Pension or ISA

Nickyno

We are able to put more money into out private pension pot monthly. Is it better to put into the pension or ISA? Planning to retire in next 5 years.

Yorkie1

Pension will get tax relief on the way in that ISA doesn't. But ISA has advantages of being tax free on the way out.

But more info is needed about your bigger picture.

What other savings will you have to rely on, if your SIPP dives in value just before you intend to retire?

When will State Pension kick in (have you checked your forecast; will you need to top up contributions if you won't have got enough years' contributions by the time you stop working)?

Which tax bands will you be in now and on retirement?

El_Torro

Pensions tend to be more tax efficient (depending on how and when you withdraw) but if you're not 55 yet you won't be able to access the money in a private pension until you are old enough.

DRS1

https://forums.moneysavingexpert.com/discussion/6668488/pension-or-isa

Are you planning to post on the Savings and Investment board as well to see if everyone on here says Pensions and everyone on there says ISA?

What is better for you depends on a whole load of things you haven't mentioned. Like what do you earn what is your tax band are you over the dreaded £100k figure how much is in your pension already and how much in your ISA what sort of ISA is it (cash or S&S). And just for completeness do you have a full state pension or will you by the time you retire.

Oh and you say we - for pension and ISA purposes maybe you should look at this as two individuals - what may be better for one may not be better or even possible for the other.

dunstonh

If you're a basic-rate taxpayer at the moment and will be a basic-rate taxpayer in retirement, then pension beats ISA by 6.25%. If you are a higher rate tax payer at the moment but will be a basic rate tax payer in retirement, then it's even better for pension.

There are caveats, such as if you're going to be close to the £1M mark on a pension but for most people, pensions are best.

af1963

If you will have some years when you have little or no other income (e.g. before state pension starts), you can take a chunk of the money from the pension each year to use your annual tax allowances. Between two of you, this could mean there is up to £25k per year that you can get out of the pensions without paying any income tax on it.

If that's available to you, then £80 put into the pension would become £100 after adding tax relief, and would still be £100 after withdrawal.

For any part that ends up being taken after state pension starts, it's likely to be taxable, but with a 25% tax free element, so you'd pay 20% tax on £75 ( £15 of tax ) and receive the remaining £60 plus the £25 TFC = £85.

Any extra contributions that you make now will probably fall partially into the two scenarios above - part of it may increase what you feel you can take in the early years using your allowances, and part will increase what you take later. So the average return for your £80 ( just from putting it in the pension, before any interest or investment growth) would fall somewhere between the £85 and £100 figures, depending on the balance of when you end up taking the extra benefits.

poseidon1

OP you own personal circumstances will dictate which option makes sense.

However, last year you put forward the idea of raiding your pension pot to fund a substantial home extension project. If you did so, what effect did that have on your remaining pot bearing in mind you now say you want to retire in 5 years?

ZeroSum

Depends on circumstances.

Im a basic rate payer with a public sector pension that will be greater than the personal allowance. So whilst a SIPP will be more tax efficient (in that id effectively would pay 15% tax on it), for the sake of 5% tax im trading that off with the greater flexibility of an ISA. There's also the matter that government also interfere with pension rules, so the tax efficiency may not be a great by the time id take it.

dunstonh

There's also the matter that government also interfere with pension rules, so the tax efficiency may not be a great by the time id take it.

They are also interfering with ISA rules. For example, the changes coming in 2027, which will make many defensive assets for those under 65 taxable. Whereas in a pension, they're not.

The reality is that all tax wrappers get fiddled with by government.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82000409#Comment_82000409

What is the issue with being close to £1M?

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82001307#Comment_82001307

The Lump Sum Allowance of c £268k (equates to a pension worth just over £1million).