How much money do you need to retire

[IR35 Avoider]

Also the pension wrapper doesnt always beat the ISA wrapper. See http://www.telegraph.co.uk/money/mai...n03.xml&page=1

I've only had time to do a quick scan of the article. They don't explain how they arrive at their figures. I suspect they assumed different paths for what to do with the money after retirement, so that they weren't comparing like with like.

Briefly, up to the point of buying the annuity, pensions beat ISA because of the 25% tax free allowance. At that point, to ensure fairness of comparison, you must buy the same type of annuity with both; since the pension has yielded more capital, it will buy a bigger annuity.

I leave aside the tricky question of how you buy the same type of annuity with each - may not be easy. You need to assume you can put three quarters of the ISA money into a pension at that point. No doubt someone will argue that the fact you don't have to buy an annuity with the ISA is the whole point. That doesn't get you anywhere. In a scenario where the ISA money doesn't go into an annuity; once you risk-adjust, charge-adjust and tax-adjust the differing returns from that point the pension must still win, because there was more capital to start with.

A legitimate way to prove me wrong would be to show that higher charges are unavoidable during the annuity stage of the pension route, and that these outweigh the tax advantages.

[ASB]

I leave aside the tricky question of how you buy the same type of annuity with each - may not be easy.

Surely it's not the same type of annuity which is required for your comparison, it's an annuity on the same terms.

So with the pension:- 25% tax free cash, balance into a CPA of whatever requirements in terms of escalating guarantees etc.

With the ISA - 25% as cash, balance into a voluntary annuity on the same basis.

The question then becomes "what is the return on a voluntary annuity compared with the CPA". The voluntary annuity has pretty much the same rate as a CPA but much less of it is taxable of course - since a good chunk of it is return of capital.

Would this be enough to put the ISA route ahead? I have no idea but for a standard rate taxpayer it seems possible.

[moorfield]

My "semi retire at 45" plan was all going quite nicely until my builder told me last night our new extension was going to cost £100K.

[ChimpMaster]

My "semi retire at 45" plan was all going quite nicely until my builder told me last night our new extension was going to cost £100K.

Wait a few years - soon the whole house will only be worth £100k.

[expat]

Hmmm.... don't think it's a foolproof though, according to digital look Northern Crock shares are currently yielding 40% but I can't imagine there would be many takers for those !

HYP author Stephen Bland might be one

Many newcomers to investing are shocked by the events and collapse in Northern's price.

But where was it written that shares don't carry risk and that very occasionally even a major share like Northern will plunge dramatically due to some highly adverse events, maybe go bust completely? Good returns over the years may have blinded the naïve to this potential but it is always lurking there in the background. Diversification and strategic ignorance are the tools to combat it for High Yield Portfolio investors. Long run, an HYP can easily survive a share going completely out of business and still do well notwithstanding the failure.

...

Stephen holds shares in Northern Rock

[IR35 Avoider]

Surely it's not the same type of annuity which is required for your comparison, it's an annuity on the same terms.

So with the pension:- 25% tax free cash, balance into a CPA of whatever requirements in terms of escalating guarantees etc.

With the ISA - 25% as cash, balance into a voluntary annuity on the same basis.

The question then becomes "what is the return on a voluntary annuity compared with the CPA". The voluntary annuity has pretty much the same rate as a CPA but much less of it is taxable of course - since a good chunk of it is return of capital.

Would this be enough to put the ISA route ahead? I have no idea but for a standard rate taxpayer it seems possible.

I think purchased-life annuities are caculated on the basis of less-favourable mortality tables than compulsory ones, that's why I stressed that it had to be the same type of annuity.

Having looked around the web for info. on self-directed annuities, I am unable to locate the information for any products, not even the two I found there a year or two ago when I last looked. Merchant Investors, for example, now publish bugger-all information online, you now have to go to through an IFA just to find out what products they offer. So in practise, for someone whose objection to an annuity is not being able to control their investments after the annuity stage is entered, I can't prove my case at the moment.

I seem to recall that the Prudential product (which allowed investment in funds but not individual shares) had a product charge of something like 0.75% a year, in addition to any fund management charges, so we could use that as a basis for discussion. For someone who is a basic-rate payer when contributing, this extra charge in the annuity stage might be enough to more than offset the bigger tax benefits available from a pension compared to an ISA.In fact, doing a crude calculation, I think it does. The extra tax-relief on a pension that comes from the 25% lump sum is worth 5% of the final capital (25% of 20% basic rate tax.) For the Prudential product, assuming an annuity bought at 75, 15 year life expectancy, 75% of capital invested, the extra charges total 15*0.75%*75%=8.4%. So for a basic-rate contributor who wants to self-invest after age 75, I'll concede for the time being that the ISA route is better. This is only true based on currently available products and their associated charges though. I would hope by 30 years time when it will matter to me, that more competitive self-invested annuity products will be available.