Increasing pension contributions v paying into stocks and shares ISA

The_Boss

Hi all. Would appreciate some advice for future investment strategy involving my pension given the tax relief benefits. In short, is there a tool I can use to compare the returns based on investing in tax free stocks and shares ISA v increasing pension contributions with 40% tax relief, 25% tax free drawdown aged 58 and then taking remainder at 20% tax rate a few years later?

For this comparison I'd assume same growth rate from each product and it will help me decide whether to accept needing to wait to age 58 versus being able to invest for 7-10 years in the stocks and shares ISA and the greater flexibility that provides.

The money would be used to payoff part of our mortgage early (19 year term, 40% deposit rates, currently a 2 year tracker 0.14 above base rate) as I've invested in the stocks and shares ISA specifically for that purpose.

More detail below...

I recently turned 46 and my partner and I have just bought a house. Following this outlay, I have a cash ISA with £26k in it (roughly 8 months take home pay, which I want to keep as a reserve fund along with accumulated interest) and £14k invested in a stocks and shares ISA.

I currently pay £1,300 per month into my company pension (via salary sacrifice and employers contributions) and have a fund of £90k.

Following mortgage and bills I have around £1k/month leftover, of which realistically I would have around £7-8k/ year to save/invest (excluding interest from the cash ISA, which I want to keep in there).

I had planned to regularly invest the majority of the monthly leftover money into the stocks and shares ISA over the next 7-10 years but am wondering if I'd be better off putting more into pension.

NoMore

The growth rate is irrelevant if all invested in the same thing. It’s the tax treatment that makes the difference. 

A pension is generally more tax efficient due to the 25% tax free and if you can contribute at a higher rate than you withdraw. The link below has a good table showing the difference for lots of different scenarios. 
 https://www.reddit.com/r/UKPersonalFinance/s/v4zZOM2onK

El_Torro

Pensions are more tax efficient, especially if you are getting 40% tax relief on the way in and only paying 20% tax on the way out. The main downside to a pension is that you will need to be at least 58 before you access it. If you are happy with this restriction then go with the pension.

Dazed_and_C0nfused

The_Boss said:

Hi all. Would appreciate some advice for future investment strategy involving my pension given the tax relief benefits. In short, is there a tool I can use to compare the returns based on investing in tax free stocks and shares ISA v increasing pension contributions with 40% tax relief, 25% tax free drawdown aged 58 and then taking remainder at 20% tax rate a few years later?

For this comparison I'd assume same growth rate from each product and it will help me decide whether to accept needing to wait to age 58 versus being able to invest for 7-10 years in the stocks and shares ISA and the greater flexibility that provides.

The money would be used to payoff part of our mortgage early (19 year term, 40% deposit rates, currently a 2 year tracker 0.14 above base rate) as I've invested in the stocks and shares ISA specifically for that purpose.

More detail below...

I recently turned 46 and my partner and I have just bought a house. Following this outlay, I have a cash ISA with £26k in it (roughly 8 months take home pay, which I want to keep as a reserve fund along with accumulated interest) and £14k invested in a stocks and shares ISA.

I currently pay £1,300 per month into my company pension (via salary sacrifice and employers contributions) and have a fund of £90k.

Following mortgage and bills I have around £1k/month leftover, of which realistically I would have around £7-8k/ year to save/invest (excluding interest from the cash ISA, which I want to keep in there).

I had planned to regularly invest the majority of the monthly leftover money into the stocks and shares ISA over the next 7-10 years but am wondering if I'd be better off putting more into pension.

For a basic rate payer (now and in retirement) the pension beats an ISA by 6.25%.

Although there is no tax to pay on money taken from an ISA there is no relief when you add money in the first place.

With the pension you are getting basic rate relief (which equates to 25% of your net contribution) on the way in and only need to pay tax on 75% of it when you take money out.

The_Boss

Thanks very much all for the responses. Am I right that pension providers will generally allow you to take the 25% lump sum but then defer the monthly payments for a few years, i.e. I could take the 25% aged 58 but then not start to receive monthly payments until I am in my 60s?

Just spent 15 mins trying to find the answer in Aviva's website prior to asking this...will drop them an email to see as well as asking here

The_Boss

Ignore this, obviously found the answer about 5 mins after I posted 😂

Albermarle

The_Boss said:

Thanks very much all for the responses. Am I right that pension providers will generally allow you to take the 25% lump sum but then defer the monthly payments for a few years, i.e. I could take the 25% aged 58 but then not start to receive monthly payments until I am in my 60s?

Just spent 15 mins trying to find the answer in Aviva's website prior to asking this...will drop them an email to see as well as asking here

One thing to be careful of is not everything that is legally possible, is offered by all providers. Older pensions can be quite restrictive .
Normally though with a modern pension, you can do what you say, and even take the 25% tax free in stages if you want.
Also you do not need to take monthly payments if you do not not want, but more irregular ones. 

On your original question, 40% tax relief on pensions contribution is a very generous system ( and it is often speculated that it will be stopped one day as it costs the Treasury tens of Billions)
So suggest you don't look a gift horse in the mouth !