Workplace pension vs Stocks/Shares ISA

Spir4

Hi all,

I'm a high rate tax payer in England. Obviously (like all of us here) I'd like the most bang for the buck. After having seen Martin's Live show about investing, I looked into Stocks/Shares ISAs. But then I did some research and I think putting any excess money into my workplace pension is still the best investment I could do (if, for argument's sake both my workplace pension and the stocks/shares ISA are using the same funds and the plan is to only start touching the money after retiring). Here's my reasoning:

Workplace pension:
If £1000 of my gross salary goes into it, the full £1000 will be in it. When I later get it after retirement and I stay in the lower tax bracket, 25% I'll get tax free and the rest is taxed at 20% (ignoring the tax-free Personal Allowance), which makes it so I'll basically pay 15% tax on it, with and end result of £850 in my pocket

Stocks/shares ISA:
If however I choose to go the Stocks/Shares ISA route, of that £1000 I'll only get £600 net (after 40% tax). That £600 will always be tax free, but I'll only have £600 in my pocket.

All of this is ignoring the potential growth of the savings/pension pot because the money was invested in stocks, because in my scenario everything was invested in the same funds portfolio.

Am I correct or am I missing something?

Thanks a lot!

Albermarle

No, you are not missing anything. 
40% tax relief on pension contributions is the gift that just keeps on giving.

One cloud on the horizon is if you ever become a 40% taxpayer in retirement, the maths is clearly not as strong, although there is still some benefit. Normally not many people pay 40% tax in retirement but with the continued freezing of the tax bands, then......

On the other hand if you retire before state pension age and have no other taxable income, you can take £12570 ( todays figure) of taxable income but pay no tax - plus some of the tax free cash as well. 

LHW99

Although if you are likely to be able / want to retire before you are able to access pension money (55 / 57 / ....), having funds in an ISA is one way of bridging the gap in income.

Spir4

Thanks everyone!

Pipthecat

Spir4 said:

(ignoring the tax-free Personal Allowance)

If you take the tax free allowance over time with each withdrawal it can give you a lower effective take rate. But nice to have as a lump sum if you have any debts you want to pay off at the point of retirement.

Also does your work place pension offer matching contributions i.e. free money?

ali_bear

Yes the only problem with stuffing excess income into a pension is that you can't access that money until you're at least 55/57. And once you do start accessing it you won't be able to contribute much more (MPAA rule). If you put in too much you'll just end up paying 40% tax on it after retirement. 

Money saved outside of a pension wrapper will be from taxed income, but then you have full flexibility about what you do with it.