Retirement 40 years away - S&S ISA vs. personal pension
Discussion
The new tax year's brought pensions into my mind once again, and I've decided to actually do something about it this time.
My employer offers a group personal with a 1% employer contribution. I joined and left immediately last year after receiving documents detailing higher than advertised "typical" fees and that I would be paying some accounting company for advice that was received by my employer.
Now I'm weighing up the options, this is how it stands:
1. Invest in various mutual funds via a personal pension opened via Cavendish (setup fee only)
2. Invest in the same funds, via stocks and shares ISA
I'm 26, earn £35k, and have about £10k to put in as an initial lump sum (I've been putting retirement money aside in a cash ISA since starting work). From the gov's website, the state pension age is due to go up to 69 in the late 2040s, but I'm sticking to my initial goal from a few years ago of 68 - that makes it 2055 giving me 41 years (call it 40).
I've worked out the returns of both options and they seem to end up very close in terms of net cash in my elderly self's pocket. This doesn't take into account contributions increases I'd make with salary increases, or fee reductions as balances grow.
For the S&S ISA, a £10k lump and £350/mth increasing 5% a year, with an effective average return of 3.85%/yr (conservative?) after fees of 1.15% for my likely funds, leaves me with £976k tax free after 40 years.
For the pension, the same inputs with tax relief start me off with £12.5k and £438/mth. Same return with higher fees of 1.5% leave me with £1,143k after 40 years, but taxable. Taking this out over 30 years at 2014/15 income tax rates would result in total tax of £169k, leaving £974k. Very little difference.
So which way to go at this stage of my life? I'll be paying higher rate tax in a few years, so at that point the pension would likely be the winner (returns wise) due to tax relief.
Any advice much appreciated
, in choosing between those, my assumptions, or alternative suggestions...
My employer offers a group personal with a 1% employer contribution. I joined and left immediately last year after receiving documents detailing higher than advertised "typical" fees and that I would be paying some accounting company for advice that was received by my employer.
Now I'm weighing up the options, this is how it stands:
1. Invest in various mutual funds via a personal pension opened via Cavendish (setup fee only)
2. Invest in the same funds, via stocks and shares ISA
I'm 26, earn £35k, and have about £10k to put in as an initial lump sum (I've been putting retirement money aside in a cash ISA since starting work). From the gov's website, the state pension age is due to go up to 69 in the late 2040s, but I'm sticking to my initial goal from a few years ago of 68 - that makes it 2055 giving me 41 years (call it 40).
I've worked out the returns of both options and they seem to end up very close in terms of net cash in my elderly self's pocket. This doesn't take into account contributions increases I'd make with salary increases, or fee reductions as balances grow.
For the S&S ISA, a £10k lump and £350/mth increasing 5% a year, with an effective average return of 3.85%/yr (conservative?) after fees of 1.15% for my likely funds, leaves me with £976k tax free after 40 years.
For the pension, the same inputs with tax relief start me off with £12.5k and £438/mth. Same return with higher fees of 1.5% leave me with £1,143k after 40 years, but taxable. Taking this out over 30 years at 2014/15 income tax rates would result in total tax of £169k, leaving £974k. Very little difference.
So which way to go at this stage of my life? I'll be paying higher rate tax in a few years, so at that point the pension would likely be the winner (returns wise) due to tax relief.
- Pension tax relief now means I get the investment growth on a higher amount
- ISA allows access before retirement, which is good and bad. I'm not easily tempted, but who knows how I'll think in 10 years when I might have a family etc.
- Pension rules are more likely to be meddled with/raided by governments in the future
- ISA probably as likely to be affected by one-off tax raids by future governments (see: Cyprus)
- Large amount of money in an ISA might disqualify me from state pension in some possible future reforms (less likely that same amount in a pension would?)
- ISA has the ultimate flexibility when I retire
- Presumably an annuity can be bought with money from a pension or ISA, if I wanted one
- If I went for the ISA now, I could always transfer some/all into a pension later. This would be better done when I'll be paying higher rate tax?
- S&S ISA can be moved to another investment platform easily, but if for example a pension's fees were hiked there would be high fees if I wanted to move to another provider
- ISA affects means tested benefits, but if all goes well I'll stay well above those limits with other savings e.g. for house anyway
Any advice much appreciated
, in choosing between those, my assumptions, or alternative suggestions...Right now, it doesn't have to be an either/or thing. Assuming you don't need advice, why allocate 1.15% for costs as well? Too rich, go for something cheaper.
If you have a pension already in the last financial year, you can subsequently make use of an unused annual allowance in that year if you want to, for pension savings, so don't worry about that too much for now. For liquidity, focus on the ISA until life pans out a little. Build up a contingency fund and you can always make larger lump sum contributions for your pension with it later?
If you have a pension already in the last financial year, you can subsequently make use of an unused annual allowance in that year if you want to, for pension savings, so don't worry about that too much for now. For liquidity, focus on the ISA until life pans out a little. Build up a contingency fund and you can always make larger lump sum contributions for your pension with it later?
BoRED S2upid said:
SIPP? Best of both worlds?
Only downside with the S&S is a is the temptation every few years. I wouldn't have the self restraint every year for 40 years!
Cheers, will look into this. I have restraint now. Future might bring a wife and family, times might get hard, so locking away would be good.Only downside with the S&S is a is the temptation every few years. I wouldn't have the self restraint every year for 40 years!
Ginge R said:
Right now, it doesn't have to be an either/or thing. Assuming you don't need advice, why allocate 1.15% for costs as well? Too rich, go for something cheaper.
If you have a pension already in the last financial year, you can subsequently make use of an unused annual allowance in that year if you want to, for pension savings, so don't worry about that too much for now. For liquidity, focus on the ISA until life pans out a little. Build up a contingency fund and you can always make larger lump sum contributions for your pension with it later?
1.15% is made up of 0.35% platform costs (only looked at Fidelity as a starting point), and the rest as fees for a fund. Haven't looked at fund choices in detail yet, but 0.75% looks like an average for some good ones.If you have a pension already in the last financial year, you can subsequently make use of an unused annual allowance in that year if you want to, for pension savings, so don't worry about that too much for now. For liquidity, focus on the ISA until life pans out a little. Build up a contingency fund and you can always make larger lump sum contributions for your pension with it later?
I am fine with liquidity, putting £10k into anything would leave me with more than twice that in a cash ISA as a contingency/car/house fund.
L555BAT said:
BoRED S2upid said:
SIPP? Best of both worlds?
Cheers, will look into this.http://monevator.com/sipps-vs-isas-best-pension-ve...
SIPP seems to be the way to go - as said, the best of both worlds.
The only benefit I can see of a personal pension is access to some "portfolio" (mainly) funds run by the provider, which carry no additional annual management charge. Would I want to invest in these funds? From a light look into their performance over other funds with similar risk, the additional cost of the latter seems to be justified by their superior performance.
I like the fact that a SIPP is more easily moveable (free with some providers), protecting against future screwing over by providers.
The Fidelity SIPP looks attractive after a look around the market. 0.35% annual platform charge, and zero transfer out fees.
The only benefit I can see of a personal pension is access to some "portfolio" (mainly) funds run by the provider, which carry no additional annual management charge. Would I want to invest in these funds? From a light look into their performance over other funds with similar risk, the additional cost of the latter seems to be justified by their superior performance.
I like the fact that a SIPP is more easily moveable (free with some providers), protecting against future screwing over by providers.
The Fidelity SIPP looks attractive after a look around the market. 0.35% annual platform charge, and zero transfer out fees.
A sipp is just a personal pension with a few extra investment options. The pp vs isa argument is the only one you need to have, your logic about charges is a fair start point but arguably counts for Isa's too.
The downside to committing to a pension is once the cash is in there it stays there. At least the isa gives you flexibility. Unless you are a higher rate tax payer I'd not rush into funding a pension too heavily as you seem pretty switched on with your management of money so far.
The downside to committing to a pension is once the cash is in there it stays there. At least the isa gives you flexibility. Unless you are a higher rate tax payer I'd not rush into funding a pension too heavily as you seem pretty switched on with your management of money so far.
I think your math is wrong simply because you can get the same/very similar level of fees on pensions now.
Perhaps you are addressing that with a look at SIPPs.
Also - I think the level of tax you pay on the pension varies dramatically depending on how fast you take it out.
So if you only take out say £10k per annum - you may never have to pay tax on it.
But if you go all at once the tax is substantial.
(Not forgetting the 25% tax free of course).
As you note though - hitting 40% tax rate on your earnings is a big swing factor in favour of pensions.
Perhaps you are addressing that with a look at SIPPs.
Also - I think the level of tax you pay on the pension varies dramatically depending on how fast you take it out.
So if you only take out say £10k per annum - you may never have to pay tax on it.
But if you go all at once the tax is substantial.
(Not forgetting the 25% tax free of course).
As you note though - hitting 40% tax rate on your earnings is a big swing factor in favour of pensions.
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