Isa vs pension, which is best?

Sammyg

Hi 

I am in need of some much needed advice here, as when it comes to pensions its a bit of a minefield to me, I am trying to learn as at the tender age of 55, I now live alone due to having to place a parent in a nursing home as they got dementia, so I have to know these things now, anyway I have a workplace pension that has been going for a number of years, I know at 55 you can withdraw this, but I would sooner let it just run on till retirement age, also to add to this I keep building money up by researching the higher rate fixed Isa's and putting money away there, in the hope I will build up a tidy sum to live off as well in my old age, right my question now, is, is it better to add money to your pension pot rather then keep putting money and building it up in fixed isa's all the time?

Brie

It depends.  Do you have enough money in your pension?  Have you checked what you'll get from your state pension?  Do you live frugally or drive a top sports car and buy all the gadgets going?  

Personally I'd put everything into a spreadsheet and see how that looks like compared to your current salary.  I found doing that very reassuring.  From there you can decide if you need to put more into a pension to get the tax savings there or isas to be tax free on any gains.

El_Torro

If you're comparing a pension with a Cash ISA you are not really comparing like for like. Pensions are for investing (long term) and Cash ISAs are for saving (short term). 

If you are looking at investing in a Stocks & Shares ISA then you will probably be better of putting money in your pension. One of the big downsides of a pension is that you can't access it until you are old enough. Since you are 55 you are already old enough to access your pension. 

If you are a 20% tax payer while working and you are a 20% tax payer in retirement then you will see a benefit of 6.25% in a pension compared to an ISA just from the fact that you have access to tax free cash, either a lump sum or regular drawdown. If you drop a tax bracket in retirement the benefit is even bigger. 


There is a place for ISAs of course, though from what you have told us I would go with the pension.

Sammyg

Brie said:

It depends.  Do you have enough money in your pension?  Have you checked what you'll get from your state pension?  Do you live frugally or drive a top sports car and buy all the gadgets going?  

Personally I'd put everything into a spreadsheet and see how that looks like compared to your current salary.  I found doing that very reassuring.  From there you can decide if you need to put more into a pension to get the tax savings there or isas to be tax free on any gains.

Brie I currently have £129,872.33 in my Aviva work pension, which was started in 2004 and I plan to let that run obviously to retirement age, I have another pension that was started years ago and I just left running,  

Incidentally, how would you know about how much you would get with the state pension at your retirement age??

My other pension was with FriendsLife, an old pension provider, these merged with my Aviva, I think that one is about the £5000 mark at the moment, I just get documents through the post regarding that one.

 I think I live quite comfortably, I don't have any children or outgoings just bills, like everyone, but I do like my holidays, usually two per year, also I don't drive, I don't really splash out now, other then the holidays, but on the rare occasion I'll update my phone, but I haven't done that for years, I mean I am likely to have the same one for years now, I used to be into all the gadgets but now not so much.

Marcon

Sammyg said:

Brie said:

It depends.  Do you have enough money in your pension?  Have you checked what you'll get from your state pension?  Do you live frugally or drive a top sports car and buy all the gadgets going?  

Personally I'd put everything into a spreadsheet and see how that looks like compared to your current salary.  I found doing that very reassuring.  From there you can decide if you need to put more into a pension to get the tax savings there or isas to be tax free on any gains.

Brie I currently have £129,872.33 in my Aviva work pension, which was started in 2004 and I plan to let that run obviously to retirement age, I have another pension that was started years ago and I just left running,  

Incidentally, how would you know about how much you would get with the state pension at your retirement age??

https://www.gov.uk/check-state-pension

Sammyg

El_Torro said:

If you're comparing a pension with a Cash ISA you are not really comparing like for like. Pensions are for investing (long term) and Cash ISAs are for saving (short term). 

If you are looking at investing in a Stocks & Shares ISA then you will probably be better of putting money in your pension. One of the big downsides of a pension is that you can't access it until you are old enough. Since you are 55 you are already old enough to access your pension. 

If you are a 20% tax payer while working and you are a 20% tax payer in retirement then you will see a benefit of 6.25% in a pension compared to an ISA just from the fact that you have access to tax free cash, either a lump sum or regular drawdown. If you drop a tax bracket in retirement the benefit is even bigger. 


There is a place for ISAs of course, though from what you have told us I would go with the pension.

El Torro, I wouldn't feel comfortable investing in a Stocks & Shares ISA, as I know how volatile the market can be, so I usually just invest in a one year Fixed Rate ISA then when that matures just scout around for the next highest rate one.

?? I don't know if I am a 20% rate tax payer, I suppose I am

Brie

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	over £125,140	45%

dunstonh

El Torro, I wouldn't feel comfortable investing in a Stocks & Shares ISA, as I know how volatile the market can be,

I wouldn't be comfortable using cash savings for long term.   Whilst investments carry investment risk and may be subject to inflation risk and shortfall risk, cash savings WILL be subject to shortfall risk and inflation risk.  Indeed, using cash savings to provide an income in retirement is high risk.

Albermarle

Sammyg said:

El_Torro said:

If you're comparing a pension with a Cash ISA you are not really comparing like for like. Pensions are for investing (long term) and Cash ISAs are for saving (short term). 

If you are looking at investing in a Stocks & Shares ISA then you will probably be better of putting money in your pension. One of the big downsides of a pension is that you can't access it until you are old enough. Since you are 55 you are already old enough to access your pension. 

If you are a 20% tax payer while working and you are a 20% tax payer in retirement then you will see a benefit of 6.25% in a pension compared to an ISA just from the fact that you have access to tax free cash, either a lump sum or regular drawdown. If you drop a tax bracket in retirement the benefit is even bigger. 


There is a place for ISAs of course, though from what you have told us I would go with the pension.

El Torro, I wouldn't feel comfortable investing in a Stocks & Shares ISA, as I know how volatile the market can be, so I usually just invest in a one year Fixed Rate ISA then when that matures just scout around for the next highest rate one.

?? I don't know if I am a 20% rate tax payer, I suppose I am

Your pension will be invested in the financial markets, so will go up and down each year, but with most investments the long term trend is up. It would be worth looking into how your pension is invested a bit more closely.

tetrarch

There is always a balance betwen risk and reward. Your "Aviva Pension" is already tied up in the equity market so you need to consider your asset profile in aggregate

It's not necessarily all or nothing.

In theory a pension set with a high risk tolerance profile (a 4 or 5) would offset the low-risk low-reward cash ISA's that you have already. You should be able to ascertain your Aviva risk profile from the regular documentation they send you.

Without knowing the proportion of your retirement savings in cash vs equities then it is extremely difficult to give you enough information to help you make the decision that is right for you.

Regards

Tet

poseidon1

I won't bore you with science and the technical speak of growing your capital via investing  (your pension pot) versus growing your capital ( very slowly) via interest bearing savings accounts.

So some hard cold realities, if you have been placing significantly more in ISA saving accounts compared to contributing to your pension over the years you have likely done yourself a disservice.

You should try and and remember that for the period 2015 to early 2023, interest rates on savings were extremely low.  For many years banks were paying very little above  1% , cash ISAs even less. Pound for pound, money in your pension scheme should have performed notably better over the same period, despite the peaks and troughs of stockmarket investing.

  
You will have noted that interest rates are currently declining from the lofty heights of 5%+  achieved over a year ago, and that trend will likely continue downwards in years to come although one would hope not as low as 1%.

As for your Aviva pension, at £130,000 although a little  higher than the average for your age, the average pot in the UK  ( at all ages) is significantly lower than most people's needs or expectations in retirement.

 You have not indicated how much you currently earn, and how that compares with the state pension, but at the current size of your pension pot, the state pension will be doing the main heavy lifting in providing you with a guranteed retirement income, so make sure your are in line for the maximum by checking your NI records as suggested by Marcon.

In my view, you need to pay far more attention to seeing how you can significantly improve the size of the Aviva pot for your remaining years in work.

If you are only making minimum personal  monthly contributions and this has been the case for the bulk of your working life , you should be reviewing the possibility of increasing ( perhaps substantially) your personal contributions, and to what extent your employer might match your efforts in that regard.

Your needs maybe modest now and in retirement, but you would  hope to be in a position to maintain those standards without having to struggle, or find yourself having to substantially eat into your cash ISA 'safety net' to support your day to day retirement wants and needs.