Pensions Pensions Pensions

[DonkeyRhubarb]

Yes but you have to pay CT on the ISA option which surely makes it 20% more expensive (all other factors remaining the same)?

I would say pensions are a good deal if you get 40% tax relief on your contributions ie. for every £60 you put in, the government puts in £40.

If you are only getting 20% relief on the way in (you pay £80, the govt pays £20), then it's not as clear cut. The pension when you come to draw it will be taxed at say 20%.

If, instead, you paid into an ISA then you'd lose the 20% upfront relief, but the income you draw in retirement will be tax free.

Coupled with this, pensions are tied up until 55 and much less flexible with regards to how you can draw the income.

One final point. You can't pass pensions on to your heirs (children), whereas you can with ISAs.

[moorfield]

Warchest / Offset Mortgage
My ISA allowance
Missus M's ISA allowance
SIPP (upto my salary level 6k ish)

Is there any particular reason for this order?

Personal preference.

While I was benched last year I realised I had put too much into the pension and not enough into the warchest.

ISA's I fill up first because (i) I'm a lower rate tax payer in effect and (ii) if necessary I can retrieve that money if the warchest gets depleted.

[moorfield]

One final point. You can't pass pensions on to your heirs (children), whereas you can with ISAs.

You can. You'll just get taxed to buggery on it.

[jmo21]

3) I have read that contributions being made must be company contributions not the company making personal contributions on you behalf. This cropped up here. Is the consensus that the ONLY thing that needs to be done is for the provider to know its a company scheme?

My company contributes to my personal SIPP. My SIPP provider (H&L) had a specific form for me to fill in that declared that it was a company contribution. That was it.

[MrC]

My company contributes to my personal SIPP. My SIPP provider (H&L) had a specific form for me to fill in that declared that it was a company contribution. That was it.

Thanks for clarifying Jmo

[MrC]

I would say pensions are a good deal if you get 40% tax relief on your contributions ie. for every £60 you put in, the government puts in £40.

If you are only getting 20% relief on the way in (you pay £80, the govt pays £20), then it's not as clear cut. The pension when you come to draw it will be taxed at say 20%.

If, instead, you paid into an ISA then you'd lose the 20% upfront relief, but the income you draw in retirement will be tax free.

I don't think we are understanding each other (maybe it's me? )
Assuming lower rate taxpayer throughout, the way i see it:

ISA:
~20% CT on way in
~20% tax PAYE or dividend to get money out of company on way in
0% on way out
Total ~40% taxation

Pension:
0% on way in
~20% on way out
Total ~20% taxation

Thus ISA, although having flexibility benefits, costs ~20% more tax.

[MrC]

Anything you put into a pension will be worthless when you come to get it out. Mostly due to interest / returns being less than inflation. Why do you think so many people jumped into property as a pension fund?

I'm pretty sure that there's not an ISA on the market today which is paying a high enough rate to offset the effects of inflation on your investments spending power.

[DonkeyRhubarb]

I don't think we are understanding each other (maybe it's me? )
Assuming lower rate taxpayer throughout, the way i see it:

ISA:
~20% CT on way in
~20% tax PAYE or dividend to get money out of company on way in
0% on way out
Total ~40% taxation

Pension:
0% on way in
~20% on way out
Total ~20% taxation

Thus ISA, although having flexibility benefits, costs ~20% more tax.

As I said, if you are getting 40% relief on the way in, then it probably tips the balance in favour of a pension.

[lje]

ISA:
~20% CT on way in
~20% tax PAYE or dividend to get money out of company on way in
0% on way out
Total ~40% taxation

This is only true if you are paying yourself dividends which take you above the 40% tax bracket - otherwise the tax is around 20%. Any other money in your company which would take you above the 40% tax bracket if you take it out can be paid into pension or left in the company.

In other words, use both ISAs and pension...

[lje]

I'm pretty sure that there's not an ISA on the market today which is paying a high enough rate to offset the effects of inflation on your investments spending power.

There's a tax free investment which is guaranteed to grow faster than the RPI rate of inflation (which is the highest one). RPI +1% over 3 or 5 years - and you can still get at your money if you need it.

http://www.nsandi.com/products/ilsc

You can invest in this even if you already have money in an ISA. Max £15,000 in each term length (ie £30,000 in total). When they change conditions then you can invest more if you want to. Obviously it's not invested in the stock exchange and so won't give you a huge returns - but it will beat inflation and it's tax free too.