What are your objectives? 

tickledpink1 said:

Is it more cost effective to get the tax relief or to keep my income below the tax threshold?

As an aside, do pension calculators automatically add on tax relief in their calculation?

Eg if I put in £600/mth it will really be £750 with tax relief. I assume the pension calculators don’t add this on.

Impossible to know on the basis of the information you've given.

Depending on the calculator you use, it will either ask you to enter your gross contributions (ie including basic rate tax relief), or you may find some pension calculators will ask you to enter your net contribution, then add the basic rate tax a provider would claim on your behalf and add to your 'pot' in a 'relief at source scheme. Try running a few numbers through one if you're in doubt!

tickledpink1 said:

Any info greatly appreciated.

Some basic reading would give you a much better grasp of things and more confidence to take decisions. Try https://www.moneyhelper.org.uk/en/pensions-and-retirement - possibly a free appointment with PensionWise would be no bad thing, given your current modest grasp of pensions?

Given the amounts you plan to invest, some decent (paid for) financial advice could be an excellent investment, if only to ensure you set off from here in the right direction.

incus432

I note you started three threads and had some excellent comments and pointers. Yet you seem to be going round in circles asking the same questions.

tickledpink1

Thanks for your input Marcon. Yes, I've read lots on Moneyhelper and have had a free appointment with PensionWise.

I've seen 2 financial advisors and they want to charge me over 1% to manage a SIPP.

My objective, as I said, is to raise enough for a small annuity, via either a personal pension or ISAs.

I fulfil all 4 reasons to choose an annuity:

1. I like the reassurance that comes from a guaranteed income for life
2. I don’t want the burden of managing my pension
3. I expect to live a long time
4. I don’t expect my spending needs to vary by much over time

tickledpink1

incus432 said:

I note you started three threads and had some excellent comments and pointers. Yet you seem to be going round in circles asking the same questions.

Yes, I'm ruling out some things as I'm learning!

Marcon

tickledpink1 said:

Thanks for your input Marcon. Yes, I've read lots on Moneyhelper and have had a free appointment with PensionWise.

I've seen 2 financial advisors and they want to charge me over 1% to manage a SIPP.

My objective, as I said, is to raise enough for a small annuity, via either a personal pension or ISAs.

I fulfil all 4 reasons to choose an annuity:

1. I like the reassurance that comes from a guaranteed income for life
2. I don’t want the burden of managing my pension
3. I expect to live a long time
4. I don’t expect my spending needs to vary by much over time

Some one-off financial advice to set up a (non-SIPP) personal pension could still be worth considering.

Those are four good reasons for looking at buying an annuity - but your comment above about 'annuities being better than drawdown for small pensions' isn't a good reason, because the administrative costs some annuity providers will charge are disproportionately high in comparison to large pots. So there's a balancing act to consider.

Presumably you've considered the different tax treatments of an annuity bought using money direct from your pension pot, as opposed to purchasing one with money from an ISA (the latter has favourable treatment because part of each payment is treated as a return of capital, so isn't subject to income tax).

tickledpink1

Marcon said:

Presumably you've considered the different tax treatments of an annuity bought using money direct from your pension pot, as opposed to purchasing one with money from an ISA (the latter has favourable treatment because part of each payment is treated as a return of capital, so isn't subject to income tax).

Ah....no, I know nothing about that. 

tickledpink1

Marcon, do you have any links with info about the differences regarding tax treatment between purchasing an annuity with isa cash and a pension pot please? I'm struggling to find anything.

Dazed_and_C0nfused

Try this for a start.

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/purchased-life-annuities

tickledpink1

Thank you. So I would pay less tax if the annuity was bought with isa money because isas aren't classed as income?