Pension or ISAs?

incus432

You pay less tax but it's because the income is part return of capital (which has already been taxed) and interest which hasnt. The latter is subject to income tax

incus432

tickledpink1 said:

I’ve read that with a small pension it’s best to buy an annuity rather than drawdown.

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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?

The first statement is highly dubious as pointed out above.

On the SIPP 

1) generally you can only pay in up to the level of your earnings (this excludes pensions) or £2880 pa net whichever is the higher.  Do you meet that criterion? If not this option is ruled out above that limit.

2) you will not pay tax on the SIPP until you withdraw to take an income.  I assume this would be 8-10 years down the line?  I assume this is the drawdown or annuity question above?

3) If you invest in cash ISAs instead will you be using the interest as income or reinvesting? 

4) You could consider investing instead into a S&S ISA rather than a SIPP. This would allow you to invest in the same funds as in the SIPP and get the same growth. Platform fees are usually lower than SIPPs.

5) If the SIPP is still an option and you are clear when and how you want to take an income, it would be best to do some calculations in a spreadsheet, comparing a SIPP invested in a world equity tracker fund (you get the tax relief boost on the way in but are taxed on the income later) versus the same in a S&S ISA (no tax relief but no tax on income you take).  The former is usually advantageous if funds grow because the pot you have to grow is bigger due to the tax bonus, and you can take 25% tax free lump sum out of it.  You can also add a comparison with cash ISAs. Factor in charges on all

tickledpink1

Thank you Incus. 

Earnings approx £27000. Retire at 67. Annuity or drawdown or a mixture; I don't know. This contribution of £600 ish/mth for 8 yrs is to provide a small top-up pension. I was thinking the ISAs + interest might finance the annuity.

As you can undoubtedly tell all of this is a minefield to me.

I'll try and get some short-term financial advice to put me out of my misery!!

Dazed_and_C0nfused

tickledpink1 said:

Thank you Incus. 

Earnings approx £27000. Retire at 67. Annuity or drawdown or a mixture; I don't know. This contribution of £600 ish/mth for 8 yrs is to provide a small top-up pension. I was thinking the ISAs + interest might finance the annuity.

As you can undoubtedly tell all of this is a minefield to me.

I'll try and get some short-term financial advice to put me out of my misery!!

Why do you think ISA is suitable when you can get an immediate 6.25% advantage from choosing the pension over the ISA 🤔

incus432

Then a SIPP is still an option, you could open one and test the water.  Remember you can start and stop payments as you like, there's no penalty.  Or you could do a mix of SIPP and cash ISA if you are feeling ultra cautious. The SIPP gives you a better chance of growth if this is just supplementary. However none of us can tell you what to do.

tickledpink1

Dazed_and_C0nfused said:

tickledpink1 said:

Thank you Incus. 

Earnings approx £27000. Retire at 67. Annuity or drawdown or a mixture; I don't know. This contribution of £600 ish/mth for 8 yrs is to provide a small top-up pension. I was thinking the ISAs + interest might finance the annuity.

As you can undoubtedly tell all of this is a minefield to me.

I'll try and get some short-term financial advice to put me out of my misery!!

Why do you think ISA is suitable when you can get an immediate 6.25% advantage from choosing the pension over the ISA 🤔

I don't,  I was just questioning if it was if the isa isn't considered as income and therefore won't get taxed. I guess the tax relief when paying into a pension outweighs anything else.

I'm just trying to get info before I make any decisions.

Thanks so much everyone for your input.

incus432

The tax advantages of a pension are hard to beat.  

You've already seen two IFAs- did you not get on? Do you think they would help you decide or feel confident about it? Is it worth the cost?  Are you concerned they would push you into an over complex and expensive solution?

tickledpink1

Yes, I got on well with both of them. They only mentioned a SIPP, nothing else. The first was charging 2% to manage a SIPP. The second was 'not fully independent' and was chargjng over 1% to manage a SIPP. Lots if what I've read online say costs are very very important.

I didn't know what questions to ask until I went away and looked into what I'd been told. Meeting the second one again next week.

At the mo I'm leaning towards an AJ Bell ready-made pension.

incus432

Fidelity are also worth a look for a SIPP.  Just been looking them up for another reason.  0.35% as platform fee on a regular savings plan (capped on £90 pa) and only £1.50 a trade if on this.

https://www.fidelity.co.uk/services/sipp/fees-and-charges/#tab-link

As for what you invest in I am unsure why you are leaning toward the dearer ready made pension (although there's probably nothing wrong with that one). You say any extra income you will eventually take from this investment is a bonus and not needed for general living so do you have a reason not to go for the maximum full equity option - a simple cheap world equity tracker fund or ETF?  This is likely to give the most growth potential.

These are available in either AJ Bell or Fidelity. The ETF versions (eg SWLD or VHVG) would mean capped platform fees when/if the fund gets bigger in a few years

tickledpink1

Thanks Incus. The reason is that I seem to be inept at this! It is jargon that I know nothing about!

I will read about workd equity tracker funds and see if I can make any sense of it.