Question
I am 47 and would like to retire at or before 60.
I have a personal pension with Skandia, currently with a total unit value of £62,000. I pay £400 into this pension every month, which is the maximum I can currently afford.
I have a mortgage of £20000 with my husband. I have no additional savings - no ISAs, no savings accounts.
My question is, should I split up some of monthly £400 to go into an ISA account, on an ongoing basis, so that after a year of contributions I have saved the maximum allowable into an ISA, and pay the remainder of the £400 into my pension? Or should I forget about saving into an ISA and just continue with the £400 monthly payment? The government tops this amount up by £100, I think.Answer
In terms of pure tax savings the pension is likely to nudge ahead of an ISA thanks to being able to take a quarter of the fund as tax-free at retirement. The benefit would be greater still if you're currently a higher rate taxpayer and likely to fall into the basic rate band during retirement .
At you've mentioned, pensions benefit from tax relief on contributions. Your £400 monthly contribution will be automatically grossed up to £500, giving you £100 of basic rate tax relief. However, if you're a higher rate taxpayer you reclaim a further £100 of higher rate relief, either via PAYE or your tax return. Pension income , when eventually taken, is taxable.
ISAs don't benefit from tax relief on contributions, but income is not taxable.
The main argument for using an ISA is flexibility. You can access the full amount of money at any time, whereas a pension is tied up until at least age 55 and can only be accessed via taking an income (using either an annuity or income drawdown), although you can take up to a quarter of the fund as a tax-free lump sum.
I suppose the other issue with pensions is that Governments have a habit of moving the goalposts from time to time and there's little you can do about it (e.g. increasing the minimum age you can take benefits from 50 to 55 andr effectively imposing limits on pension fund size at retirement via the lifetime allowance).
If flexibility and/or concern over potential future pension legislation changes is important to you, then redirecting some of your pension contribution into an ISA would be sensible. You should be able to hold the same investments as your pension within a Skandia ISA, should you wish (in fact they'll likely be available via any other fund supermarket ISA too).
Whatever you decide, pay close attention to the underlying investments held - their success or failure will have a big impact on your eventual retirement income.
I am 47 and would like to retire at or before 60.
I have a personal pension with Skandia, currently with a total unit value of £62,000. I pay £400 into this pension every month, which is the maximum I can currently afford.
I have a mortgage of £20000 with my husband. I have no additional savings - no ISAs, no savings accounts.
My question is, should I split up some of monthly £400 to go into an ISA account, on an ongoing basis, so that after a year of contributions I have saved the maximum allowable into an ISA, and pay the remainder of the £400 into my pension? Or should I forget about saving into an ISA and just continue with the £400 monthly payment? The government tops this amount up by £100, I think.Answer
In terms of pure tax savings the pension is likely to nudge ahead of an ISA thanks to being able to take a quarter of the fund as tax-free at retirement. The benefit would be greater still if you're currently a higher rate taxpayer and likely to fall into the basic rate band during retirement .
At you've mentioned, pensions benefit from tax relief on contributions. Your £400 monthly contribution will be automatically grossed up to £500, giving you £100 of basic rate tax relief. However, if you're a higher rate taxpayer you reclaim a further £100 of higher rate relief, either via PAYE or your tax return. Pension income , when eventually taken, is taxable.
ISAs don't benefit from tax relief on contributions, but income is not taxable.
The main argument for using an ISA is flexibility. You can access the full amount of money at any time, whereas a pension is tied up until at least age 55 and can only be accessed via taking an income (using either an annuity or income drawdown), although you can take up to a quarter of the fund as a tax-free lump sum.
I suppose the other issue with pensions is that Governments have a habit of moving the goalposts from time to time and there's little you can do about it (e.g. increasing the minimum age you can take benefits from 50 to 55 andr effectively imposing limits on pension fund size at retirement via the lifetime allowance).
If flexibility and/or concern over potential future pension legislation changes is important to you, then redirecting some of your pension contribution into an ISA would be sensible. You should be able to hold the same investments as your pension within a Skandia ISA, should you wish (in fact they'll likely be available via any other fund supermarket ISA too).
Whatever you decide, pay close attention to the underlying investments held - their success or failure will have a big impact on your eventual retirement income.
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