Pension lifetime allowance

[98elise]

keo said:

But ISA’s could just as easily be messed about with. I hedge my bets and go with both personally as I don’t know what will happen in the future.

But with an ISA you have the flexibility to do something else with the cash if they pull the rug from under you. With Pensions your money is locked away under one set of rules, which can then be changed dramatically.

I saved hard into my pension during my final years working. As I'm not married IHT was a big consideration in providing for my family. Now it will be double taxed if I died. If we were under the current rules I wouldn't have put the money into a pension. It would have been ISA's and property.

[YouWhat]

98elise said:

But with an ISA you have the flexibility to do something else with the cash if they pull the rug from under you. With Pensions your money is locked away under one set of rules, which can then be changed dramatically.

I saved hard into my pension during my final years working. As I'm not married IHT was a big consideration in providing for my family. Now it will be double taxed if I died. If we were under the current rules I wouldn't have put the money into a pension. It would have been ISA's and property.

What makes you think they can’t change the ISA rules dramatically over night. It’s the government they certainly can.

[98elise]

YouWhat said:

98elise said:

But with an ISA you have the flexibility to do something else with the cash if they pull the rug from under you. With Pensions your money is locked away under one set of rules, which can then be changed dramatically.

I saved hard into my pension during my final years working. As I'm not married IHT was a big consideration in providing for my family. Now it will be double taxed if I died. If we were under the current rules I wouldn't have put the money into a pension. It would have been ISA's and property.

What makes you think they can’t change the ISA rules dramatically over night. It’s the government they certainly can.

As I said, you have the flexibility to move the cash to other investments. With pensions you don't.

[SunsetZed]

98elise said:

YouWhat said:

98elise said:

But with an ISA you have the flexibility to do something else with the cash if they pull the rug from under you. With Pensions your money is locked away under one set of rules, which can then be changed dramatically.

I saved hard into my pension during my final years working. As I'm not married IHT was a big consideration in providing for my family. Now it will be double taxed if I died. If we were under the current rules I wouldn't have put the money into a pension. It would have been ISA's and property.

What makes you think they can’t change the ISA rules dramatically over night. It’s the government they certainly can.

As I said, you have the flexibility to move the cash to other investments. With pensions you don't.

It will only be double taxed if you die after 75 and whilst I disagree with the double taxation the timeframe gives you a good amount of time to move a fair chunk out of the pension.

[Guyr]

The point on employer contributions is a valid one. The others less so.

In relation to 'time in the market', if they invest in the same assets now for the same amount of time they will have the same 'time in the market' whatever the wrapper.

In relations to the tax benefits of a pension these are often an illusion. If you do the maths and ignore tax relief, the outcome is the same for an ISA or a pension. The tax is relieved up-front for a pension, but paid back at withdrawal. There is ZERO difference - do the maths.

The value of tax relief only occurs if you get tax relief at a higher rate than you are taxed at when withdrawing. This is the critical aspect of pensions that is generally overlooked. Tax relief is generally at 20%/40% (we'll ignore much higher earners), with 20% being the band that most people will be in for their lives. It is also the case that upon receipt of a state pension the tax-free band is effectively utilised. So for most people they will be paying 20% tax on most of their withdrawals, so unless they get 40% relief on contributions it's not that worth it.

The 25% tax-free lump-sum is course a benefit, but who is certain that that will still be there in 40 years time.

The other certain benefit of a pension is that it stops it being spent and ensures there is something there for retirement, but the financial benefits of the pension wrapper are far less clear than many people realise, not that pension firms or IFAs who both have clear reasons to promote them will highlight.

[omniflow]

YouWhat said:

omniflow said:

For a bit of balance - pensions up to the point where employer contributions / matching stops increasing, then ISAs. With a pension, you're paying tax on the way out and you can only access it when you get to a certain age. With ISAs, there's no tax to pay and you can access whenever.

So you’re happy to miss out on the 20/40/45% uplift because it’s tax free on the way in. Compound that over 30 plus years makes a huge difference over ISA. Don’t forget the tax free lump some as well up to £268,275.

Edited by YouWhat on Friday 29th November 10:32

This has been answered in the post that SHOULD be above this quoted post.

Compound over 30 years DOES NOT MAKE "a huge difference" over ISA, once you factor in that you're taxed on the result. Put some numbers into an Excel spreadsheet and see for yourself.

Put in £8,000 / year with 10% annual growth and you have: £458,000
Put in £10,000 / year with 10% annual growth and you have: £573,000

The ratio between the two numbers is EXACTLY the same as the ratio between £8K and £10K.

The difference is, with the £458K there is no more tax to pay and you can access the money when and how you want to.

[mikeiow]

Clearly some differing views here

I’m happy with the words I wrote above: those who want to ignore pensions over ISAs are welcome to their views, but if they aren’t taking free company matching and government benefits, especially when they are 40% taxpayers, well, I fear you’re missing a big trick….

Each to their own!

[omniflow]

mikeiow said:

Clearly some differing views here

I’m happy with the words I wrote above: those who want to ignore pensions over ISAs are welcome to their views, but if they aren’t taking free company matching and government benefits, especially when they are 40% taxpayers, well, I fear you’re missing a big trick….

Each to their own!

To be clear, I am not saying NO pension. Take the employer contributions to the maximum they will give you. After that, start thinking about diversifying your retirement portfolio.

Remember, someone paying 40% tax when they're working is likely to have a lifestyle that needs 40% level income to sustain it - even when they're retired.

[supersport]

omniflow said:

mikeiow said:

Clearly some differing views here

I’m happy with the words I wrote above: those who want to ignore pensions over ISAs are welcome to their views, but if they aren’t taking free company matching and government benefits, especially when they are 40% taxpayers, well, I fear you’re missing a big trick….

Each to their own!

To be clear, I am not saying NO pension. Take the employer contributions to the maximum they will give you. After that, start thinking about diversifying your retirement portfolio.

Remember, someone paying 40% tax when they're working is likely to have a lifestyle that needs 40% level income to sustain it - even when they're retired.

Someone earning £50,001 a year is paying 40% tax, I suspect they could live on a 20% income.

I certainly could and I earn a bit more.

[98elise]

mikeiow said:

Clearly some differing views here

I’m happy with the words I wrote above: those who want to ignore pensions over ISAs are welcome to their views, but if they aren’t taking free company matching and government benefits, especially when they are 40% taxpayers, well, I fear you’re missing a big trick….

Each to their own!

Mine were all my own contributions. You're still going to pay tax, just on the way out rather than up front. In an ISA all subsequent growth would be tax free and you're free to spend it on whatever you want, or give it away to whoever you want.

If I die before 75 I think my family will be fked financially. My pension pot would have paid off the mortgage (we still have one) plus the rest of the IHT liability.

[alscar]

YouWhat said:

What makes you think they can’t change the ISA rules dramatically over night. It’s the government they certainly can.

I’ve no doubt they will look at changing but perhaps limit the changes to both an overall cap and perhaps a reduced annual amount to invest.

[Zigster]

Pensions have a slight tax advantage over ISAs - namely the 25% tax free lump sum which we all know can be mucked about with and reduced or even removed. And if the LTA was reintroduced, that messes up the plans of anyone having paid significant pension contributions to date.

If you’re a 40% tax payer now (which you might well not be at the start of your career), there is a potential tax band shifting benefit. But that’s making big assumptions about what tax rates will be several decades from now, and your financial situation in retirement.

So it boils down to making sure you pay enough to get any matching contributions from your employer. I’d be very wary about suggesting to anyone early in their career that they paid any more than that.

[YouWhat]

omniflow said:

This has been answered in the post that SHOULD be above this quoted post.

Compound over 30 years DOES NOT MAKE "a huge difference" over ISA, once you factor in that you're taxed on the result. Put some numbers into an Excel spreadsheet and see for yourself.

Put in £8,000 / year with 10% annual growth and you have: £458,000
Put in £10,000 / year with 10% annual growth and you have: £573,000

The ratio between the two numbers is EXACTLY the same as the ratio between £8K and £10K.

The difference is, with the £458K there is no more tax to pay and you can access the money when and how you want to.

I don't know how you got your figures, but I suggest your spreadsheet formula is WRONG

£8,000 per year for 30 yrs with annual growth of 10% is £1,455,547
£10,000 per year for 30 yrs with annual growth of 10% is £1,819,434

Thats a difference of £363,887. Might be small to you but thats a huge difference.

Try any number of the compound interest calculators on the web and you will see my figures are correct

In reality the difference between contributions into an ISA and a pension when you take into consideration the tax relief and employer contributions will make a bigger difference than your simple example. As Albert Einstein once said “Compound interest is the eight wonder of the world”

Edited by YouWhat on Friday 29th November 19:27

[craig1912]

omniflow said:

Remember, someone paying 40% tax when they're working is likely to have a lifestyle that needs 40% level income to sustain it - even when they're retired.

I don’t - always a 40% tax payer but pay 20% in retirement but I do wish I had put a bit more in ISAs to give more flexibility.

[NowWatchThisDrive]

YouWhat said:

omniflow said:

This has been answered in the post that SHOULD be above this quoted post.

Compound over 30 years DOES NOT MAKE "a huge difference" over ISA, once you factor in that you're taxed on the result. Put some numbers into an Excel spreadsheet and see for yourself.

Put in £8,000 / year with 10% annual growth and you have: £458,000
Put in £10,000 / year with 10% annual growth and you have: £573,000

The ratio between the two numbers is EXACTLY the same as the ratio between £8K and £10K.

The difference is, with the £458K there is no more tax to pay and you can access the money when and how you want to.

I don't know how you got your figures, but I suggest your spreadsheet formula is WRONG

£8,000 per year for 30 yrs with annual growth of 10% is £1,455,547
£10,000 per year for 30 yrs with annual growth of 10% is £1,819,434

Thats a difference of £363,887. Might be small to you but thats a huge difference.

Try any number of the compound interest calculators on the web and you will see my figures are correct

In reality the difference between contributions into an ISA and a pension when you take into consideration the tax relief and employer contributions will make a bigger difference than your simple example. As Albert Einstein once said “Compound interest is the eight wonder of the world”

Edited by YouWhat on Friday 29th November 19:27

His point is that after tax the difference is zero - i.e. assuming the same rate of tax at each point, relief on the way in (pension) vs on the way out (ISA) amounts to the same thing arithmetically.

[YouWhat]

NowWatchThisDrive said:

His point is that after tax the difference is zero - i.e. assuming the same rate of tax at each point, relief on the way in (pension) vs on the way out (ISA) amounts to the same thing arithmetically.

Well he’s wrong. He doesn’t even understand compound interest!

Edited by YouWhat on Friday 29th November 21:25

[NowWatchThisDrive]

YouWhat said:

NowWatchThisDrive said:

His point is that after tax the difference is zero - i.e. assuming the same rate of tax at each point, relief on the way in (pension) vs on the way out (ISA) amounts to the same thing arithmetically.

Well he’s wrong. He doesn’t even understand compound interest!

Edited by YouWhat on Friday 29th November 21:25

For simplicity (and cos the maths is the same anyway), consider a single lump sum of £10k growing at 10% for 30yrs and a tax rate of 20%:

Pension
• No tax on contribution, but 20% at the other end
• 10000 * (1.1^30) * 0.8 = 139595

ISA
• Contribution funded from taxed income, but no tax on withdrawal
• 10000 * 0.8 * (1.1^30) = 139595

Obviously many other changeable factors (tax-free lump sum, employer contributions, personal allowance, tax rate in retirement, desired retirement age, health etc etc) that may be pertinent to individual circumstances and swing it one way or another. But on his point of simple arithmetic the poster is correct.

[omniflow]

YouWhat said:

omniflow said:

This has been answered in the post that SHOULD be above this quoted post.

Compound over 30 years DOES NOT MAKE "a huge difference" over ISA, once you factor in that you're taxed on the result. Put some numbers into an Excel spreadsheet and see for yourself.

Put in £8,000 / year with 10% annual growth and you have: £458,000
Put in £10,000 / year with 10% annual growth and you have: £573,000

The ratio between the two numbers is EXACTLY the same as the ratio between £8K and £10K.

The difference is, with the £458K there is no more tax to pay and you can access the money when and how you want to.

I don't know how you got your figures, but I suggest your spreadsheet formula is WRONG

£8,000 per year for 30 yrs with annual growth of 10% is £1,455,547
£10,000 per year for 30 yrs with annual growth of 10% is £1,819,434

Thats a difference of £363,887. Might be small to you but thats a huge difference.

Try any number of the compound interest calculators on the web and you will see my figures are correct

In reality the difference between contributions into an ISA and a pension when you take into consideration the tax relief and employer contributions will make a bigger difference than your simple example. As Albert Einstein once said “Compound interest is the eight wonder of the world”

Edited by YouWhat on Friday 29th November 19:27

Apologies, I used 20 years not 30 years. Sorry for the mistake. However, I do fully understand compound interest.

What you don't appear to be able to understand is that your "huge difference" is simply 20%, which is swallowed up by tax.

[TownIdiot]

NowWatchThisDrive said:

For simplicity (and cos the maths is the same anyway), consider a single lump sum of £10k growing at 10% for 30yrs and a tax rate of 20%:

Pension
• No tax on contribution, but 20% at the other end
• 10000 * (1.1^30) * 0.8 = 139595

ISA
• Contribution funded from taxed income, but no tax on withdrawal
• 10000 * 0.8 * (1.1^30) = 139595

Obviously many other changeable factors (tax-free lump sum, employer contributions, personal allowance, tax rate in retirement, desired retirement age, health etc etc) that may be pertinent to individual circumstances and swing it one way or another. But on his point of simple arithmetic the poster is correct.

How does the spreadsheet work with the TFLS and higher rate tax relief with lower rate income tax on withdrawal?

That would be the scenario for a great many with a decent size pot

[YouWhat]

NowWatchThisDrive said:

For simplicity (and cos the maths is the same anyway), consider a single lump sum of £10k growing at 10% for 30yrs and a tax rate of 20%:

Pension
• No tax on contribution, but 20% at the other end
• 10000 * (1.1^30) * 0.8 = 139595

ISA
• Contribution funded from taxed income, but no tax on withdrawal
• 10000 * 0.8 * (1.1^30) = 139595

Obviously many other changeable factors (tax-free lump sum, employer contributions, personal allowance, tax rate in retirement, desired retirement age, health etc etc) that may be pertinent to individual circumstances and swing it one way or another. But on his point of simple arithmetic the poster is correct.

We are not talking about arithmetic, we are discussing pensions and ISA’s