Balancing pension and S&S ISA

El_Torro

I'll start this thread by saying I'm going to be 46 in a few months time, so it's going to be over a decade before I can access my pension. Bearing that in mind a lot of what I am looking at is theoretical, and by the nature of the beast involves making various assumptions which may or may not be true. Still, it's a thought exercise which may help others who are closer to accessing their pension than I am. 

Currently all the money that is going into my pension (via salary sacrifice) would be taxed at 40% (or 42%,. to be more accurate) if I wasn't contributing to my pension. I could put more in than I currently do to use up more of my money that gets 40% income tax on it. However I made the decision a couple of years ago to put what I can into my Stocks & Shares ISAs. I'm not using my full ISA allowance every year, it's close though.

Assuming I work until 58 (I might wish to retire sooner or later, will see how it goes) my pension will be worth about £920k and my ISA about £370k. As I said at the start of this post I am making various assumptions about this value. The value is in today's money.

When I retire I am looking at wanting an income of at least £36k a year (again, in today's figures). So depending on how things pan out I will continue to pay in to my pension as a 40% tax payer and when I retire will be a 20% tax payer. 


Assuming I do retire at 58 my plan is to not take a tax free lump sum and withdraw £60k a year from my pension. Only £45k of this £60k will be taxable so I will pay 20% tax on some of my withdrawal. After tax I will be getting £53.5k, so can put the money I don't use into my ISA. This will diminish my pension quickly while my ISA grows. When I get to state pension age the idea would be to either buy an annuity with what's left in the pension or just keep withdrawing, while making sure I remain a 20% tax payer. At 68 my pension should be worth about £420k and my ISA almost £600k.


On to my question: On the face of it does this sound like a good plan? Lots of what-ifs of course, for example if I retire earlier or later this will change the figures.

ali_bear

It is a bit far-off to be thinking about how you'll be taking the pension. I would suggest that any money you SS into pension that would otherwise be taxed at 40% effectively gets an immediate rebate. So maximise this, up until the point where it looks like you would end up paying 40% tax after retirement. 

And, choose your underlying investments well. If you have large ISA savings at retirement there is no need to be doing any lifestyling so you can forget about that.

singhini

ali_bear said:

It is a bit far-off to be thinking about how you'll be taking the pension. I would suggest that any money you SS into pension that would otherwise be taxed at 40% effectively gets an immediate rebate. So maximise this, up until the point where it looks like you would end up paying 40% tax after retirement. 

And, choose your underlying investments well. If you have large ISA savings at retirement there is no need to be doing any lifestyling so you can forget about that.

This is pretty much what i was going to say. 

If we were all a couple of drunks talking in the pub, i would say OP your figures of £920k and £370k mean you shouldn't have any money worries in your old age so happy days.

So maximise salary sacrifice and think about where your funds are / lifestyling (as previously mentioned)

El_Torro

Fair point from both of you about making more use of the pension now. I don't want to be a 40% taxpayer in retirement, but my pension would need to be worth £2M or more before worrying too much about that I suppose. 

I do see some benefits in having a decent amount in ISAs. It gives me the option to retire before 58. It also makes paying for multiple large outlays more manageable. There comes a point though where if I'm going to have additional investments I might as well have them in a pension rather than an ISA. Especially if I'm going down a tax bracket in retirement.

I think I'll stick to my current plan for now. My ISA is only worth about £100k at the moment. I know it will grow on its own with time but I think I need to give it some help for a few years, then review the plan when I hit 50. 

HedgehogRulez

I’m similar to you. 46 year old married with 2 mid teens.
£875k DC pension, £120k S&S ISA.
Wife primary school head (so TPS DB) with separate £50k SIPP and same £120k S&S ISA.

My aim is to keep out of higher rate tax by SS into pension and chuck as much as I can into ISAs to support early retirement in about 8 or 9 years.

My only snag atm is that we’re intending to move house next year (at double the value) so moving ISAs into cash atm (enjoying those equity gains over the last 8 years or so) to help with the house move. This will significantly deplete our ISAs depending on new house price.

Do you have any significant cash spends in the coming 5 years? (Kids/house etc)

El_Torro

HedgehogRulez said:

Do you have any significant cash spends in the coming 5 years? (Kids/house etc)

Nothing major planned. Probably the biggest spend in the next few years will be a car to replace my current one. I'm hoping my current car will last another 5 years. I am single with no dependents.

WitsEnd101

El_Torro said:

Assuming I work until 58 (I might wish to retire sooner or later, will see how it goes) my pension will be worth about £920k and my ISA about £370k. 

I have read some interesting posts recently related to FIRE, where you remortgage to cover your living costs to bridge the gap to pension age (currently 55). The plan seems to be that at pension age they take their TFLS to pay off the mortgage and then live off the pension. I can see various problems with this strategy but its another option to consider for early retirement wannabees.

El_Torro

WitsEnd101 said:

I have read some interesting posts recently related to FIRE, where you remortgage to cover your living costs to bridge the gap to pension age (currently 55). The plan seems to be that at pension age they take their TFLS to pay off the mortgage and then live off the pension. I can see various problems with this strategy but its another option to consider for early retirement wannabees.

I won't be able to access my pension until I am 57, possibly later. 

The strategy you suggest could work for some, not something I'm interested in doing right now though. If I do move to a bigger property (not something I am considering right now, though might in a few years time) then I might do this. I've even looked at getting an interest only mortgage and using the TFLS from my pension to pay it off. 

Currently I am happy with my job and in no real urgency to retire. That can change quickly of course. That's one of the reasons why I'm upping my Stocks & Shares ISA contributions.

ali_bear

WitsEnd101 said:

: 

I have read some interesting posts recently related to FIRE, where you remortgage to cover your living costs to bridge the gap to pension age (currently 55). The plan seems to be that at pension age they take their TFLS to pay off the mortgage and then live off the pension. I can see various problems with this strategy but its another option to consider for early retirement wannabees.

That sounds like a lot of FIRE. Take it from a bear, large fires are bad news. A little fire is OK but stay away from the big ones. 

singhini

Banks typically offer mortgages based on someone's income.
However;
Does anyone know if banks offer mortgages based on pensions aswell as incomes?    i.e. the banks are actively considering pension pots.
(opposed to the individual who might use their TFLS as a strategy to pay off a mortgage early). 

Hope that make sense

Alexland

singhini said:

Banks typically offer mortgages based on someone's income.
However;
Does anyone know if banks offer mortgages based on pensions aswell as incomes?    i.e. the banks are actively considering pension pots.
(opposed to the individual who might use their TFLS as a strategy to pay off a mortgage early). 

There is certainly at least one building society that was willing to consider the income and/or lump sums pension pots would give in retirement. When applying for my current 40 year mortgage Cumberland BS asked me to upload pension statements to confirm that I could afford the mortgage if it continued beyond my retirement. I was raising money to buyout my ex-wife. I didn't try asking them to release a further lump sum to pay for early retirement!

In the past Santander were difficult when I went interest-only saying that my pension lump sum was the repayment method (as technically a pension is not mine it's held in trust) but they seemed fine when I said that I was happy to sell the house and downsize if I couldn't raise the money. They made me sign a form to confirm that I would sell it if required.