ISA or Pension
Discussion
A combination of DB, DC, and State pensions means that I'm going to be well into the 40% tax band when I retire (hopefully within the next 10 years)
I know I'm saving 40% tax on the way in but is there any point given that
1. I'll be paying 40% on the way out.
2. It's locked away for at least 5 year
3. I risk losing a big chunk of the DC stuff if me and my wife shuffle off this mortal coil
Whilst I don't get the initial tax relief for ISA contributions I retain a lot more flexibility in terms of paying in / taking out / giving away to avoid IHT.
Am I missing something? Or is this one of those decisions where it comes down to personal choice?
I know I'm saving 40% tax on the way in but is there any point given that
1. I'll be paying 40% on the way out.
2. It's locked away for at least 5 year
3. I risk losing a big chunk of the DC stuff if me and my wife shuffle off this mortal coil
Whilst I don't get the initial tax relief for ISA contributions I retain a lot more flexibility in terms of paying in / taking out / giving away to avoid IHT.
Am I missing something? Or is this one of those decisions where it comes down to personal choice?
I think the general idea is that you should be able to withdraw from the pension at 1 tax band less than you saved on the way in.
(Plus of course you also get the 25% tax free bit which helps the numbers even further)
i.e. save 60% tax on the way in, withdraw at 40%,
OR save 40% and withdraw at 20 etc
I think this means that for most folks, there should be a decent win for the pension over the ISA.
If you aren't able to do this, then maybe the maths dowsn't math in quite the same way, but that suggests to me that you might have a fair bit of other income to take in to account ?
(Plus of course you also get the 25% tax free bit which helps the numbers even further)
i.e. save 60% tax on the way in, withdraw at 40%,
OR save 40% and withdraw at 20 etc
I think this means that for most folks, there should be a decent win for the pension over the ISA.
If you aren't able to do this, then maybe the maths dowsn't math in quite the same way, but that suggests to me that you might have a fair bit of other income to take in to account ?
fat80b said:
I think the general idea is that you should be able to withdraw from the pension at 1 tax band less than you saved on the way in.
(Plus of course you also get the 25% tax free bit which helps the numbers even further)
i.e. save 60% tax on the way in, withdraw at 40%,
OR save 40% and withdraw at 20 etc
I think this means that for most folks, there should be a decent win for the pension over the ISA.
If you aren't able to do this, then maybe the maths dowsn't math in quite the same way, but that suggests to me that you might have a fair bit of other income to take in to account ?
That's my thinking exactly.(Plus of course you also get the 25% tax free bit which helps the numbers even further)
i.e. save 60% tax on the way in, withdraw at 40%,
OR save 40% and withdraw at 20 etc
I think this means that for most folks, there should be a decent win for the pension over the ISA.
If you aren't able to do this, then maybe the maths dowsn't math in quite the same way, but that suggests to me that you might have a fair bit of other income to take in to account ?
At the moment I'm paying in at 40% and Ill be taxed at 40% on the way out, so why not put into an ISA instead and get extra flexibility?
But in the pension you aren't paying in at 40% are you? £100 into a pension gets the tax back so costs £60. Ignoring NI for simplicity. £100 into an ISA though is actually £100 after tax. But then pension out is taxable and ISA out is not taxable [unless they somehow manage to change that too in future]
Countdown said:
Whilst I don't get the initial tax relief for ISA contributions I retain a lot more flexibility in terms of paying in / taking out / giving away to avoid IHT.
Am I missing something? Or is this one of those decisions where it comes down to personal choice?
Am I missing something? Or is this one of those decisions where it comes down to personal choice?
Here is another aspect, but of course this is looking back, not forward.
DB pension in payment. (Annual inflationary increases, up to max 5%)
ISA holdings unchanged.
Comparing income received.
To begin with, the income received from the pension was greater than the income (dividends) from the ISAs.
Now the ISA income far exceeds the pension income.
If businesses do well, they might increase dividend payments by (say) 20%, which can never be implemented by pension providers.
Perhaps this aspect is one that you had not considered.
You suggest that your present pension provision might be sufficient for your needs, if so, you have that part guaranteed.
Therefore it is easier to accept some risk with further investments.
It does seem sensible to first build foundations for family security, then take more risk to open the prospect of greater returns.
Countdown said:
A combination of DB, DC, and State pensions means that I'm going to be well into the 40% tax band when I retire (hopefully within the next 10 years)
I know I'm saving 40% tax on the way in but is there any point given that
1. I'll be paying 40% on the way out.
2. It's locked away for at least 5 year
3. I risk losing a big chunk of the DC stuff if me and my wife shuffle off this mortal coil
Whilst I don't get the initial tax relief for ISA contributions I retain a lot more flexibility in terms of paying in / taking out / giving away to avoid IHT.
Am I missing something? Or is this one of those decisions where it comes down to personal choice?
Well there is a the benefit of the investment income from the 40% extra that you can contribute to your DC pension that you wont get from taking taxed money and sticking that in an ISA, especially if you intend to invest long term. That is almost 40% down. I know I'm saving 40% tax on the way in but is there any point given that
1. I'll be paying 40% on the way out.
2. It's locked away for at least 5 year
3. I risk losing a big chunk of the DC stuff if me and my wife shuffle off this mortal coil
Whilst I don't get the initial tax relief for ISA contributions I retain a lot more flexibility in terms of paying in / taking out / giving away to avoid IHT.
Am I missing something? Or is this one of those decisions where it comes down to personal choice?
I have a couple of life policies that will pay out if I die before I retire, in trust so isn't part of my estate and will all be IHT free for the beneficaries, they are a good way of ensuring that any dependents get a nice payout without having to worry about inheritance tax. My pension is purely for my enjoyment.
I also took my DB pension early as that didn't impact my DC pension contributions (you can still contribute up to 60k per year into a DC pension even if you start to take money from the DB pension). I now live off my DB pension plus some of my salary and the rest goes into a DC pension which I can draw on anytime I want. Looking to retire soon as I will hit the pension limit and once I have purchased my retirement Mclaren all I will have left to spend the money is endless holidays
Personally if I was over 50 I would be dumping as much as possible into my pension because I can get 25% tax free at 55 or 57 on the entire lot (or parts of it). I console myself in the knowledge that I will live to at least 90 and if I dont I will be dead so wont actually be aware of what happens to my cash. Just enjoy what you have whilst you can, you never know you might live to 110! or be put into a care home
Having a nice buffer fund in an ISA is good though, just not all of it.
scot_aln said:
But in the pension you aren't paying in at 40% are you? £100 into a pension gets the tax back so costs £60. Ignoring NI for simplicity. £100 into an ISA though is actually £100 after tax. But then pension out is taxable and ISA out is not taxable [unless they somehow manage to change that too in future]
AIUI the 40% "saving" when you pay into the pension gets taken off you when you withdraw from the pension. Ergo (again afaics) there isn't a great advantage to paying into a SIPP if you're saving 40% only to be paying 40% when you withdraw.Jon39 said:
Here is another aspect, but of course this is looking back, not forward.
DB pension in payment. (Annual inflationary increases, up to max 5%)
ISA holdings unchanged.
Comparing income received.
To begin with, the income received from the pension was greater than the income (dividends) from the ISAs.
Now the ISA income far exceeds the pension income.
If businesses do well, they might increase dividend payments by (say) 20%, which can never be implemented by pension providers.
Perhaps this aspect is one that you had not considered.
You suggest that your present pension provision might be sufficient for your needs, if so, you have that part guaranteed.
Therefore it is easier to accept some risk with further investments.
It does seem sensible to first build foundations for family security, then take more risk to open the prospect of greater returns.
My investments in the SIPP and the ISA are both in various vanguard ETFs so i would expect income to be broadly similar
Jon39 said:
Here is another aspect, but of course this is looking back, not forward.
DB pension in payment. (Annual inflationary increases, up to max 5%)
ISA holdings unchanged.
Comparing income received.
To begin with, the income received from the pension was greater than the income (dividends) from the ISAs.
Now the ISA income far exceeds the pension income.
If businesses do well, they might increase dividend payments by (say) 20%, which can never be implemented by pension providers.
Perhaps this aspect is one that you had not considered.
You suggest that your present pension provision might be sufficient for your needs, if so, you have that part guaranteed.
Therefore it is easier to accept some risk with further investments.
It does seem sensible to first build foundations for family security, then take more risk to open the prospect of greater returns.
.
It made sense to max the pension pot vs ISA when there was no IHT. My original plan, as was typical, had me taking the SIPP last. That's gone out of the window now (or will do from Apr 27).
One thing I could have done, but was fairly unusual in that we both worked for the same company for our last few years of work, is I might have been able to divert more of our employers contribution into her SIPP as she's not going to trouble the 40% tax band in retirement.
Depends doesn't it?
i.e. you might get 40% tax relief on the way in but on the way out you might get 25% tax free then just pay basic.
I don't think there is a "right" answer as I have a similar dilemma.
I think the key thing in my mind right now is not so much the absolute pros and cons of ISA v pension but being sure that if you do prioritise the pension you can bridge the gap from retirement to accessing it - basically that you have enough money instantly accessible in any scenario that you don't end up needing to access a pension that you can't.
i.e. you might get 40% tax relief on the way in but on the way out you might get 25% tax free then just pay basic.
I don't think there is a "right" answer as I have a similar dilemma.
I think the key thing in my mind right now is not so much the absolute pros and cons of ISA v pension but being sure that if you do prioritise the pension you can bridge the gap from retirement to accessing it - basically that you have enough money instantly accessible in any scenario that you don't end up needing to access a pension that you can't.
AbbeyNormal said:
Well there is a the benefit of the investment income from the 40% extra that you can contribute to your DC pension that you wont get from taking taxed money and sticking that in an ISA, especially if you intend to invest long term. That is almost 40% down.
That's a good point. The downside from my point of view is the lack of flexibility with that money.I guess the point here is how likely is it you will need quick / early access to it or want to give gifts for IHT planning?
If you don't need it, then perhaps putting it into a SIPP is better as you have a larger amount (thanks to the tax relief) to invest and earn a return on, against the ISA (assuming both are invested in the same thing). So although you're paying the same amount of tax in and out, what you're getting back from the SIPP could be more...
Obviously investments can go up and down in value so nothing is guaranteed, but it would be the same for ISA and SIPP anyway.
If you don't need it, then perhaps putting it into a SIPP is better as you have a larger amount (thanks to the tax relief) to invest and earn a return on, against the ISA (assuming both are invested in the same thing). So although you're paying the same amount of tax in and out, what you're getting back from the SIPP could be more...
Obviously investments can go up and down in value so nothing is guaranteed, but it would be the same for ISA and SIPP anyway.
I've generally split the difference, and my ISA and my SIPP are not too different in size. I don't have an employer to match, so just get 19 or 20%.
There is no maths behind this, it's mainly a consequence of me distrusting pensions when I was younger. And wanting to keep my options open for mini or early retirements.
when I'm 57 I'll be able to withdraw from my SIPP a tax efficient amount and then top up with my ISA as I go.
Gives me some peace of mind. Not even sure if it actually makes any sense or not, but it serves its purpose
There is no maths behind this, it's mainly a consequence of me distrusting pensions when I was younger. And wanting to keep my options open for mini or early retirements.
when I'm 57 I'll be able to withdraw from my SIPP a tax efficient amount and then top up with my ISA as I go.
Gives me some peace of mind. Not even sure if it actually makes any sense or not, but it serves its purpose
If you're saving 40% tax on the way in but paying 40% on the way out then arithmetically it's a wash. If you have unused PCLS headroom (i.e. pot < £1,073,100 so scope to take more tax-free cash) then you could potentially lower your effective tax rate by contributing more. Up to you whether that's worth locking the money away for.
Gassing Station | Finance | Top of Page | What's New | My Stuff