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  • FIRST POST
    • MSE Martin
    • By MSE Martin 12th Feb 07, 9:28 PM
    • 8,116Posts
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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 3
    • valmiki
    • By valmiki 14th Feb 07, 6:23 AM
    • 94 Posts
    • 13 Thanks
    valmiki
    stocks and shares ISA (via various index trackers) for me all the way baby!

    ...and I work in local government.

    I would rather know what tax I have paid putting money into an ISA, rather than pay money into a pension, for which I won't know what I'll be taxed 30 years in the future.

    Also, my employer's scheme is a final salary scheme but I don't know whether I'll still be working in LG when I retire, or what the terms of my retirement (age, etc.) will be. They have tried to change this recently so just because you get a few extra quid from the employer to put into a pension doesn't make it the icing on the cake, as you don't know how it will be taxed when you retire!

    Remember, the population is aging, 30 years time, there will be a lot less taxpayers, the Gov will need their income from somewhere, so just be careful. With a pension, they'll be able to tax you how they want, with an ISA it's all tax-free. And I know I'll be leaving my kids a decent inheritance.

    So, yes, in the long-term I may be a couple of quid down with an ISA, that's the risk but personally I don't think I will. I know I'd be really annoyed if I dropped dead one week after retirement, and lose the pension capital for an extra half percent return through an annuity!
    • jamesd
    • By jamesd 14th Feb 07, 7:29 AM
    • 23,495 Posts
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    jamesd
    Why are you sure that an ISA is immune from a future government declaring that say all ISA funds of rich people will be taxed as usual? This hypothetical government might then say that anyone with ISA "savings" of more than 50k or 100k is rich, hurting everyone using it for pension planning but not those of low income relying on state schemes.

    Nothing is immune from legislative risk.
  • EdInvestor
    In the long run, earning growth cannot exceed nominal GDP growth, which is currently around 2.5%. The historicaly 7% projection was based on high nominal GDP (and also high inflation world) and may or may not be true going forward.

    Nominal share returns are based on 3 things: GDP growth, as you say, dividend yield, and inflation. Real (after inflation) returns are based on GDP plus dividend yield.

    The market dividend yield at present is around 3%, and UK GDP growth is around 3.5% with inflation at around 3.5%.Of course you have to take charges into account as well, and they can knock of 2 or even 3% at times.

    Those who invest in shares paying higher dividends and cut charges to the minimum should do better in the long term
    • NeilW
    • By NeilW 14th Feb 07, 8:29 AM
    • 138 Posts
    • 68 Thanks
    NeilW
    The third way
    I actually prefer the third way and hold my assets 'bare' , but in joint names which gives me access to the maximum amount of capital gains allowance while keeping the 'pot' as one lump sum.

    My assets are all direct share investments in big boring companies that won't light any fires but will probably be around in some shape or form when I retire and beyond.

    I find that the general wriggle amongst the companies manages the capital gain pretty well, and it takes quite a few years of cumulative growth to build up over £17,600 of gains anyway. Plus that amount grows every year.

    I have had ISAs in the past, but I found them restrictive. They slice your pot up in inconvenient ways and the 'tax benefits' can stop you allocating your assets to the best opportunity because you don't want to lose that special status.

    Pensions are even worse since the capital is locked away essentially forever and the rules keep changing every ten minutes. Again I have pensions but only from jobs where they gave me 'free money' as long as I matched the employers contribution. That money is now in a SIPP

    I suspect that if I do use tax wrappers in the future it will be a self-select ISA, simply because I believe in 'progressive retirement'. I don't want to be flogging my guts out waiting for the day I become 55. I want a slow steady build up of assets and income from those assets which I can allocate as it arises as I see fit, reinvest when I feel that is appropriate and spend when I want to.

    I'm fortunate in the line of work I'm in that I've had dealings with some very wealthy individuals - all self-made. What I have learnt is that they don't do what it says in the FSA manual and they don't necessarily do what appears on the surface to be the most tax efficient or even capital efficient way of doing things. But they do make money.

    Now I may not be as skillful or charismatic as they are, but I'm a good listener and learner. I've learned to question received wisdom from 'experts' with vested interests. I've learned that humans are very good at dealing with the here and now, but very bad at 40 or 50 year planning. And so far I'm doing OK - house paid off, no debt, reasonable asset base, I'm home by 5:20pm on a three and a half day week so I can spend time with my toddlers.

    Diet planning is very simple: Don't eat too much, eat more greens and exercise more.

    Retirement planning is similarly very simple: Accumulate assets that pay a rising income so that you eventually you can replaced earned income with investment income.

    It isn't any more complicated than that.

    Everything else (including the tax wrapper debate) is merely a distraction.
  • EdInvestor
    My assets are all direct share investments in big boring companies that won't light any fires but will probably be around in some shape or form when I retire and beyond.
    I follow much the same strategy.If you do this, and additionally choose companies that pay good divis it is certainly quite possible to fund yourself from capital without bothering much with tax wrappers if you are in the basic rate tax band.

    Effectively your income is tax free because of the divi tax credit and can be topped up with judicious use of the CGT annual allowance of nearly 9k.

    But the ISA can come in handy if your income hits the 20k mark because age allowance is then clawed back in retirement. And of course it's also very useful if you want some lower risk investments like property or bond funds as well where the income is taxed on an interest basis.
    • dunstonh
    • By dunstonh 14th Feb 07, 9:36 AM
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    dunstonh
    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.
    So, for the personal allowances, you get 6-7% tax free guaranteed. There is no savings account that guarantees that. Just because you can get savings accounts near that level now, doesnt mean you always will. Just look at rates a few years ago.

    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.
    Dont look at todays rates as an example. Savings rates move with interest ratse and you were getting 3% not too many years back. Also, cash historically fails to keep up with inflation. A cash ISA just about beats it so you are getting no real growth using cash ISAs.

    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.
    Not much use for those needing advice and nowadays the cost of advice is not that great on ISAs. (FSA publish average commission taken and ISAs are 1.8%).
    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.
    • bobmccluckie
    • By bobmccluckie 14th Feb 07, 9:39 AM
    • 61 Posts
    • 27 Thanks
    bobmccluckie
    Ewymac
    I definitely have a view! Teachers' AVCs are a waste of time, particularly when you have the facility to buy extra years from your teachers pension.
    So consider
    AVC that has to buy an annuity when you retire
    or
    extra years bought in the teachers pension scheme linked to final salary and index linked.
    What to choose?
    Its a no brainer!
    • Andy L
    • By Andy L 14th Feb 07, 10:30 AM
    • 10,181 Posts
    • 9,364 Thanks
    Andy L
    stocks and shares ISA (via various index trackers) for me all the way baby!

    ...and I work in local government.

    I would rather know what tax I have paid putting money into an ISA, rather than pay money into a pension, for which I won't know what I'll be taxed 30 years in the future.

    Also, my employer's scheme is a final salary scheme but I don't know whether I'll still be working in LG when I retire, or what the terms of my retirement (age, etc.) will be. They have tried to change this recently so just because you get a few extra quid from the employer to put into a pension doesn't make it the icing on the cake, as you don't know how it will be taxed when you retire!

    Remember, the population is aging, 30 years time, there will be a lot less taxpayers, the Gov will need their income from somewhere, so just be careful. With a pension, they'll be able to tax you how they want, with an ISA it's all tax-free. And I know I'll be leaving my kids a decent inheritance.

    So, yes, in the long-term I may be a couple of quid down with an ISA, that's the risk but personally I don't think I will. I know I'd be really annoyed if I dropped dead one week after retirement, and lose the pension capital for an extra half percent return through an annuity!
    by valmiki
    Hmm, as a tax payer I salute you for opting out of the LGPS. As a MSEer it's not just a "few quid" you get from the employer, you're talking ~15-20% you're throwing away
    • jem16
    • By jem16 14th Feb 07, 11:04 AM
    • 18,718 Posts
    • 11,561 Thanks
    jem16
    Ewymac
    I definitely have a view! Teachers' AVCs are a waste of time, particularly when you have the facility to buy extra years from your teachers pension.
    So consider
    AVC that has to buy an annuity when you retire
    or
    extra years bought in the teachers pension scheme linked to final salary and index linked.
    What to choose?
    Its a no brainer!
    by bobmccluckie
    Unfortunately the purchase of extra years is now not available in England & Wales as from 1st January. In Scotland you can still purchase extra years but only up till 1st April.


    It's now been superceded by additional pension which is simply an amount and not linked to final salary although is index-linked. Not as good IMO.

    I suspect S&S ISAs might now be better for some.
    • NeilW
    • By NeilW 14th Feb 07, 12:10 PM
    • 138 Posts
    • 68 Thanks
    NeilW
    But the ISA can come in handy if your income hits the 20k mark because age allowance is then clawed back in retirement. And of course it's also very useful if you want some lower risk investments like property or bond funds as well where the income is taxed on an interest basis.
    by EdInvestor
    Income is clawed back outside retirement if you have kids. The marginal tax rate for anybody receiving Tax Credits is 70%. And Tax Credits apply for family incomes up to £50K. It ain't just 'poor people' that are affected. According to ONS about 3/5ths of the population are in that income range.

    That's one of the reasons I only do a short week. I can't see the point in working for 30p in the pound. I'd rather concentrate on building the capital side which isn't assessed - at least while the kids are small.

    NeilW
    • dunstonh
    • By dunstonh 14th Feb 07, 12:49 PM
    • 98,597 Posts
    • 67,055 Thanks
    dunstonh
    Remember, the population is aging, 30 years time, there will be a lot less taxpayers, the Gov will need their income from somewhere, so just be careful. With a pension, they'll be able to tax you how they want, with an ISA it's all tax-free. And I know I'll be leaving my kids a decent inheritance.
    And the Govt can wipe out the tax free status of ISAs overnight if they wanted.

    stocks and shares ISA (via various index trackers) for me all the way baby!

    ...and I work in local government.

    I would rather know what tax I have paid putting money into an ISA, rather than pay money into a pension, for which I won't know what I'll be taxed 30 years in the future.
    Andy says it well in his response.

    You are willing to throw all that free money away for a guaranteed pension that you mistakenly believe will be beaten by tracker funds which rarely if ever go above sector average performance?

    Unless you are paying around 15%-20% of your income into these trackers, you wont come close to what the occ scheme would give you.
    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.
  • stefanf
    So far there has been conflicting advice for the average earnings 37 yr-old basic rate tax payer that I am, but on the whole the received wisdom is in favour of employers' schemes comapred to ISAs.

    I have a dilemma though: I am in a Final Salary type (career averaged)employer's pension scheme which I feel I am right in contributing to. The standard contribution for 1/60ths is 5% from gross earnings. There is an option however for increased accrual rates and the cost for 1/45ths is 9.6%. Ideally I'd like to go for the 1/45ths so that I can build up the maximum two-thirds pension by about 65, but the contribution rate is quite high and will get higher.

    Can anyone advise whether it is best to pay the difference in cost of the two accrual rates into ISAs and the like, or should I persist with the 45ths?
  • mrken30
    People should also think about investing in property and if property is too much think about investing in gold coins as this dont have CGT associated with them
    • dunstonh
    • By dunstonh 14th Feb 07, 2:02 PM
    • 98,597 Posts
    • 67,055 Thanks
    dunstonh
    People should also think about investing in property and if property is too much think about investing in gold coins as this dont have CGT associated with them
    by mrken30
    Property is an asset class and not a tax wrapper. You can invest in property inside an ISA or pension.

    Coins are not liquid enough to be suitable for retirement planning generally and it is really a niche area and not something for the average person to even consider.
    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.
  • Happiness71
    So far there has been conflicting advice for the average earnings 37 yr-old basic rate tax payer that I am, but on the whole the received wisdom is in favour of employers' schemes comapred to ISAs.

    I have a dilemma though: I am in a Final Salary type (career averaged)employer's pension scheme which I feel I am right in contributing to. The standard contribution for 1/60ths is 5% from gross earnings. There is an option however for increased accrual rates and the cost for 1/45ths is 9.6%. Ideally I'd like to go for the 1/45ths so that I can build up the maximum two-thirds pension by about 65, but the contribution rate is quite high and will get higher.

    Can anyone advise whether it is best to pay the difference in cost of the two accrual rates into ISAs and the like, or should I persist with the 45ths?
    by stefanf
    The option of 1/45th seems good to me despite the cost. My final salary scheme shifted us all to earning 1/80th salary per year from 1/60th per year when I started work to save money before they sold us to another company. The final salary pension already accrued was safe however. Thats why I like the idea of 1/45th, get as much of that as you can before they change their minds!!
  • Neil_Lovatt
    Pensions vs ISA
    Things changed with A-day for pensions. These days it really doesn't make a lot of sense to pay into a pension until you have exhausted all your other tax-free roll-up options; ISA, TESP and investments within your CGT allowance where possible.

    The benefit of the fact that ISAs/TESPs and Pensions all roll up at the same rate means that from an overall financial perspective it doesnít matter if you get tax relief at the beginning or the end of your investment term. However timing of tax-relief does make a huge difference depending on your current tax rate.

    As there is effectively no annual limit on contributions (other than your annual salary) with a bit of planning you can invest in a more flexible investment (above) without all the tax downside of income withdrawals that you get with a pension, and then "time" your payments into a pension at a date that suits you.

    The big advantage of this is that by doing so you can ensure that you only invest in a pension in those years you are a higher rate taxpayer (thereby maximising your tax-relief or reducing your tax bill) but you can invest in a pension at a date much closer to your retirement which should mean you can work out whether the balance between tax relief going in is worth the tax penalties on income withdrawals which come with a pension.

    Iíve put a number of articles together on this post A-day change in pensions and basically now refer to them as the retirement investment of last resort. Personally I think thatís an apt description for pensions in this day and age and would use them as retirement vehicles but for now Iíd only use them until Iíd exhausted my other options.
    • stphnstevey
    • By stphnstevey 14th Feb 07, 5:07 PM
    • 3,119 Posts
    • 503 Thanks
    stphnstevey
    People are trying to compare oranges with apples just because they both come from Tesco's!! Yes, they both have tax advantages, but in as many ways as they are similar, they are very different.

    I think the most important difference is that pensions allow you to invest with pre-tax pounds where as ISA's only with post-tax pounds. So for a basic rate tax payer they could receive 22% tax rebate on the entire contribution to a pension. Were as an ISA you receive 22% tax back only on the interest paid on your contribution.

    Eg
    £100 pension contribution you would need to contribute £78 and receive a £22 tax rebate or for every £78 pounds invested you receive £22 tax break

    £78 ISA contribution at say 6% interest you would receive a tax rebate of ((78x6%)x20%=) 93p or for every £78 invested you would receive a 93p tax break

    I know in a pension this is tax deffered till when you receive an income, but the point is that the fund starts with considerably more money and that will compound (the power of compound interest!) to a massively larger amount than you could ever achieve with post-tax pounds.

    However, as much as I thought I understood pensions and ISA's this has made me wonder one thing - how best to take advantage of my wife's tax allowance either through an ISA or pension. We are both working, but my wife doesn't get an employer's pension - can I contribute to a pension for her?
  • nobodieshero
    My current plan, as a 22% tax payer with prospects, is to save an ISA till such a time I become a Higher rate tax payer. Under the current rules I can then contribute my equivalent entire salary upto the annual allowance, as I understand it and get 40% relief on this. I realise that potentially I am losing growth on 22% of the original however feel more confident in this overall, I am Mid 20's. What are peoples opinions on this?
  • Mortgage & debt free
    And the Govt can wipe out the tax free status of ISAs overnight if they wanted.



    Andy says it well in his response.

    You are willing to throw all that free money away for a guaranteed pension that you mistakenly believe will be beaten by tracker funds which rarely if ever go above sector average performance?

    Unless you are paying around 15%-20% of your income into these trackers, you wont come close to what the occ scheme would give you.
    by dunstonh
    The LGPS allows you to take 25% tax free of the entire pension (final pension x 20 + 3/80ths lump sum + AVC). Paying into AVCs adds to this total and so increases the tax free lump sum.

    I am 42 and paying in 18% of my salary to an AVC. I have constructed a spreadsheet that shows if I maintain this payment in line with inflation/wages, and working on the AVC averaging 5%p.a. growth, I stand to gain a tax free lump sum of around £213,000 + another £73,000 to purchase extra LGPS pension on top of my FS Scheme. To put it in perpective I estimate the lump sum to be just under 6 yrs gross salary tax free, plus a pension of 50% of my final salary + an additional pension bought from the AVC surplus (you can "only" take out up to 100% of the AVC as tax free cash).

    I would suggest your kids may be quite happy with a slice of this, in fact don't tell them or you may find the odd rollerskate placed at the top of the stairs.

    Yes, legislation may change, but it's a risk that I am very happy to take considering the potential of the investment. In almost all cases government backed pension reforms are not applied retrospectively so you are still likely to be able to get the benefit credited up to when the rules change.

    Choosing not to pay into LGPS AVCs requires careful consideration due to the potential benefits.

    Choosing not to pay into the LGPS Final Salary Scheme requires (please don't take this personally) a lobotomy.
    Last edited by Mortgage & debt free; 14-02-2007 at 6:00 PM.
  • Madiba
    I am doing both S&S ISA and Stakeholder Pension scheme through work.

    I have 3% of my salary contributed to my pension by my employer, rising to 5% when I turn 26 later this year. Currently its all in a Cautiously managed fund, however I am looking to get it spread across multiple funds this year.

    I put £8k into S&S ISAs through HargreavesLandsdown each tax year (£4k in mine, £4k in my wife's) but this gets spread across loads of different things, UK equity, South American funds, China, Japan, Eastern Europe.

    I want to invest in some property funds at some point too.

    I think if you have the stakeholder option, its good to take.
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