We'd like to remind Forumites to please avoid political debate on the Forum... Read More »
Pension vs ISA when basic rate tax payer...

22225
Posts: 214 Forumite


Yes I know it's been done to death BUT
If you are a basic rate tax payer, maxed employer contributions, no salary sacrifice available, unlikely to be able to access means tested benefits anyway ....
Surely ISA does beat pension because say you put 10k into an ISA from salary after tax. Yes you have already paid tax on that salary, but at least that amount of tax you have paid is limited. From then on, if it compounded for 20 years, those capital gains or compounding or whatever it is called, they are unlimited (I know they can go down). So you have paid tax on the the original amount but perhaps the compounded amount will be larger.
With pensions if you are a basic rate tax payer in retirement you will have to pay tax on ALL of it including the gains, so an unlimited amount. Whereas with an ISA you have at least crystalized that loss at the outset.
There is the tax free allowance but would that outweigh everything????
Thoughts please.
If you are a basic rate tax payer, maxed employer contributions, no salary sacrifice available, unlikely to be able to access means tested benefits anyway ....
Surely ISA does beat pension because say you put 10k into an ISA from salary after tax. Yes you have already paid tax on that salary, but at least that amount of tax you have paid is limited. From then on, if it compounded for 20 years, those capital gains or compounding or whatever it is called, they are unlimited (I know they can go down). So you have paid tax on the the original amount but perhaps the compounded amount will be larger.
With pensions if you are a basic rate tax payer in retirement you will have to pay tax on ALL of it including the gains, so an unlimited amount. Whereas with an ISA you have at least crystalized that loss at the outset.
There is the tax free allowance but would that outweigh everything????
Thoughts please.
1
Comments
-
Put £100 in an Isa it’s still £100 on withdrawal.Put £100 into a pension it becomes £125 after tax relief. Take this out , 25% is tax free (125 x 25% is £31.25) rest is taxable. Assume 20% tax that leaves £75 (93.75 x 0.8) so total from a £100 contribution is £106.25 a 6.25 % gain.It’s all down to the 25 % tax free , which is truly tax free having not paid tax on either contribution (isa comes from taxed income) or withdrawal (other 75% of pension)We can ignore investment gains in all this because tax x contribution x gain (Isa) is the same as contribution x gain x tax (pension)As long as you withdraw at the same or lower rate of tax as you contribute pension is more tax efficient than isa up until the tax free limit. Contributing at higher rates and withdrawing at lower gives even better gains.4
-
22225 said:Thoughts please.Pension beats ISA.You earn £80 after tax. You put it in an ISA. It grows by 100%. You have £160.You earn £80. You put it in a pension. It receives £20 tax relief and becomes £100. It grows by 100% and becomes £200. When you withdraw it, you get 25% of it tax-free (£50) and pay 20% tax on the remaining £150 (-£30). You have £170.£170 is more than £160.
N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Vodafone BB / iD mobile. Ripple Kirk Hill member.
2.72kWp PV facing SSW installed Jan 2012. 11 x 247w panels, 3.6kw inverter. 33MWh generated, long-term average 2.6 Os.Not exactly back from my break, but dipping in and out of the forum.Ofgem cap table, Ofgem cap explainer. Economy 7 cap explainer. Gas vs E7 vs peak elec heating costs, Best kettle!4 -
If under 40 have you considered a S&S LISA for your additional contributions (ie those in excess of max employer matching)? 25% uplift on contributions and no tax on withdrawal age 60+2
-
This is what I did. Self employed and paying into a personal pension. But at some point I did the sums and decided to open a PEP and fund that alongside the pension fund.PEPs later evolved into ISAs and now, in retirement, my tax free income from the ISAs is approximately double that from the taxed pension income.1
-
2
-
HedgehogRulez said:0
-
N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Vodafone BB / iD mobile. Ripple Kirk Hill member.
2.72kWp PV facing SSW installed Jan 2012. 11 x 247w panels, 3.6kw inverter. 33MWh generated, long-term average 2.6 Os.Not exactly back from my break, but dipping in and out of the forum.Ofgem cap table, Ofgem cap explainer. Economy 7 cap explainer. Gas vs E7 vs peak elec heating costs, Best kettle!0 -
Ah, thanks0
-
HedgehogRulez said:3
Confirm your email address to Create Threads and Reply

Categories
- All Categories
- 349.8K Banking & Borrowing
- 252.6K Reduce Debt & Boost Income
- 453K Spending & Discounts
- 242.8K Work, Benefits & Business
- 619.5K Mortgages, Homes & Bills
- 176.4K Life & Family
- 255.7K Travel & Transport
- 1.5M Hobbies & Leisure
- 16.1K Discuss & Feedback
- 15.1K Coronavirus Support Boards