Another Pension advice thread

[Tony_T]

I m 39 and just realised I need to start saving for retirement. I earn an average wage and I m looking to put £500 a month away for at least 25 years. Is there a clear case for putting it in one of the following?

1. Paying more into Nest pension (have been enrolled for about 8 years putting in minimum 5%.

2. Stocks and shares ISA

3. SIPP

Or should I spread it between multiple of these?

From my own research a SIPP beats ‘overpaying’ into Nest pension due to the 1.8% fee with Nest. So leaning towards £250 Stocks and shares ISA and £250 SIPP.

Any advice much appreciated.

Edited by Tony_T on Tuesday 5th August 19:57

[trickywoo]

Higher or lower rate tax payer?

Do you expect that to change?

If lower and you expect to go higher in a few years maybe concentrate on filling a S&s isa now and pension later.

Pension is good for the tax saving but inflexible on access.

[Tony_T]

trickywoo said:

Higher or lower rate tax payer?

Do you expect that to change?

If lower and you expect to go higher in a few years maybe concentrate on filling a S&s isa now and pension later.

Pension is good for the tax saving but inflexible on access.

Hi, I’m a lower rate tax payer (about 45k) and don’t expect it to go much higher in the next few years. I’m not too bothered about access, just want to save as much as I can and happy to leave it until my mid sixties.

[NortonES2]

Tony_T said:

Hi, I m a lower rate tax payer (about 45k) and don t expect it to go much higher in the next few years. I m not too bothered about access, just want to save as much as I can and happy to leave it until my mid sixties.

Then I would open a SIPP as you say the nest has high fees.

[Royal Jelly]

Open a SIPP and invest in a broad market ETF like a Vanguard world tracker. Set and forget.

500 quid will be topped up to 600 by the taxman - and in 35 years at 5% growth, it ll be just shy of 700k. At 7%, 1.1m

Well done for getting going with it. Don t overthink it, just do it.

Edited to note you’re looking at a 25-30 year horizon until you access it, so the totals won’t be as high, but the principle still stands..

Edited by Royal Jelly on Tuesday 5th August 22:54

[Simpo Two]

Royal Jelly said:

500 quid will be topped up to 600 by the taxman - and in 35 years at 5% growth, it ll be just shy of 700k. At 7%, 1.1m

But (other than any initial tax free lump sum that may be available that far ahead) withdrawals are subject to income tax. With a S&S ISA you invest taxed income but all withdrawals are tax free. ISAs are also much simpler than pensions - so maybe the answer is 'both'.

Of course in 25-30 years we can only guess what the economic climate and tax regime will be - everything might be completely different. It seems highly likely that the country will be even more bankrupt than it currently is.

[Royal Jelly]

If I wasn’t a tax-dodging expat, I’d be doing both - but my horizon is retiring mid-50s and using the ISA to bridge the gap.

Pension rules may change (as they could with ISAs) but my money (pun intended) is on the pension being the most efficient vehicle for access in the OP’s scenario given the timeframes/ages/figures involved, but yes, fair call.

[Cabbage Patch]

With at least 18 years until you can access a SIPP, the fact that pension access / tax rules can change and receiving tax relief on contributions at standard rate means I’d be looking at an ISA.

The downside is that you can access an ISA straightaway. If you think you’d be tempted to dip into the accumulated savings then a SIPP will keep your pot out of temptation's way.

If your circumstances change and you run out of ISA allowance, or you become a higher rate taxpayer you can reevaluate.

[Hotrods1974]

Do not ever misunderstand the impact of the tax relief. £1 turns into £1.25 and the compound effect of that over time extrapolated by a growth assumption is huge

It is free money

And with careful management of the pension in drawdown using a combination of PCLS (tax free cash) linked to personal allowances for your taxable element you can extract significant amounts with no exposure to tax, and any excess only suffering 20%

Pension every day of the week. And you can’t get it until 55 or 57 from 2028 so it is not a temptation.

[Tony_T]

Thanks all for the advice.

As I understand it on the stocks and shares ISA you are taxed on the way in and SIPP the same percentage on the way out? But ISA has potential for better/worse returns, hence me thinking to hedge my bets and go 50/50 in each. What I don t really understand is how compounding works I.e is it better to have it all in one pot for compounding?

Another thing that worries me is could the government change the rules on stocks and shares ISA and start taxing people when they withdraw?

The end goal is to have roughly £1500 a month after tax as a private pension (in future money so £2500?) which is a modest amount but even that is looking like a struggle.

Edited by Tony_T on Wednesday 6th August 07:24

[mikeiow]

Some thoughts

As I understand it on the stocks and shares ISA you are taxed on the way in and SIPP the same percentage on the way out?
Under current rules, yes

But ISA has potential for better/worse returns, hence me thinking to hedge my bets and go 50/50 in each.
No! They could potentially be both invested in the SAME funds, so the potential for better/worse depends on where you invest .& pensions get a Government boost that ISAs generally do not

What I don’t really understand is how compounding works I.e is it better to have it all in one pot for compounding?
Any investment as the potential for compounding - time in the market, rather than timing the market.

Another thing that worries me is could the government change the rules on stocks and shares ISA and start taxing people when they withdraw?
Of course: nobody knows what a future Government will do although mass tinkering might make that an out-going Government - there is a large pensioner vote!

The end goal is to have roughly £1500 a month after tax as a private pension (in future money so £2500?) which is a modest amount but even that is looking like a struggle.
All you can do is try to build your pot & doing it sooner rather than later let s the power of compounding do its magic




Well done for thinking about this now.
Pensions get the free Government contribution, so likely better than ISA.

.unless you grab a LISA, where they add 25% (for the £4K pa you invest, it becomes £5K). LISA was intended for a first house purchase, but if not used for that can only be accessed without punitive penalty from the age of 60.

It is always a balance.
Maybe spend half an hour listening to the videos of https://kroijer.com/

[TwigtheWonderkid]

Royal Jelly said:

Open a SIPP and invest in a broad market ETF like a Vanguard world tracker. Set and forget.

500 quid will be topped up to 600 by the taxman

£625 I think.

[mikef]

Royal Jelly said:

Open a SIPP and invest in a broad market ETF like a Vanguard world tracker. Set and forget.

This.

And next time you change jobs, look for an employer that offers a better option than Nest. Or better still, will pay into your SIPP (unlikely, but you can ask).
Also, when you change employers, transfer anything accumulated in Nest to your SIPP.

[Rusty Old-Banger]

Royal Jelly said:

500 quid will be topped up to 600 by the taxman - and in 35 years at 5% growth, it ll be just shy of 700k. At 7%, 1.1m

Is there a calculator you use for sums like that? Would be interesting to see what I'll be sitting on come retirement time.

Also, how would the taxman top it up? How does that work? Do you not just mean, you would not pay tax on the £500? It wouldn't actually physically manifest itself as another £100 in the pot would it? (Obvs I am not a financial person)

Edited by Rusty Old-Banger on Wednesday 6th August 08:24

[Tony_T]

Thanks all,

So now leaning towards SIPP, do i need to tell my current employer about this?

Also a LISA was mentioned, i am 39 so would have to do this now. Is it a better option that SIPP?

[Tim Cognito]

Ref the fees on sipp Vs nest, doesn't this depend on which platform you use for your sipp?

And also aren't the nest fees done differently to others but they are competitive once your pot gets bigger?

[duckson]

Rusty Old-Banger said:

Is there a calculator you use for sums like that? Would be interesting to see what I'll be sitting on come retirement time.

Also, how would the taxman top it up? How does that work? Do you not just mean, you would not pay tax on the £500? It wouldn't actually physically manifest itself as another £100 in the pot would it? (Obvs I am not a financial person)

Edited by Rusty Old-Banger on Wednesday 6th August 08:24

£500 into a SIPP would actually get you £125 not £100 back from the tax man (it s 25% of the amount paid in that would be reclaimed for the tax previously paid on it for a 20% tax payer).
The Gov would pay you the £125 direct into the SIPP and you can have it auto investing into what your main £50 is being paid into (eg my wife s Vangaurd SIPP is set up to invest in the FTSE Global All Cap fund which is basically spread over many thousands of companies so highly diversified in equities).

[NH-0]

Jasey_ said:

Compounding basically means get as much in as soon as you can.

If I were you I'd be putting 100% into a sipp then maybe change after too many more years of labours meddling.

When I got to 55 my tax free lump sum paid off my mortgage.

I was favouring my pension but have since decided to split between a stocks and shares ISA, mortgage overpayments, and pension. Not optimum for investment growth but builds more security in the years before I reach pension age for ill health or job loss.

I am concerned about employment opportunities with the advance of AI, and concerned the government cannot afford to keep going the way it is so somebody has to pay. Getting money out of the tax system seems sensible right now.

[Royal Jelly]

Rusty Old-Banger said:

Is there a calculator you use for sums like that? Would be interesting to see what I'll be sitting on come retirement time.

Also, how would the taxman top it up? How does that work? Do you not just mean, you would not pay tax on the £500? It wouldn't actually physically manifest itself as another £100 in the pot would it? (Obvs I am not a financial person)

Edited by Rusty Old-Banger on Wednesday 6th August 08:24

Yes - there are apps which have compound interest/various finance-themed calculators.. I use one called Ez Calculators. Loads of options to work out various finance scenarios including compound interest.

Just plug in starting balance, monthly deposit, interest/growth rate and time. Voila.

[jfdi]

Rusty Old-Banger said:

Also, how would the taxman top it up? How does that work? Do you not just mean, you would not pay tax on the £500? It wouldn't actually physically manifest itself as another £100 in the pot would it? (Obvs I am not a financial person)

You pay in £500 per month and the SIPP provider will request the tax back from the tax man for you, a few months later an extra £125 will appear in the account. If you're paying in every month then this will happen every month so you'll end up with £625 going in every month, the taxman's part is just 2 or 3 months in arrears.