Pensions Vs ISAs and fiscal drag

mark_cycling00

Pension £400, ISAs £400

Retire in 15 years. Full time employed. Will get 100% state pension at 67.

Hi, my plan for next 15 years was to slowly use the ISA cash and contribute an equivalent into pension thus adding 25%ish tax relief into it

However if the 40% tax rate keeps at same level, in 15years I'll be paying 40% tax on a lot of my pension, having only received 25% tax relief. Whereas the ISA should be tax free.

ISAs were funded after basic rate tax and NI. I don't think I'll be able to add much more over the next 15 years.

Appreciate that it's impossible to predict the future. But would it be more sensible to try and keep the ISAs for retirement?

Many thanks for thoughts

QrizB

Pension £400, ISAs £400

Are there some digits missing from those numbers?

However if the 40% tax rate keeps at same level, in 15years ...

I wonder what odds Ladbrokes would give me on this? It seems unlikely toe that the next three+ parliaments will all choose to freeze the income tax thresholds.

westv

https://forums.moneysavingexpert.com/discussion/comment/82051302#Comment_82051302

I would imagine a "k" is missing

af1963

You'll only be paying 40% on the pension if you choose to withdraw it at a fast enough rate. And if you stop working before state pension starts, you'll be able to get some of it within your tax allowance and pay no tax on it at all.

hugheskevi

I think it is impossible to guess the future of higher rate tax threshold, and even the rate itself. There could be a further freeze, or it could even be reduced to ensure higher earners do not benefit from a higher Personal Allowance, as happened about 10 years ago. Any change to thresholds is likely to see the Personal Allowance prioritised above higher rate threshold. About the best that could be hoped for would be CPI increases, which should lag behind earnings and investment returns.

Looking at public finances and future changes, the demands are only increasing as the population ages. It is hard to see a scenario where the tax burden falls. Whether that is higher general tax, or more specific means-tested things like Winter Fuel payment, having more in a pension does rather paint a target on your back in terms of getting it out at a tax-efficient rate.

Assuming the money could be taken out at 20% tax, the gain from moving it from the ISA into the pension is 6.25%. I've never viewed that as sufficient for the policy change risk I bear on monies in a pension, and have never contributed to a pension from basic rate income.

I wouldn't be adding money that only benefits from basic rate relief 15 years out. I doubt I would be persuaded to do so any more than a maximum of 5 years from when I planned to withdraw the funds.

dunstonh

However if the 40% tax rate keeps at same level, in 15years I'll be paying 40% tax on a lot of my pension, having only received 25% tax relief. Whereas the ISA should be tax free.

Tax relief is 20%, not 25%.

However if the 40% tax rate keeps at same level, in 15years I'll be paying 40% tax on a lot of my pension, having only received 25% tax relief. Whereas the ISA should be tax free.

If higher rate tax remains at the same level for the next 15 years, then those earning minimum wage could be higher rate taxpayers.

DT2001

https://forums.moneysavingexpert.com/discussion/comment/82051435#Comment_82051435

I don’t want to assume anything so can you just clarify if your suggestion about not adding to a pension unless receiving high rate relief is on the basis that you will pay HRT in retirement or a more general observation applicable to a BRT?

hugheskevi

https://forums.moneysavingexpert.com/discussion/comment/82052964#Comment_82052964

A more general observation for most paying basic rate tax when working and still some distance (5+ years) from retirement, regardless of the rate of tax they will pay in retirement.

Assuming basic rate relief and basic rate taxpayer in retirement with basic rate unchanged at 20%, the uplift from the tax-free lump sum is 6.25%, and the funds are free of dividend and capital gains tax.

Contributing an amount to the pension to get the maximum employer contribution and any matching is almost certainly going to be the right thing to do. But after that, I think it becomes very questionable unless salary sacrifice is available, or the individual is in receipt of means-tested benefits.

The obvious alternatives are a stocks and shares ISA, or a LISA for those able to contribute to one. If in a stocks and shares ISA, the funds may be used to increase pension contributions at a future time when the incentives are better and that would result in an overall superior outcome. If using a LISA, then a much better increase than 6.25% is secured on the contribution.

The closer to retirement an individual is, the more certain everything becomes, and that might justify contributions from basic rate income, perhaps reducing a stocks and shares ISA at that point to do so.