Viewing 33 posts - 1 through 33 (of 33 total)
  • Super exciting ISA or pension question.
  • Premier Icon whippersnapper
    Free Member

    I know I should see an IFA however I thought I would see what the opinion here is first, stw always provides good insights.

    I have no pension to speak of really. Small ones from jobs a few years ago. I am also a sole trader so only pension options I know of are private. I have also managed to just sneak in to the lifetime ISA age bracket. For ease I was thinking a stocks and shares lifetime ISA maybe a good pension option. I understand the tax benefits are to be had upfront with a pension whereas the money held in the ISA would be tax free afterwards. Beyond this I am not too sure which would be a better option, assuming there is such a thing.

    Any thoughts greatly appreciated.

    Premier Icon gonefishin
    Free Member

    Likely depends on what tax band you are in. If you only pay basic rate then there may not be much in it either way. That said if you are in the 40% bracket then the tax benefit you receive is that much bigger and overtime will compound up so that you will likely be better off even if you are paying a bit more in tax.

    An IFA is however probably your best option.

    Premier Icon 5lab
    Free Member

    ^ that’s only true if you won’t be in the 40% rate once retired. If you’re a 40% payer before/after retirement (ie: very well paid public sector worker), again it’ll make marginal difference (but I guess then you don’t have a choice about moneys going into your pension..)

    Premier Icon Sundayjumper
    Full Member

    I’m in a similar position and have been pondering the same thing. Right now I’ve stuck some money into an ISA, in a FTSE100 tracker. My reasoning being that an ISA is accessible should I need some cash suddenly – e.g. if I’m without work for a few months. I’m going to stick some more in when I can, and then when I feel I’ve got enough of a war chest built up I’ll start splitting money between ISA & pension. Probably a SIPP containing low-cost tracker funds.

    Three pages. Everybody else is wrong.

    Premier Icon anagallis_arvensis
    Free Member

    If you’re a 40% payer before/after retirement

    If the op is likely to be a 40% tax payer after retirement I would guess he wouldnt give a ****

    Premier Icon oldnpastit
    Full Member

    Check the charges. There are lots of them. Fund charges, platform charges, exit charges and more.

    I keep meaning to move from hargreaves Lansdown sipp but laziness and exit charges has stopped me.

    Premier Icon whippersnapper
    Free Member

    If the op is likely to be a 40% tax payer after retirement I would guess he wouldnt give a ****

    😀

    The chances of this given my current rate of “career” discipline are quite limited. At the moment I am nearing the upper limit of basic tax rate.

    Premier Icon Sundayjumper
    Full Member

    If the op is likely to be a 40% tax payer after retirement I would guess he wouldnt give a ****

    Considering the way the 40% band has completely failed to keep up with inflation, quite a lot of people might find themselves in that situation and very much giving a ****.

    Premier Icon footflaps
    Full Member

    Even if you’re not in the 40% bracket a SIPP gets you the 20% tax back, so beats an ISA given they’ll both be invested in the same funds at the end of the day.

    Personally I’d put spare cash into a SIPP, the not being able to touch it until you’re 55 means you’re more likely to have it still intact when you come to retire.

    Considering the way the 40% band has completely failed to keep up with inflation, quite a lot of people might find themselves in that situation and very much giving a ****.

    It was a Conservative manifesto promise to increase it to £50k IIRC?

    Premier Icon kcal
    Full Member

    They could be viewed as side by side options, ISA is quite handy to put cash into, though amount limited per annum. Same for SIPP but you get tax relief, albeit it’s then locked away.

    One additional benefit for an ISA over normal shares is not having to bother with the tax declaration for growth and income within the ISA, might not matter too much but if you’re approaching the band, might be worth thinking about, frees time and also frees worry over decisions being taken that might affect banding in future.

    Premier Icon 5lab
    Free Member

    Even if you’re not in the 40% bracket a SIPP gets you the 20% tax back, so beats an ISA given they’ll both be invested in the same funds at the end of the day.

    it isn’t quite as simple as that. With a pension you’re (potentially) taxed on the ‘way out’ – if your pensionable income has a 20% tax rate (which is likely for most people), you will effectively be in the same position (financially) with an ISA and a pension.

    There are other reasons to invest in a pension though – the money is protected from divorce and bankrupcy proceedings, where I believe an ISA is not

    Premier Icon Sundayjumper
    Full Member

    There are other reasons to invest in a pension though – the money is protected from divorce…

    I’m not sure that is true.

    https://www.pensionwise.gov.uk/en/divorce

    Premier Icon shinton
    Free Member

    ^^^^^^
    But you can take 25% of your pot tax free when you decide to retire so not in the same position.

    Premier Icon 5lab
    Free Member

    True. I’d got that from the MSE page – I guess the difference is that the value of a pension can be deferred (ie until the person is withdrawing their pension), but the value of the ISA is taken at the moment of the divorce?

    Premier Icon grumpysculler
    Free Member

    it isn’t quite as simple as that. With a pension you’re (potentially) taxed on the ‘way out’ – if your pensionable income has a 20% tax rate (which is likely for most people), you will effectively be in the same position (financially) with an ISA and a pension.

    You always save the tax on the PCLS. Plus you have a tax free allowance in retirement so even if you have a full state pension then you don’t pay 20% on all of your pension income but you do get tax relief on it all.

    OP – are you paying NICs for a state pension? That’s something else you should look at.

    The answer is you probably need & want both pension & ISA. The pension has the disadvantage that you can’t touch it until 55 or later, the pension also has the advantage that you can’t touch it until 55 or later.

    As a sole trader with unlimited liability, are you at risk of bankruptcy? Pensions are protected against this (with some caveats) whereas ISAs are fair game for the trustee.

    Premier Icon footflaps
    Full Member

    I guess the difference is that the value of a pension can be deferred (ie until the person is withdrawing their pension), but the value of the ISA is taken at the moment of the divorce?

    No, the court can order the fund be split in two and then both halves keep on growing till each divorcee retires.

    Premier Icon whippersnapper
    Free Member

    thanks all….food for thought

    OP – are you paying NICs for a state pension? That’s something else you should look at.

    Yes, all years full except when i was at uni.

    A SIPP and (L)ISA could be a good idea – will look into further.

    Premier Icon NZCol
    Free Member

    Depends when you want to retire as well. A combo might be the way forward. The tax breaks for Pension pots have changed and aren’t as compelling, a good mixed fund portfolio of low/med/high risk could be another mechanism and could provide annuity to live off if you manage it well. Check fees etc.IANAIFA

    Premier Icon footflaps
    Full Member

    I have a company pension, a SIPP and an ISA (hedge my bets)….

    The tax breaks for Pension pots have changed and aren’t as compelling,

    Only if your fund exceeds £1m, which is what they call a ‘high quality’ problem….

    Premier Icon NZCol
    Free Member

    I thought all the silver surfers had > £1m pension pots ?

    Premier Icon footflaps
    Full Member

    I thought all the silver surfers had > £1m pension pots ?

    You’re ok if you got in before they announced it, or agreed to freeze your fund the year it was announced (originally £1.25m then dropped to £1m IIRC).

    If your fund is still growing then it’s a potential problem down the line…

    Premier Icon gonefishin
    Free Member

    Only if your fund exceeds £1m, which is what they call a ‘high quality’ problem….

    Based on the last statement I got from my pension provider, a pension pot of £1000000 would provide an annuity of just over £18k. The cost of a £1000 being taken at £55188

    Not exactly what I’d call a “high quality” problem.

    Premier Icon Sundayjumper
    Full Member

    Based on the last statement I got from my pension provider, a pension pot of £1000000 would provide an annuity of just over £18k

    Seems like a poor deal ? You could put it under your bed and draw £20k a year for 40 years (from age 60-100 for sake of argument), and still have £200k left for the kids, unlike if you’d put the £1m into a pension.

    Premier Icon gonefishin
    Free Member

    It is based on certain assumptions like a guarantee of five years payments, spousal benefits of 50% of the payments. I’m not saying it’s the best deal there is but it gives a general indication of what £1million will get you in retirement and it’s not as much as many might think.

    Premier Icon surfer
    Free Member

    you will effectively be in the same position (financially) with an ISA and a pension.

    Not sure I understand. Your income from your pension will be taxable if it exceeds the threshold but you can take unlimited income from your ISA and this is tax free. So for instance you could take £11k from your pension (depending on the tax free allowance at the time) and £20k from you ISA. That would be an income of £31k pa but would be tax free.
    If you take an income in this example from your pension only of £31k then you will pay tax on £20k of it.

    Premier Icon Sundayjumper
    Full Member

    …you could take £11k from your pension (depending on the tax free allowance at the time…

    And state pension, which counts as taxable income.

    Fair point about using pension for the personal allowance and ISA for anything on top.

    Premier Icon 5lab
    Free Member

    Not sure I understand. Your income from your pension will be taxable if it exceeds the threshold but you can take unlimited income from your ISA and this is tax free. So for instance you could take £11k from your pension (depending on the tax free allowance at the time) and £20k from you ISA. That would be an income of £31k pa but would be tax free.
    If you take an income in this example from your pension only of £31k then you will pay tax on £20k of it.

    correct, but when you paid in to the isa/pension, for the isa your £100 would have cost you £100 post-tax, but for the pension it would have cost you £100 pre-tax – so the post-tax impact is only ~£80 or ~£60 depending on your tax rate. So with a pension your pot will be larger, but you are taxed on most of it when you withdraw it. The MSE guide to LISAs is good, and worth a read.

    The £18k thing is probably index-linked as well – if you assume 4% inflation per year, after 40 of them your £20k would only be ‘worth’ £5k (in real spending terms). The annuity would balance this to give less money up front, and more later on. With an index-linked drawdown of 4%, your money would run out after 28 years, before you include thoughts like spousal income. The rate there represents £100k buying £1800, which is admittedly very low – the company is screwing you in the hope you wont shop around. If you shopped on the open market, £1m would buy you £31,000 if you wanted to retire at 65 and link to RPI. Even if you threw the state pension on top of that, it’s not a ‘massive’ income

    Premier Icon allthepies
    Free Member
    Premier Icon footflaps
    Full Member

    Not exactly what I’d call a “high quality” problem.

    Paying additional tax on pension over £1m (total fund) is a higher quality problem than living in poverty as you have less than £1m saved….

    NB I would expect the £1m limit to be inflation adjusted upwards at some point….

    Premier Icon allthepies
    Free Member

    footflaps wrote:

    NB I would expect the £1m limit to be inflation adjusted upwards at some point….

    It will be, it’s index linked from 2018.

    Premier Icon surfer
    Free Member

    for the isa your £100 would have cost you £100 post-tax, but for the pension it would have cost you £100 pre-tax – so the post-tax impact is only ~£80 or ~£60 depending on your tax rate.

    Yes plus often pension contributions are matched by employers which means for example if you invest £100 and your employer matches it then a £200 investment has cost you £60 if you are a higher rate tax payer! Investing in workplace pensions up to a least the “matching” threshold is a no brainer.

    Premier Icon grumpysculler
    Free Member

    Based on the last statement I got from my pension provider, a pension pot of £1000000 would provide an annuity of just over £18k.

    That’s a pretty poor annuity. An annuities in general are pretty poor value just now anyway – although we seem to be passing the peak.

    Using drawdown, you would expect to be able to take around £40k per year sustainably (and indexed).

    I thought all the silver surfers had > £1m pension pots ?

    No because they have DB pensions which are assigned stupidly low values by HMRC.

    The £1m LTA would require a DB pension of £50k (they use a basic 20x multiplier) but there is no way in hell you can get £50k index linked with spouse benefits for anything like £1m.

    Premier Icon footflaps
    Full Member

    No because they have DB pensions which are assigned stupidly low values by HMRC.

    The £1m LTA would require a DB pension of £50k (they use a basic 20x multiplier) but there is no way in hell you can get £50k index linked with spouse benefits for anything like £1m.

    Nothing to do with the fact the MPs and civil servants writing the rules all have DB index linked gold plated pensions!

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