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  • FIRST POST
    • MSE Martin
    • By MSE Martin 12th Feb 07, 9:28 PM
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    MSE Martin
    ISAs v Pensions: The Official Retirement Debate
    • #1
    • 12th Feb 07, 9:28 PM
    ISAs v Pensions: The Official Retirement Debate 12th Feb 07 at 9:28 PM
    Both ISAs and Pensions are tax-free wrappers you can use to invest or save money in to provide a return for your old age.
    • ISAs In a nutshell you put money in ISAs from your after tax salary, and the returns aren't taxed (very much in a nutshell, its more complex than that, see the ISA guide)
    • Pensions. In a nutshell the benefit it you get to put your money in a pension from your before tax salary, but the returns once you retire are taxed (again read the pensions guide for more on this)
    It's important to remember both these are just wrappers, in other words you can choose what you put in them. In both you can have a savings product or a range of investments.

    So which is better for retirement?

    Now I'm opening the debate up. There's no strict right or wrong answer only views. I thought it would be interesting to canvas opinions, there are many qualified (and unqualified) money nerds on these boards. Now its time to have your say.

    Martin
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.

    Don't miss out on urgent MoneySaving, get my weekly e-mail at www.moneysavingexpert.com/tips.

    Debt-Free Wannabee Official Nerd Club: (Honorary) Members number 000
Page 2
    • dunstonh
    • By dunstonh 13th Feb 07, 11:13 AM
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    dunstonh
    When we talk about ISAs on the pensions front we refer to stocks and shares ISAs.

    Cash ISAs are not suitable retirement planning vehicles as they are no good for long term planning.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Linda32
    • By Linda32 13th Feb 07, 11:21 AM
    • 4,314 Posts
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    Linda32
    Okay, thankyou, I know nothing about the Stocks and Shares ISA.

    Basically, hope this is the right place to ask.

    Myself and my partner are 35 and 37

    I have a stakeholder pension, which I transfered the fund from a private pension into.
    Partner has a private pension with L&G but not paid into for 16 years, due to having a company pension at Caterpillar.

    We both have ISA's and easy access savings.

    He now dosn't work for Caterpillar so wants to know if these somewhere else to put, what would be his pension contribution, rather than back with L&G.
    • DavidLaGuardia
    • By DavidLaGuardia 13th Feb 07, 11:45 AM
    • 600 Posts
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    DavidLaGuardia
    Benefits of pension

    1 - tax relief on contributions
    2 - no inheritance tax to pay if you die before retirement as lump sum is outside of estate
    3 - on death before retirement, the death benefits (value) will be 22% higher than an ISA
    4 - not accessible until 55 (from 2010). Double edged sword for some but some need the tie in.
    5 - contributions can increase your working/childrens tax credits received giving upto a potential equivalent of 72% tax relief
    by dunstonh
    You have covered nearly all the pros and cons, just to add that pensions are protected from creditors should this ever be an issue (but not ex spouses!)
    • DavidLaGuardia
    • By DavidLaGuardia 13th Feb 07, 11:50 AM
    • 600 Posts
    • 268 Thanks
    DavidLaGuardia
    I would go for an isa because I don't trust pensions.
    That' not a view due to the recent troubles but because money is locked in and there's not a lot you can do if the rules change.
    At least currently with an isa you can take the money out so I feel there's less chance of an unavoidable loss.
    But then I wouldn't keep everything in an isa wrapper either, just in case.
    by nrsql
    I don't trust chickens due to the recent troubles.
    Such is the inane quality of people who use "received wisdom" without elaborating on it. What troubles? are they even relevant to the majority of pensions available. What are you on about?
    • dunstonh
    • By dunstonh 13th Feb 07, 12:08 PM
    • 98,597 Posts
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    dunstonh
    Its a bit like the comment you get at times from people who say they invest in ISAs because they make more money than their pension. There is no sense in that comment but you hear it very often.

    Or those that say that they have switched to a SIPP and its making more than their personal pension used to.

    It has nothing to do with the wrapper. Its where you invest the money that is important. If you pick the same investment funds in an ISA and a pension, they will perform exactly the same.

    The most important part about investing is where you invest the money. Yet when it comes to pensions, people seem to ignore the investment side of it and go with a default fund (which usually ends up being pretty naff). Then they wonder why performance is poor.

    A common mistake by the novice investor who altered their investments after a crash (also known as fair weather investors) is to compare what they have now against what they had before and make a judgement based only on that. What they had before went through a crash (often transferred or cashed in before recovery was possible). What they have now has only seen growth and hasnt gone through a crash.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • jem16
    • By jem16 13th Feb 07, 12:39 PM
    • 18,718 Posts
    • 11,561 Thanks
    jem16
    Okay, thankyou, I know nothing about the Stocks and Shares ISA.

    Basically, hope this is the right place to ask.

    Myself and my partner are 35 and 37

    I have a stakeholder pension, which I transfered the fund from a private pension into.
    Partner has a private pension with L&G but not paid into for 16 years, due to having a company pension at Caterpillar.

    We both have ISA's and easy access savings.

    He now dosn't work for Caterpillar so wants to know if these somewhere else to put, what would be his pension contribution, rather than back with L&G.
    by Linda32
    Might be best to start a new thread with these questions. You'll probably get more answers.
  • JohnThomas
    I'm new here, just having a look around. In 5 mins I have literally doubled my knowledge of pensions and ISAs. That's probably a sad reflection of my knowledge. But still, thanks.
  • deadparrot
    Any reason why someone starting out in their career and a basic rate tax payer shouldn't pay into an ISA to begin with, then later in their career when more likely to be a higher rate tax payer start transfering (within pension contribution limits) ISA money in to a pension fund?

    risk is that rules will change, but surely if someone expects to become a higher rate tax payer in the future, defferring contributions while a basic rate tax payer would be a good idea?
  • EdInvestor
    Any reason why someone starting out in their career and a basic rate tax payer shouldn't pay into an ISA to begin with, then later in their career when more likely to be a higher rate tax payer start transfering (within pension contribution limits) ISA money in to a pension fund?

    risk is that rules will change, but surely if someone expects to become a higher rate tax payer in the future, defferring contributions while a basic rate tax payer would be a good idea?
    by deadparrot
    Yes.The ISA is a "use it or lose it" annual allowance, whereas pensions are now subject to a "lifetime limit."

    So if there are no employer contributions available, it's much more sensible for the BRT to save in the ISA and then later transfer the ISA lump sum into the pension, getting 40% tax relief ( of which 22% will top up the pension and 18% will come back in cash as a rebate and can be put back to replenish ISA savings.)
  • moneyandmountains
    Any reason why someone starting out in their career and a basic rate tax payer shouldn't pay into an ISA to begin with, then later in their career when more likely to be a higher rate tax payer start transfering (within pension contribution limits) ISA money in to a pension fund?
    by deadparrot
    This depends on whether the company that they work for pay a contribution to the pension. This is free money that will be lost if they aren't part of the occupational pension scheme.
    • dunstonh
    • By dunstonh 13th Feb 07, 7:35 PM
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    dunstonh
    free money from the employer into a pension trumps an ISA.

    At the end of the day, what you are looking at here are identical investment options but with different tax handling and maturity issues. The UK has something like 13 tax wrappers which is really daft and confusing but it does allow you to manipulate the tax system to your advantage if you know what you are doing or have an adviser who knows what they are doing.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • deadparrot
    This depends on whether the company that they work for pay a contribution to the pension. This is free money that will be lost if they aren't part of the occupational pension scheme.
    by moneyandmountains
    Yes, but that's no reason not to do both. Always take free money from your employer, but don't necessarily stop there.
  • EdInvestor
    The really huge downside of the pension is the fact that once the money is in, you can't get it out, except as a (taxed) income according to strict limits and not before age 55.The capital, apart from the tax free cash, is gone forever.You cannot spend it and nor can you pass it on to your heirs.

    When you come to think of it, you really do need quite a big bribe of free money to have anything to do with the idea.
    • peterg1965
    • By peterg1965 13th Feb 07, 9:27 PM
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    peterg1965
    This has now got me thinking. Being in the very 'comfortable' position of having a variety of pensions (occupational, state and pension) that will put me very much in the higher rate tax bracket, perhaps I should now put all my spare 'investment' cash, which will not quite reach the annual ISA limit of £7000, into ISAs, preferably stocks and shares ISAs. Although I will not get the tax relief at part of a pension investment now, at least I will not be giving it all back in 25 years time as income tax. On reflection the ISA gives me more options and taken as a 'joint' investment with my wife, we can invest £14K a year as and when we can afford it in the future. It would certainly be advantageous for me though if I could 'lock' the ISA investments in for a period of time so that I(we) do not become tempted to withdraw it and spend it!
    • jamesd
    • By jamesd 13th Feb 07, 9:33 PM
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    jamesd
    deadparrot, the trouble with that scenario is that the ISA annual allowances you switch are more valuable then, so the incentive not to switch them is high. Using the full ISA allowance and also putting significant money into the pension becomes increasingly affordable at around that time as well.

    If you switch, you get the problem when retired that the ISA allowance you switched would have produced tax free income that doesn't count for reducing age allowance. In a pension it gets the extra tax break but then you lose age allowance in the 20-25k zone so you effectively pay 33% tax on the pension money in that range. That really erodes the benefit of the higher rate tax gain going in.

    If you're only just higher rate and likely to stay that way, it looks like a reasonable option to use in the few years before retirement. If you may be well into the higher rate band then it's likely that you can put so much into pension investing that you're going to be trying to avoid taxable income in retirement and keeping the ISA is good for that.
  • woodhouseian
    I see pensions as you giving your money away to someone else - they pay you an income from it on retirement, but they gat to keep the capital when you die. Whereas an ISA is you saving up your own money for yourself, spending it as you see fit, and able to leave it to your family when you die.

    On the face of it the ISA is the much better deal, all things being equal. I'm always amazed by how pathetic the annuity rates are on pensions, eg about 6% or 7% at the age of 60. There are cash savings accounts with almost that level of return.

    That means, I think that a pension is only worth doing if someone else (either your employer or the taxman) is going to pay a serious amount into it for you. If you've not got a company scheme, and you're a basic rate taxpayer, it's not worth doing. The only 'benefit' is the tax relief and you pay that back anyway because you have to pay tax on your pension income.

    I reckon the best idea for basic-rate taxpayers is, bite the bullet, pay as much as you can into a stocks and shares maxi ISA, including the amount that the taxman would have paid in if it was a pension.

    Higher-rate taxpayers, do pretty much the same but pay into a pension as well!
  • competitionscafe
    It has nothing to do with the wrapper. Its where you invest the money that is important. If you pick the same investment funds in an ISA and a pension, they will perform exactly the same.
    by dunstonh
    Yes, granted, identical funds will provide the same return regardless of the wrapper - but the charges and the tax rules will also affect what you get back when you cash in those funds.

    That's where (for me) it starts to get complicated. At the moment I am self-employed and pay money into both a stakeholder and into an ISA. Obviously I get tax relief (lower rate) on the pension payments and none on the ISA payments. The main concern re the ISA is that because self employed income can fluctuate so much there is no way I could say that some time in the next 10, 15 years I would not be able to resist drawing on the ISA savings, whereas with the pension this is not an option until age 55. As the main aim of either an ISA or a pension would be to provide an income over and above the state basic pension once I retire, that would be the main disadvantage of the ISA only option as far as I can see it?

    Otherwise what woodhouseian says above makes a lot of sense - but only if you could guarantee that you would not dip into your ISA and thereby significantly deplete your retirement income. I cannot guarantee that - hence my decision to pay into an ISA and a pension. I don't know if this is the 'correct' decision, hence my interest in this debate, and am no expert on the subject - so i guess in a way I am hedging my bets by sitting on the fence and not going for an either/or option?
    Last edited by competitionscafe; 14-02-2007 at 12:35 AM.
    "The happiest of people don't necessarily have the
    best of everything; they just make the best
    of everything that comes along their way."
    -- Author Unknown --
  • McGhie
    A couple of comments:

    1. If your employer will make pension contributions for you (via salary sacrifice) and pass all of their savings on to you then paying into a pension is much more tax efficient than paying into an ISA. You end up having the 12.8% employer NI savings passed back to you by your employer and save the employee NI on your sacrificed salary, on top of the tax relief, which you don't even have to claim as the contributions were made before tax. For a higher rate tax payer you save almost 47%.

    2. If you are fortunate enough to be able to max out your annual ISA contributions then IMHO the either/or argument is void as you should simply do both. Of course, that won't sway the people who wouldn't touch a pension with a bargepole.
    • ducky2004
    • By ducky2004 14th Feb 07, 1:16 AM
    • 88 Posts
    • 35 Thanks
    ducky2004
    Cash ISA is not necessarily not suitable
    When we talk about ISAs on the pensions front we refer to stocks and shares ISAs.

    Cash ISAs are not suitable retirement planning vehicles as they are no good for long term planning.
    by dunstonh
    I disagree that cash ISA is not suitable, epsecially for those who can afford and will stash away 3k per year, Especially at current rate where top paying Cash ISA pays 5.93% AER guaranteed.

    With stocks and shares ISA, one is subjected to the whimp of stock market. In the long run, earning growth cannot exceed nominal GDP growth, which is currently around 2.5%. If PE ratio remains the same, stock prices cannot grow at more than 2.5% pa (UK only, or around 5% if the exposure is worldwide) before fund/ISA charges. The historicaly 7% projection was based on high nominal GDP (and also high inflation world) and may or may not be true going forward.


    For anyone who takes the stock and shares ISA route, remember to get a discounted broker to reduce your initial charge and annual charge to minimum. One does not usually have to worry about this with pension fund as your employer is likely to negotiate a good deal with the pension company already.

    Also, personally, I feel that the real risk of pension is that when most people do live until 100 and the government run out of money, it would have the tendency of carrying out policies that rob the rich paul to pay the poor peter.


    p.s. I came across this as well - for those you are more technical. It describe the chance of having enough money to live to end of life in stock and share investment.

    http://www.investorsinsight.com/otb_va_print.aspx?EditionID=469
    Last edited by ducky2004; 14-02-2007 at 1:30 AM.
  • competitionscafe
    I disagree that cash ISA is not suitable
    by ducky2004
    I don't see how cash ISA returns will beat equities over the long term - and saving for retirement is a long-term investment (whether via a personal pension or equity ISA wrapper).

    As this chart shows, equities have far outperformed cash over the last 3 years, throughout the 90's and over the very long term (since 1900):
    http://uk.standardlifeinvestments.com/content/data/press/press_articles/financial_adviser_06_2006.html

    "It is worthwhile therefore to examine the very long term, which can smooth out the effects of cycles in business activity or inflation rates. We can compare market returns since 1900; the average annual nominal return for equities, gilts and cash, was 11.5%, 6.0% and 5.1%, respectively."
    "The happiest of people don't necessarily have the
    best of everything; they just make the best
    of everything that comes along their way."
    -- Author Unknown --
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