Pension vs ISA when basic rate tax payer...

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.
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Comments

  • NoMore
    NoMore Posts: 1,525 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    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.

  • QrizB
    QrizB Posts: 16,533 Forumite
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    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.
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  • Alexland
    Alexland Posts: 10,183 Forumite
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    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+
  • DiamondLil
    DiamondLil Posts: 724 Forumite
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    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.
  • £60k into pension each year
    £20k into S&S ISA
    £20k savings balance @5%
    £50k PBs

    Go from there.
  • 22225
    22225 Posts: 214 Forumite
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
    Alexland said:
    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+
    Hi yes I have a LISA thanks. Trying to fill that up first.
  • £60k into pension each year
    £20k into S&S ISA
    £20k savings balance @5%
    £50k PBs

    Go from there.
    What are PBs?
  • QrizB
    QrizB Posts: 16,533 Forumite
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    £60k into pension each year
    £20k into S&S ISA
    £20k savings balance @5%
    £50k PBs

    Go from there.
    What are PBs?
    Premium Bonds?

    N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Vodafone BB / iD mobile. Ripple Kirk Hill member.
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  • Ah, thanks 
  • eskbanker
    eskbanker Posts: 36,529 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    £60k into pension each year
    £20k into S&S ISA
    £20k savings balance @5%
    £50k PBs

    Go from there.
    It's unclear what this represents, as it appears to be answering a question that isn't visible - is it intended to be a recommended set of actions for a notional very high earner, or a menu to choose from, or something else, and whatever it is, how does it relate to OP as a basic rate taxpayer, seeking guidance specifically on pension versus ISA?
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