Retirement savings - pension vs ISAs?
7-Feb-07 03:45 PM
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I was wondering if anyone might be able to help me solve a dilema.
Under what cir$%^&tances would you invest in a Pension or an ISA to get the most "bang for your buck" for retirement planning?
ISAs - with ISAs there is no tax relief on contributions made, but you do get a tax free amount when you withdraw your money at the end of it
Pension - tax relief on contributions, get to take 25% as a lump free sum, but other income is taxed.
I'll have at least another 33 to 35 years before likely retirement and I'm a higher rate tax payer.
Any advise?
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b_paul_r
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Re: Retirement savings - pension vs ISAs?
7-Feb-07 04:25 PM
Pension upside is the tax benefit if you are a high-earner. Also, the money is locked-away, so you can't get at it until you are 50. Downside is that you can only draw income, not capital, and watch the fees.
ISA upside is more freedom and lower costs. You can also drawdown the capital later in retirement.
Whatever you do (and it can be a 50:50 split) make sure you invest in equity-based funds - and spread your cash as widely and thinly as possible via funds of funds, investment trusts, etc, to diversify risk and give you a decent investment growth over the period available.
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Geoff J
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Re: Retirement savings - pension vs ISAs?
7-Feb-07 09:17 PM
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My general view is that it should always be a combination of both Fund your pension where you are getting 40% tax relief, but would generally say that there is a tough call on basic rate relief.
The new rules allow higher contibutions to pension so the money in the Isa can be transferred at a later date. that will of course take discipline.
Governement has continually whacked pensions and I dont think it is impossible that they won't take away higher rate tax relief in the future
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Keith M
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Re: Retirement savings - pension vs ISAs?
8-Feb-07 08:26 AM
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Tax relief will never be taken off pensions.
This is a constant rumour put about by pension salesmen trying to bully you into putting in more money now.
The government has to place incentives for people to put money into pensions. They need 40% of the people to fund their own pensions - this will push bond yields low enough so that the government can borrow to pay the pittance to the rest of the pensioners. For the moment they're way too far short so tax relief needs to stay.
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Paul D
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Re: Retirement savings - pension vs ISAs?
8-Feb-07 09:50 AM
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If you have the chance to join an employer's pension scheme - take it, as your employer may also make contributions to match your own.
If it is a final salary scheme, keep an eye on your employers trading performance & the pension fund's funding ratio (ask the trustees)so that there's sufficient money in the pension fund to pay all it's future liabilities. If things start to look rocky, take advice upon whether to transfer out or stay in
If it is a defined contribution scheme, both your and your employer,s contributions may well be in an account in your name - so there shouldn't be any risk of your employer's insolvency resulting in you losing your pension savings.
Whatever you put into an ISA can be transferred to pension savings later on as a lump sum, & attract tax relief.
In addition to all that has been said in previous replies, remember that your pension fund growth is also free of taxes.
You may consider a SIPP if you want to manage the pension savings yourself.
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Ian G
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Re: Retirement savings - pension vs ISAs?
8-Feb-07 11:43 AM
Not quite true Ian - dont forget the pension fund dividend tax raid.
A company final salary scheme is only any good if you intend to stay 10+ years, and who can guarantee that nowdays. Otherwise you will lose out if you try to transfer to another scheme, or your fund is effectively frozen until you retire. I was fortunate to have one for 30-odd years, with the additional benefit of matched AVCs into a '62 club'. I was bribed into transferring into a money purchase scheme, which was the best thing I ever did, as I no longer had to declare a retirement age, and thus qualified for redundancy at 58. Also, I no longer had to buy an annuity and so transferred all my funds into a SIPP. This has grown 28% in the past 15 months, even after drawing the maximum income I am allowed. I have been fortunate, but there are some lessons here if you are in a company pension scheme.
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Geoff J
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Re: Retirement savings - pension vs ISAs?
2-Aug-07 06:29 PM
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Just remember if you join your company pension check if it is contracted out of the state second pension. Then make sure it is better (it may not be if it is only based on basic pay) If its contracted in then you get both private and state second pension which is great.
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bbbll2000
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Re: Retirement savings - pension vs ISAs?
8-Feb-07 02:16 PM
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In 2004 it was fairly regularly reported in newspapers that 40% tax band would have this incentive removed.
There isn't so much motivation for regular tax payer - it yields about 8% advantage on money invested as the pension money in is taxed on the way out as pension. (25% cash free of tax is taken into account in this 8% figure).
Brown is so much in debt that he'll have to raise taxes in future. And look at demography of increased number of pensioners who will have to be paid out of the taxation at that time.
So while there's a 28% uplift now giving 8% return when paid out if tax rates rise in future then the 8% will drop to ...6%?
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mjbflr
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Re: Retirement savings - pension vs ISAs?
8-Feb-07 06:22 PM
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Whoa Geoff and MJB - I know this is a message board, but let's not confuse the enquirer.
Although the govt withdrew pension tax credits, the point I was making is that whatever money is paid into a pension plan, it grows free of CGT and income tax. The enquirer appreciated that the eventual pension is taxable.
And if an employer invites you to join its pension scheme & will contribute itself, then surely one should take up the employers offer, rather than forgo the employer's contribution
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Ian G
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Re: Retirement savings - pension vs ISAs?
9-Feb-07 08:05 AM
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And in 2003 and 2002, in fact every year for as long as I can remember (about 12) this rumour has come out before the budget.
And gullible has been removed from the dictionary too!!!
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Paul D
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Re: Retirement savings - pension vs ISAs?
8-Feb-07 07:30 PM
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Take the 40% tax relief on a pension whilst it lasts and anything left over (if any) put into an ISA because you will probably be paying basic rate tax on your pension when you draw it unless you retire to say Cyprus where pensions are only taxed at 5%. So mop up the 40% liability while you can. That evil chancellor will probably abolish it if he wins the next election, so make the most of it!
Keith
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keithvernona...
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Re: Retirement savings - pension vs ISAs?
11-Feb-07 11:05 AM
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pensions are a big con when you croke it ,the money if you are single ,goes back to the government and you cant touch the fund as it has to go into an annuitie.
With isa,s you take what you want tax free when you want so you can pass it on .
Pensions are just another way for insurance company,s to get at your cash.
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j w
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Re: Retirement savings - pension vs ISAs?
16-Feb-07 08:54 AM
Buz
I think you will find that personal pension benefits form part of a deceased's estate, just as an ISA or any other asset would. If a member of a company scheme, then in some cases there a greater death-in-service benefits paid out, than there are to non-members (e.g. 4 times salary, rather than 2 times salary).
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Ian G
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Re: Retirement savings - pension vs ISAs?
16-Jul-07 11:38 PM
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I had exactly the same question for a mate of mine who is a financial adviser. The ISA means that you can get at your cash of course - unike the pension. The Pension of course has good tax breaks.
I have chosen the ISA option at present - but I am looking to buy some property in Switzerland so I decided that for the short time the ISA was best for me.
I suppose in the long term I prefer the rigour of the pension because I wont be tempted to dip into it.
I am told that the costs are lower on a pension for lump sum payments rather than monthly.
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richard80184...
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Re: Retirement savings - pension vs ISAs?
29-Aug-07 12:24 PM
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First of all JW is incorrect. If you die before you take any benefits (e.g. you retire) the value of your pension (assuming a personal pension or SIPP etc) will be returned to a designated person free of all tax. After you have taken benefits is different, but you don't need to worry about that for now.
Figures show it is better to invest more at the beginning of your investment life to benefit from compound interest. Therefore investing £7000 in a pension will give you an immediate boost to £8,974, plus you reclaim a further £1,615 on your tax return. With an ISA, you put in £7000 and that's how much is invested. The tax treatment within the pension is the same as the ISA, however, as you have seen on this board, the tax treatment at the end is different. But, considering your time to retirement, and the benefits of tax relief, I would suggest rainy day money first, pension second and ISA third. or divide pension and isa contributions equally.
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Craig H
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