ISA vs Pension - The Winner FINALLY Revealed!
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- Опубліковано 2 чер 2024
- You may have heard opinions on which wins out of ISA vs Pension, but here is the DEFINITIVE answer...
I have tested different tax scenarios with cash flow modelling software to reveal which out of the ISA or pension would provide the best result.
⏲ TIMESTAMPS ⏲
0:00 Start
1:16 What Are Pensions and ISAs?
2:01 How Do Pensions Work?
4:30 What Are Pension Tax Advantages?
5:53 How Do ISAs Work?
7:26 What Are ISA Tax Advantages?
8:50 Will Pension Or ISA Last Longer? (Scenario 1)
10:30 Will Pension Or ISA Last Longer? (Scenario 2)
11:11 Will Pension Or ISA Last Longer? (Scenario 3)
💥💥💥 ABOUT ISA vs PENSION 💥💥💥
In this video I provide a beginners guide to ISAs (Individual Savings Accounts) and a beginners guide to pensions ✅
I explain in simple terms:
'What is an ISA and how does it work?' 🤔
AND
'What is a pension and how does it work? 🤔
I talk through the main benefits of pensions and ISAs and the main difference between pension tax treatment and ISA tax treatment. ✅
Then, to settle the age old debate about which vehicle is best for retirement planning, I use my advanced cash flow modelling software to demonstrate which plan would last longer in retirement, depending on your personal tax rates. 📈👏👏👏📈
If you're new to financial planning and retirement planning, this simple guide to ISAs and pensions will give you a full understanding, but it will also help experienced investors decide which vehicle would best suit their needs.
For more UK financial planning content, be sure to subscribe to my channel and turn on your notifications. 🔔🚀
🎥🎥 UK PENSION DRAWDOWN PLAYLIST 🎥🎥
• UK Pension Drawdown Se...
*** CASH FLOW MODEL ASSUMPTIONS ***
- Inflation rate is 2%
- Property growth rate is 2.5%
- Investment return on pension and ISA wrapper is 7% net of costs
- State Pension not included
- Pension withdrawals taken using UFPLS method - taxable income and tax free lump sum is drawn gradually to spread tax free lump sum
- In higher rate tax retirement scenario, taxable income exceeding the higher rate tax threshold is in payment at retirement
*** DISCLAIMER ***
The content in this video is provided for information and entertainment purposes. It should not be construed as direct or indirect financial advice. You must throughly research any potential financial or investment decision and fully understand the risks before taking it. If in doubt, you should seek individual advice from a professional adviser.
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There's another factor to consider, general health.
I was unfortunate enough to have cancer in my mid twenties. As a result, my life expectancy means I am unlikely to make it to 65, let alone 90.
I'd rather have the majority of my savings in a tax efficient isa, than tied up until (insert new retirement age here). Yes, you can take it out without any penalties if you can prove your mortality is within 12 months, but by that point it's already too late to get any enjoyment out of it.
Just my two pennies.
Very good points Cameron. There will always be individual reasons why one plan could be more suitable than another.
Spot on, who knows if we're going to live to see our pension.
@@chrisbourne-retirementplanner Absolutely, I have both a sipp, a DC pension with my company and a S&S isa. The majority is in the isa but I'm planning to invest in my sipp further once my earnings grow.
I understand the additional 'boost' that pension contribution relief gives you on your contributions over an ISA. However, I prefer the simplicity of an ISA. There are no complex rules that are forever being changed and it is an extremely flexible savings vehicle - you can take it out anytime you want tax free (not subject to income tax and you are not penalised for going above a certain threshold as with a pension).
Exactly. If I die I want my wife to have easy access. That won't be the case with a pension. The chances are she won't get it.
@@kinggeoffrey3801if your pension is a SIPP and you die before 75. Your wife will get the pension tax free.
Great video again Chris, informative and enlightening. Thanks for all the sage advice, its really helping me plan.
That’s great to hear Andy! Thanks for your comment 👍🏼
The Mrs and I giving some thought to this recently, seems a well timed video for us! Congrats on that subscriber growth too. Well deserved 👍
Glad it’s timely David! I don’t think there’ll ever be one clear winner between the two wrappers, but it’s worth knowing which one your circumstances should lean you more towards. Thank you for those kind words 👍🏼
Love this video. Very informative. Right up my street because as you know I have have a combination of pension and isas myself. And I like the combination of both. Growth and freedom combined.
I am going to share this video as very relevant (especially to youngsters who have more time) and try to get you up to that magic 10,000 subs that you throughly deserve
Thank you Anita I’m grateful for you sharing my content! We’re quite fortunate in the UK that ISA and pension allowances are quite generous and provide a real good mix of benefits.
First time ive seen one of your videos and as a seasoned investor in equities and property.....i just wanted to say quality and informative... should be shown in schools.....
That’s good of you to say thank you! Hope you enjoy more of my content.
Great and informative video explained clearly as always. Thank you very much
Very kind of you to say! I do try to make my explanations clear so I appreciate your comment 👍🏼
One thing to consider is what if tax rates go up massively over time. An ISA pot is always going to have tax free withdrawals, where a pension may be taxed at much higher rates in the future.
Yes that is true Adam, rates could go up, but I’d say they’re unlikely to go up massively. Small changes to tax rates are sometimes made, but they have remained pretty stable for many, many years. If we had a more left leaning government we could see some income tax rises, but they’d almost certainly be focused on higher earners and most pensioners probably wouldn’t be affected. If anything, lower earners (which would include a lot of pensioners) might see a reduction in taxes under such a regime. Significant tax rises probably wouldn’t be implemented by conservative governments because a punitive income tax system would be at odds with capitalist ideals. I’d therefore say that the base case would be for income taxes to remain broadly similar.
Good point, but you could also consider that the government could introduce a new tax on ISAs at a reduced CGT rate or introduce a LTA on ISAs or just scrap ISAs completely. Call me a pessimist, but I can see this coming in over the next 30-70 years when I will be needing my ISA/ pension which is why I’m trying to spread my risk as much as possible over all tax wrappers and assets.
I would be interesting to see a LISA vs pension comparison. The government bonus and limitations on withdrawal would make this a much closer comparison.
Yes I will do more of a focus on LISAs in future vids as there does seem to be an appetite. The allowance is frustratingly low though at £4k. I’d like to see the government double it.
@@chrisbourne-retirementplanner While that’s true, you can mix it with a SIPP or S&S ISA.
I appreciate that a true, best strategy for any income video has so many variables, I’d be interested in your take on how to best use those three wrappers.
The equivalents in America and Canada are taxed on withdrawal at full income tax rates, no tax free 25% lump sum (or 25% of withdrawals). So in North America, the ISA equivalents (Roth or TFSA) are likely better since you have a known end result of tax free money and everyone expects taxes to rise over time. In North America, once you've maxed out the employer matching, it is often advised to go to the Roth or TFSA instead of more 401k/RRSP.
Hi Adam. Thanks for your comment. Always interesting to hear how different country’s tax vehicles work.
Brilliant. Thats for making these videos. I feel like the best thing I can do for my 7 month old daughter is put £240 a month into a junior pension. I was thinking about a junior isa, but she would get that at 18 and most 18 year olds dont have much financial maturity.
Hi Jonathan. I suppose the only thing you can do is try to instil that financial maturity into her and hope that she takes your wisdom on board. A Junior ISA would certainly be the best option for tax efficient savings. You could of course contribute into a pension for her, but you may never see her get the benefit of that!
@@chrisbourne-retirementplanner absolutely valid point. I am putting some money away for her in my pension, my lifetime S&S ISA and standard S&S ISA as well to help buy a house, etc. I was thinking it through and £2.5m would be amazing, but actually I think it would be better to give her money earlier on and reduce the junior SIPP. Even £50 a month for 18 years net would result in a healthy wedge in 60 years time.
I have thought about giving her £100 a month in pocket money, but then making her pay 'tax', board, food and make savings, so she gets £25 a month in the end, but then invest the £75 for her secretly every month, to help her understand the importance of money.
Is it possible you don’t tell your daughter about the isa and keep contributing until she’s say 30. I know she’d legally own it at 18, but if she didn’t know about it she can’t spend it
Thanks for the analysis! I’ve always felt that pensions will likely generate more money in the future, but what holds me back is that I don’t want to wait til I’m old to access my own money. My goal has always been to be financially free early so I can enjoy life sooner. A long and healthy retirement is not guaranteed unfortunately. I think a mixture of ISA and pension is a good way to hedge your bets
I agree Amy. There’ll never be one clear winner because the benefit comparison extends beyond just projected growth. I’m a big advocate of planning for financial independence in stages, so pensions should always form part of the picture as you say.
In that sense would it be good to have enough in your isa to provide you up to pension age? Then you can rely on your pension 👍i think that makes sense
@@davyhoogy yes that would make sense. Please note that the goalposts recently changed from age 55 to 57 before you can access private pension. Hope these age limits don’t keep shifting!
@@amyyan4763 we are 6 years away from that change….
One advantage of the pension is that if you die under age 75 the remainder of your pension pot will be paid to your beneficiaries tax free, unlike an ISA where it may be subject to inheritance tax.
Yes that’s correct David.
One option could be a Lifetime ISA, if someone is wanting save £4k a year and starts before 40. If a basic rate taxpayer when contributing you get the benefit of both the tax free ISA wrapper AND a 25% contribution from the state… which arguably makes it better than putting that money in a SIPP?
Hi Martin. Yes Lifetime ISAs are excellent vehicles. It’s a shame the allowance isn’t just a little higher. Pensions would still probably win in most cases if you’re a higher or additional rate tax payer, and pensions can currently be accessed a little earlier too, but I see LISAs as very complementary.
Great analysis. Regarding ISAs, any thoughts on what’s best out of stocks&shares v innovative finance p2p? I have some experience of both and so far the latter (via Zopa) was much less stressful and gave a steady 5% return. Forget cash ISAs of course. Re. pension, as I’m 2 years away from retiring what split of funds would you recommend between equities, bonds and cash? Thanks.
Hi Steve. Innovative Finance ISAs can be a good option. The main concern is the level of diversification (how is risk being spread) and no FSCS protection. There’s no right or wrong answer to asset split - it will depend on your attitude to risk, capacity for loss, income needs and other factors, so I can’t answer that specifically.
@@chrisbourne-retirementplanner OK, thanks Chris. You've got a new subscriber btw! Good to find some solid no-nonsense advice, at last.
A great video, there's no doubt a pension pot will be considerably bigger over time, a lot will blow the lot and buy an annuity which is daylight robbery, nothing left for inheritance at all. For me its ISA all the way mixed with some BTL's, only skim off the ISA on a decent market uptrend. Aiming for 500K plus ISA which will take another 20 years but thats the dream.
Thank you. I’m sure you’ll get there!
So with the additional tax relief at 40%, do your contributions to a personal SIPP effectively get increased by 50% once you've completed your self assessment. I.e. £100 contributed to SIPP, £25 from initial tax relief and then a further £25 from the self assessment giving a total of £150?
Yes, effectively. The thing to remember is that the initial gross up is equal to 25%, but that is because your contribution is reinstated to the amount it would have been before tax was taken. So £125 would become £100 after 20% tax is taken, and that 20% tax on the gross amount is put back in. The additional 20% of £125 (a further £25) is then given back to you if you are a higher rate taxpayer.
Hi Chris - When demonstrating the cash flow of ISA vs pension using the 2 models you mention that the reason the pension runs out of money later is because of the compounding of the tax relief over the years. My view is that it's not the compounding of the tax relief that makes the pension model better but the 25% tax relief you get on withdrawal from the pension. ie. If that 25% tax relief on withdrawal from pension did not exist then i think the 2 models would be identical?
pension model: £1250 per month over 20 years = £300,000. lets say there was no 25% tax relief on withdrawal from the pension then it would be worth £240,000 once withdrawn (assuming 20% income tax)
ISA model: £1000 per month over 20 years = £240,000
The tax free lump sum definitely plays a big part too Paul, but as demonstrated at 9:56 the tax relief has led to a value £130k higher in the pension. Even without tax free lump sum though, there is also the Personal Allowance which currently allows the first £12,570 to be withdrawn at 0%.
@@chrisbourne-retirementplanner thanks for the reply chris. the point i'm making is that the extra £130k in the pension is lost due to income tax on withdrawal (per the example I gave in my comment above - so ends up same amount as the ISA in the end) - so the only factor that is making the pension last longer than the ISA is the fact that 25% of your pension withdrawals are tax free (and also the £12,570 annual tax free allowance if that happens to apply to your individual circumstances)
I tend to restrict what I put into my SIPP because I know in an emergency I cannot get at it again if I need it. But would it make any sense to start transferring lumps across from my ISA to my SIPP as I get nearer to retirement ?
It’s important to consider what your exposure would be in the event of an emergency. Think to yourself what situation have you ever been faced with that would require you to pay out 10s of 1000s of pounds, that wouldn’t generally be covered by insurance? Emergency funds are important but be sure not to over inflate the amount you’d need immediate access to. The tax relief on pensions has the greatest impact when left to compound for long periods. It could certainly make sense to switch some holdings beating the above in mind. This decision can only be based on a full knowledge of individual circumstances though so I can’t say for definite.
If you are a company director and your contributions are made from your own company then your tax relief is not paid directly into your pension but used to offset the company's corporation tax then would the isa not be the better option as your not getting the benefit of compounding on the tax relief?
From a personal taxation perspective the ISA definitely wins in this scenario. A lot would depend though on what the company does with the corporation taxing. I suppose that if invested back into the business wisely, this could lead to much more growth, and therefore income, in other ways.
Hi Chris thanks for a great video. Higher tax bracket, how does the extra tax inventive from the government get into your pension? Thought this comes as a cheque at the end of the tax year?
Hi Harry. It’s more commonly done by adding to your basic rate tax band. The basic rate band is increased by the amount of pension contribution you make, hence you are able to earn more at 20% before you start paying at 40%, thus giving you a further 20% relief. It would normally only be refunded if there is no longer any income being paid to make band adjustments.
I write to HMRC to claim my Higher Rate Relief the instant I get my P60 and P11d off my employer. (Usually early July.....). Usually by August, HMRC do the calculation and offer me a cheque within 3 months or a bank payment within a week. Its worked like this for 8 years without a problem.
Great video. The main issue with a pension is the money is tied up until a minimum of 55, soon to be 57. I would say do both, but that also depends on whether the pension is invested in the right funds. Not all pensions give you that flexibility whereas ISA's do. Also better asset management towards retirement would mean you wouldn't have to take as much out of the ISA, allowing it to last longer. And lastly the 7% is a high benchmark for a pension. My ISA did 27% last year, the pension 7%. I would rather pay the tax on earnings now rather than later when it's unknown what the rates and inflation will be.
Hi Lucia. It sounds as though your pension is invested very differently to your ISA. There is no reason why an ISA should grow by more than a pension or vice versa… they are simply tax wrappers and they can hold exactly the same funds. SIPPs actually have wider investment powers than ISAs because they can invest directly into commercial property and they have the power to borrow. As estate planning vehicles pensions are superior, but both wrappers complement each other.
Need your advise on Tax free wrappers. Other than stocks and shares ISA any other tax free wrappers available in UK?
Yes there are VCTs and EISs. They carry higher risk, but they offer tax free growth and income as well as tax relief. Offshore bonds can grow free of tax as well but are taxable upon surrender (unless you are a non-taxpayer at that point or you assign to a non-taxpayer).
@@chrisbourne-retirementplanner Thanks
Hi Chris, I’m 25 so won’t be able to access my pension until at least 58. Of the funds available with pension provider my employer uses, should I look to select the fund with 100% equity (apposed to say an 80/20 or even 60/40 split) given how long I have until I can access the money?
As long as you are comfortable with the volatility and higher risk of stocks, then you are likely to receive a better average return over the long term. Lower equity content portfolios are for people who want a smoother journey. They tend to be more appropriate if the investment timeframe is shorter.
Good video Chris. Thanks for creating this, along with all the others. I'm glad you finished the video off with the "they work well in combination", as both the video title, and some of the comments below imply there is an "either - or" situation. Life tends not to be that simple.
Pro's of pension, as you say - the tax relief on the way in, and a DC pension can also shelter from IHT. The pro of the ISA - tax relief on the way out, and you can access at any time.
It's also it's easy to forget that the first £12,570 of pension income is actually tax free if you have no other income, and can be topped up from an ISA tax free (along with c£2k from share dividends tax free too). There are ways ....
I retire this year, and have a combination of DB and DC pensions.
I was late to the ISA party - only just started last year, for historical reasons.
But I'm telling my kids (18 - 28 years) 2 things -
1. Don't delay starting up pensions - the compounding growth is just too important.
2. Don't end up in a situation where none of your money can be accessed until you're 57 - won't help if you lose your job when you're 32.
As Reacher says - Hope for the best - plan for the worst :)
Yes I’m a big fan of both wrappers and always advocate both, unless there are specific reasons why one should be exclusively chosen over the other. I have to say that titles a mainly used to ‘peak the interest’ in a video, but I always like to give a balanced view where possible. The pension income withdrawals assume an UFPLS extraction method, so the first part of income is within the PA at 0%. That definitely helps sustainability. In reality I think the gap would be closer than the 9 years suggested because most people would get some state pension part way through retirement and this has been left out of the models.
Why do most videos not include NI save? in case of salary sacrifice, I understood we no pay NI when withdrawing from pension right?
Yes you’re right that NI would be saved on sal sac contributions. There would also be no NI on pension income in payments - only income tax. The contributions discussed in this video though are paid into personal pensions out of already taxed income.
An interesting video and I definitely agree that the two work better together. However as you rightly say there are many variables. It depends on what you put in your ISA and whether your pension is managed or in a SIPP. MY ISAs generally perfomed much better than my pensions in terms of growth. There is a bit more flexibility with ISAs and 7% compound is a pretty poor growth rate. Also if you are a lower rate tax payer sticking £1000 a month into an ISA or pension is going to be a stretch!
It depends on how well you control lifestyle costs. I’d probably say 7% is at the very top end of what you can expect from equities over the next 10 years!
Hi Chris, great channel. I’ve recently started paying into a sipp. Does this impact net taxable income like a workplace pension therefore helping avoid child benefit tax.
Hi James. Thank you! Yes I believe child benefit qualification is based on net adjusted income, which means that making pension contributions could bring you below the threshold. That is my understanding anyway.
and an added advantage of the pension is its not part of your estate for inheritance tax (at the moment!) if you have any left when you peg out
Indeed Dudley. That’s a subject I touched on in some of my recent UK Pension Drawdown playlist videos. It is possible to keep ISA holdings out of your estate too if you can get the holdings into Business Relief qualifying assets. This does carry higher investment risk though.
Very well explained Chris. We retired in our mid 50s and take our personal allowance and PCLS and top up from our ISA as and when it's necessary to do so. Works really well for us. Encouraging our children to go down the same path. For under 40s, there's also the Lifetime ISA which is another tax efficient long term investment for retirement income.
Thanks Shree! I will do a video discussing LISAs at some stage… it can be difficult to fit all of these into one vid and still keep it succinct.
@@chrisbourne-retirementplanner Yes of course Chris. Shorter videos are much more easier to follow and understand. I immediately shared this video with my two children. They are loving investing their money especially now that market conditions are favourable for investors.
Pension is far better for tax benefits in most cases, and especially if you can contribute via salary sacrifice as many are able to nowadays.
Use ISA if you need to have a pot to spend before pension access age (eg early retirees) and/or if you are likely to exceed lifetime allowance on standard rate relief on the next £ you want to invest.
The tricky thing with both is the annual allowances mean you can't just make wholesale switches out of one and into another so it needs planning and projection well in advance!
Yes, I agree. A good retirement plan makes use of different tax free wrappers, particularly if the plan is to retire early.
"An ISA pot is always going to have tax free withdrawals," can you provide me with a source of that claim? Is it in constitution? Oh sorry you don't have any in UK. So tomorrow we change parliament and new leftist lord says: "ISA IS FULL TAXABLE CUZ ITS IMMORAL THAT PEOPLE WHO WORKS AND SAVE HAVE MORE MONEY THAN FUCKING BASTARDS WHO JUST BREEDS, we need to to tax you now and give that money as benefit to doctors. engineers, scientists and nobel prize winners who are comming illegaly to this country on boats!"
So once again, where doies it say its ALWAYS going to be tax free? I remember when I started working I have been promised to reach retire age at 60. Now its fucking 68 and fuck knows if later I won't be told to work till 80 or 100 cuz they just said so.
Long story short, you're naive
So I am currently paying the highest band of tax in the UK. My adviser said put £1000 per month into my pension and £1000 into an ISA. Why would I split it ? would I not be best doing one or the other to maximise compounding gains ? Thanks, I'm very new to this.
Hi Gareth. The pension would provide the greatest compounded gains assuming both plans are invested in the same way. The ISA does provide the flexibility of earlier access though, so perhaps that added flexibility is the reason for the recommendation?
Very interesting! Thanks Chris!
Thank you Scott. Thanks for continuing to support my channel 👍🏼
A scenario that includes the lifetime allowance would be useful for comparison.
Yes I will try to put a direct comparison of that in at some point Andrew. In many cases, the LTA is not the problem that people imagine it to be, particularly when considering the front end taxation benefits of pension contributions for people earning £100k+.
Once drawing a pension can I still contribute to it?
IE , if I draw from the pension without paying tax ( under the income tax limit ) can I then put money into the pension and get 25% added to my contributions ?
Hi Nigel. You can still make contributions, but once you’ve taken taxable income out of a pension your contribution allowance is reduced to £4k per annum. This does not apply if you only take tax free lump sum out of your pension though and no taxable income - you still retain your full annual allowance in those circumstances.
@@chrisbourne-retirementplanner thanks.
I'll leave the pension intact in that case for now.
If you are close to 55/57 and don’t need to worry so much about having funds locked away, should you focus on the pension contributions over the isa? If you are a higher rate tax payer does the tax relief not trump everything else
Hi Rob. Pensions are shown to generally provide the better net result, particularly if you are a hrt payer and become a brt payer in retirement.
Hi Chris, I'm retiring in a few months age 57 and I currently have 50% of my money in a pension, 20% in an ISA and 30% in cash. I know that I should use cash then ISA then Pension but if I have no other income should I be drawing down from my pension each year, up to the personal tax allowance, and investing that in my ISA and also then top my ISA up from my cash pot?
That can certainly be sensible planning David. It is a way of carrying forward your unused Personal Allowance to future tax years. The ISA effectively allows you to take this tax free allowance at a later date. I have done this planning before with clients and it is probably worth me mentioning in a future video 👍🏼
Another difference is inheritance. ISA investments are incorporated into the estate and can be distributed to anyone. Pensions can only be distributed to a dependent on death.
That’s right Steve. It’s an issue I’ve discussed in a number of videos and a big tick in the box for pensions.
@@chrisbourne-retirementplanner You mean a tick in the box for ISA's don't you?
Don't forget if you pay into a DC pension your employer also makes a contribution (in my case 10%) and in addition, if you pay via Salary Sacrifice you save NI as well. So the actual contribution is much higher than the small drop in the bottom line you actually see reduced in your "take home" pay. So a pension pretty much will always win with those 3 aspects included as you are getting so much free money from NI (11ish %), and tax relief (40% in my case) and employer's contributions (another "tax free" 10%). A bit of a "no brainer" really. Find any ISA that can match or beat that initial boost in your contributions....
So, what is the magic ratio if you were asked to split the £1000 between SIPP and ISA?...50:50?...60:40?...70:30? 🤔
There isn’t a catch all answer to that Sonny! It really depends on your tax status now and in the future.
I have both
That’s sensible.
Very interesting, but not something that's likely to affect most of us I don't think. Most of us will have a miniscule pension pot and have to rely on state pension for the bulk of our income, topped up by a few grand per year from our work and private pensions.
I suppose it’s everybody’s power to get more, but doing so is not always easy.
How do people get 620,000 at age 50 on just over minimum wage
Unfortunately they don’t. They have to find a way of earning more money so they can make contributions similar to those outlined in the video.
In my situation, I'm very sure that I'd be able to live very comfortably in my retirement without going over my personal allowance. So the tax wouldn't be an issue in my my case.
That would make a pension very advantageous Neil.
It must be overseas... Attaboy!
@@MA-ho8nh What must be overseas? Do you mean in order to live comfortably I should move abroad? I'd seriously consider that, but in my current situation, £3600 per year pays for all my home expenses, including, food, council tax, gas, electric etc (my partner pays the same amount). Given the current personal allowance, I'd have a further £9150 to withdraw before I'd start paying any income tax. I won't be retiring for quite a few years, but I expect the personal allowance to rise with inflation.
How about a pension v VCT comparison. You are then getting the tax relief and some flexibility if you need the cash pre-retirement. Every 5 years go for a buy back and claim relief again.
Yes, please Chris!
Pension takes the cookie. you have so many options to take your money out, tax relief on contributions and you have a much wider range of investments choice. VCT's are also capped for contributions and Pensions are not. VCT's also can struggle to pay the promised dividends and can only invest in UK based companies younger than 7 years.
That being said, if you have enough money to fund your pension a VCT or Offshore Bond is a must over anything else for creating extra tax efficient retirement income.
Hi Richard. VCTs can be useful vehicles for sure. There is the issue of higher risk though and the fact that they are geographically heavily focused on UK companies as opposed to the more global exposure allowed through the pension wrapper. The annual contribution allowance of £200k into a VCT is greater than the £40k annual allowance for pensions, but in both cases, not everyone has this allowance. The way in which tax relief is awarded on VCTs is also not as favourable from a growth perspective… pensions get 25% uplift immediately, which can attract growth from day 1, VCT tax relief is a refund usually a year after the end of the tax year in which the contribution was made. Higher rate and additional rate taxpayers can obviously gain higher rates of relief than the 30% offered by VCT.
@@chrisbourne-retirementplanner Yes my comment was more of a thought experiment.
How I see it, ISA is liquid, lots of choice but no up front tax relief, Pension illiquid (to me that’s 20 years away at least) lots of choice and up front tax relief (also the LTA to take into account). VCT somewhere in the middle, semi liquid, less choice and tax relief.
Reality the order I go in, max out employer pension contributions, ISA, pension yearly allowance, max CGT and dividend allowance tax then hit the VCT.
The only thing I see hard to self service is offshore bonds
Yes, and sometimes an onshore bond can be more advantageous than an offshore. In other cases a GIA can be better than bonds. I think in almost everyone’s case though, pensions and ISAs will always come first.
What about the advantages of salary sacrifice schemes and employer-matched contributions to pensions ? Wouldn’t a higher rate tax payer effectively get 42% tax relief fully invested plus whatever their employer is putting in - which is currently minimum of 3% of employee’s salary. Maybe a future video on this ?
Indeed they would Mark. Salary sacrifice can be very tax efficient. The only downside is that it affects borrowing capacity, because as far as a mortgage lender is concerned, you earn less money (they don’t take the pension contribution into account). This impacts some people more than others of course, but always worth remembering. I touched on this subject a little bit in my video about the Nest pension, but I could perhaps do another more specific vid in future.
In Scotland , there is a sweet spot if you salary sacrifice from £50262- £43662 , you can also take advantage of 12% saving on NI , as well as the higher rate 41% income tax savings.
Should probably test LISA £4k + ISA £16k annually if the assumption is you will use the money in retirement.
Yes it would be a good scenario to test as well Josh for sure. I suppose there are so many different permutations that a video could end up going on too long, but this is definitely something I’d test in an individual case if that person qualified to make LISA contributions. The low ratio of LISA bonus reward v pension tax relief (I.e £1k vs £3k in the video example) would still see the pension come out on top, but it would be closer.
I guess it comes down to the difference in growth. If the pension fund has a 1% higher fee, and performs 1% less well than a Vanguard ISA ETF, the tax relief on the pension gets wiped out.
Yes but there’d be no reason why you’d hold different investments in the two wrappers if they’re there for the same purpose.
@@chrisbourne-retirementplanner I agree. Which is why I prefer an ISA
It has to be driven by circumstances and tax treatment as there shouldn’t be any reason to pay different charges for a pension or an ISA… you could hold exactly the same index funds or ETFs in both. Some providers charge a little more to open their SIPP wrapper, but many providers would charge the same.
Question that I've never seen answered anywhere on the internet: I turn 55 in March 2028 just before the private pension age changed to 57 in April 2028. It's take it in March or then stuck waiting until I'm 57 or can I take it anytime because I was 55 before the new rule came on (just) ???
That is a very good question Mark. I would be inclined to think you need to take some benefits in the March when you turn 55. Even if it is just a small amount of tax free lump sum (no taxable income) so as not to trigger the MPAA. You can achieve this with a small partial crystallisation into flexi-access drawdown.
Freetrade SIPP - can anybody tell me can you hold US$ within the account without repeatingly converting back to UK£'s?
Does your tax bracket while working have any impact on tax once you retire? If I'm 40% now, will that automatically make any withdrawals from my pension 40% or does it only go on what you actually take out and if that goes into the higher band?
Cheers
No your tax band is only based on your earnings at the time David. Being higher rate while working and basic rate in retirement gives you the benefit of higher relief while contributing, and lower rates upon withdrawal.
Great video, thanks! Stocks & Shares ISA question: is my yearly 20,000£ allowance defined by the amount of money I pay in or defined by the value of the stocks & shares I hold? For instance, if I pay in 19,000£ and then a month later the market value rises to 21,000£ because the stocks do well - am I still within the allowance or have I exceeded it? Many thanks!!
Th2 tax allowance is for what you put in. All gains are tax free.
So if you put in £20k (max allowance) and it increases by £5k, the whole £25k of tax free.
So if you invest over 40 years, and invest a good amount of money, your 7 figure sum at the end will be tax free :)
Thank you! Your allowance is based only on what you pay in Alex; growth doesn’t come into the equation.
Or in my case, put 40k into stocks & shares ISA over 2 years which is now worth 35k! 😫
@@stevegeek what did you invest in
@@cameronmilne3590 Mix, approx. 50% in individual stocks (8 companies from different industries) and 50% in managed global funds plus a specialised ETF. Most are down 10 - 20%, one more recent company stock is up 30%. It’s been a rollercoaster ride. Expensive hobby! 😉
Everyone's circumstances vary, but I think most people couldn't go wrong with putting in as much into their pensions as their employer will match (which equates to 125% topup from tax relief and employer contributions combined for basic rate taxpayers), then saving the rest of their spare money in a S&S ISA & LISA. I save into all three
Yep… I think that’s the nail on the head. It doesn’t need to be any more complicated than that really. That mix will serve you well I’m sure.
On pensions one gets shafted on way out when it's too late to do anything about it, I'm with ISA's, withdraw at anytime if needed for any emergencies or house purchase, gift to kids etc
@@NS-pt9rr so there’s another video from Chris that demonstrates that on average, getting employer contributions and tax relief in the long-term + compounding will mean that even after getting taxed on withdrawal, you end up with more money than if you had used a S&S ISA.
Basic pension tax relief is 20% not 25%?
Yes, but it uplifts your net contribution by 25% because the 20% relief is ‘in’ the contribution rather than on it. Essentially, when you pay £100 into a pension, it is treated as though you have paid £125 and you get 20% relief on the £125 contribution.
As Warren buffett thinks we should buy and hold index funds for 30 years to get a returns 10%. I m putting my investment on pension. PENSION WIN
Index funds have definitely served people very well over the long term, and tax relief from pensions can improve returns even further 👍🏼
so my mortgage is nearly paid I will have just turned 46 when it is, so with the money I was paying into the mortgage I was thinking of doing an ISA but watching this id be better off putting it into my scary sacrifice pension, thing is everyone I speak to say you should diversify with your money when saving for retirement 🤔
Yes, diversification is good. Defining your goals and identifying the most suitable and highest probability strategies to reach them is the most important thing though.
I am luck i have a good BTL income so i use SIPP as an IHT vehicle I will take tax free cash to spend but my funds will be passed on to son and grandchildren and I will always be a 40% tax payer so I want to fund up to age 75 I am lucky I have never really used pensions so I dont think i will breach the fund limit of around a million we are all different
Yes absolutely. Pensions can be highly efficient if used as IHT vehicles as opposed to income vehicles. ISAs can be exempt from IHT if the assets held qualify for Business Relief, but that does require a specific type of investment strategy.
Is inflation a factor here in regards to when you are taxed? e.g. does being taxed in the future have a bigger impact overall, whereas would the amount tax you’d pay prior to contributing to an ISA be ‘eroded’ by inflation? Not sure if that makes any sense or not!
I think I know what you’re driving at Paul. I’d say inflation, growth and taxation are always relative to each other… costs increase, investments increase and tax bands increase, so there is a harmony of sorts.
@@chrisbourne-retirementplanner thanks Chris - that makes sense
I think it is quite simple. Pay into your pension the maximum amount you can get work contributions on. The rest goes into an ISA. This is unless you are fortunate enough to trouble the tax man with ultra high contributions.
Yes pensions and ISAs alone will meet 99% of people’s retirement needs.
Hi Chris ,very much enjoy your videos and I’m subscribed to your channel. I am 64 and due to retire in 3 yrs and have come in to a lump sum of £80k due to my portion of the sale of my family home and after paying HMRC and want to know the most tax efficient of saving this money. My Personal pension is with SJP,I have a frozen pension with Zurich and a 5% defined contract pension with my employer with Scott Widows. I have no debt and have just pd £5k to HMRC to max my partners NIC to ensure she receives her max State Pension when it become due next year.
My question is do I pay a lump sum in to my pension and benefit from Govt tax benefits when paying in and the additional tax saving of 25% of a portion of it Tax Free when I withdraw it, or, do I maximise with an isa for me an my partner and keep the rest in bank a/c with 5% + interest rates. My thinking here is that with stock mkts so volatile I’d be drawing from my pension pots at a time when they’re on a downward trajectory. Would appreciate your advice about this.
Hi Graham. I’m afraid I can’t provide specific advice on here. This is the type of thing you’d need to speak to an adviser about directly to work through the different scenarios.
I could really use that modeller, I have a DB pension. And trying to figure out if it is better to pay extra in to my pension, or increase in to s&s ISA. I’m 40, and want to retire at 60 and need to plug a gap between 60-65 due to the short fall in retiring early 😵💫
It sounds like you could benefit from financial advice. I am planning on creating a course though which will give people access to a customer version of the cash flow software. Stay tuned because I’ll no doubt announce it in future videos!
Better to invest in a pension, take £20K 25% tax free lumps to fund an IAS after age 55. If you have a £500K Pension then you can fund an ISA with £20K a year for over 6 years with the £125k that would be tax free. This will work for me as my whole tax allowance is already taken up by a DB pension in payment.
Yes that can be a good strategy for some people. There are inheritance tax implications for some to think about though.
This is not correct, Compound interest calculators demonstrate you end up with the same result if you pay your ISA into the pension before retirement to benefit from the 25% increase in value and 25% tax free lump sum withdrawal. However with the ISA you can afford to pay in more as you don't need to have so many insurances for lack of quick access capital so ISA then into pension can end up with more. Additionaly paying in later on means you get relief for your tax bracket, typically people earn more in later years so if they move their isa into pension later they can receive 40% relief on money they earnt at 20% tax
Hi Dan. It is correct. Your statement is wrong in numerous ways… 1. People may ‘normally’ earn more as they get older, but that’s certainly not guaranteed to be the case, and people may not necessarily move into a higher tax bracket even if their earnings are higher. 2. Deferring means missing out on potentially many years of compound growth on the tax relief, which won’t be recovered. 3. It may not be possible to pay the deferred years into a pension in one or even two attempts due to annual allowance restrictions.
Now run the simulation again with the assumptions of using a company like NEST that take 1.8% of everything contributed and then charge a 0.3% platform fee compared to using something like an investengine or trading 212 ISA that have no fees other than the specific fund fees (which are very low if using something like a vanguard fund)
Also consider the fact that they don't even let you invest in all equities, even the highest risk fund has bonds and stuff...
Assuming the returns will be the same is just flat incorrect
I don’t see how Nest is relevant to this sort of comparison… Nest is a workplace pension scheme, and is therefore chosen by your employer. There is no such thing as a company ISA contribution, so that comparison is totally irrelevant. If you were making a free choice over where to invest money, you would have the luxury of choosing your pension provider just as you would your ISA. Assuming that the returns will be the same is therefore perfectly reasonable, because with free choice of pension wrapper you have freedom of fund universe. Where your argument is even more flawed though, is that you seem to have failed to grasp the basic maths… a basic rate taxpayer would receive a 20% uplift on their contribution. A higher rate or additional rate taxpayer 40/45… Therefore, even if the ISA platform was free and the pension platform cost you 0.30% a year, you would still be up at least 20% on every pension contribution, and it would take a much heftier charge to make a dent in that differential.
@@chrisbourne-retirementplannerAh, i missed the idea that you would be investing into a personal pension as opposed to increasing workplace pension contributions. That does make a lot more sense and does invalidate my arguement. I'm just clearly blinded by anger at the rip off that workplace pensions are but shouldn't hold that against the clearly great pension benifits
I’ve got both i max out my isa and put £1000 a month in pension. The only reason I favour isa is having access to it should it all go pear shaped in my job which is currently safe but that could change. I’m a higher rate tax payer. So isa maxed out first then pension.
That may change in the future.
Hi Pat. Yes the earlier access to ISAs will always be a potential advantage. From a tax perspective you’ll benefit more from pension contributions, but they’re not very useful as emergency funds!
I think this the exact position I'm in. I'm a higher rate tax payer and I've been advised to invest in company pension and ISA. I currently invest 7% in my pension and my employer invests 9% (rising to 12% in two years). So how much should I be investing in my ISA ? I was advised a £1000 a month in both.
@@garethwilliams4467 Depends on your age I guess, and if you would need access to the money. I have company pension and private SIPP. Since I posted this above I have started paying more into my pension to gain from the tax relief. I'm 54 now so have access to my Pension at 55. I intend to retire around 62 if it all goes to plan.
@@pataleno I'm 48. I guess I can't say for certain if I'll need access to the money in the future. I guess I would like to hedge my bets. In an ISA who manages your "stocks and shares" to make sure they are getting a good return ? If I open one with the bank do they do it.
@@garethwilliams4467 I have all mine with Vanguard both ISA and SIPP. There are others as well Invest Engine, Trading 212. keeping charges low is important. I prefer Vanguard as they are one of the longest and cheapest. Lots of videos comparing them all on youtube. Think Chris has some. Good Luck
If your good at stock selection you can easily outperform a pension
Why wouldn’t you hold the stocks within the pension? You’d then receive a guaranteed uplift in value on each purchase.
Good analysis, but also a pension Dies with you!
Hi William. No it’s the opposite! Pensions are probably the most efficient vehicles to pass assets to whoever you want upon death because they are not subject to inheritance tax and 100% of the value can be transferred to your nominated beneficiary/ies. The only way it will die with you is if you’ve purchased a single life annuity with no guaranteed income period or you’re in a defined benefit pension without a spouse. DB schemes have different rules on death benefits.
2% inflation as a baseline? We're at historical lows, even at 5%, and those figures are fiddled. People need at least 15% gains on their investments to stand still. Unless you know how to play the market, or own multiple properties, you're basically knackered. But you know that I guess.
15%?! 🤣🤣🤣🤣🤣 Well done for giving me a laugh. 2% is the long term inflation target for the BoE. They have seen no reason to adjust that. We’re not at historic lows by the way… most people’s views are based on the fact that proper inflation recording only began a hundred years or so ago. We had spells of high inflation in the 20th century, but historical analysis shows this to be anomalous and not the norm.
what do you mean by "pension will run out" ? I thought you bought an annuity with your pension and they paid your every month until death.
Hi Gareth. Yes that’s true if you purchase an annuity, but not if you utilise a flexible drawdown method like flexi-access drawdown or UFPLS. These withdrawal methods are far more common these days.
@@chrisbourne-retirementplanner Thanks for your help. so I'm planning to open an stocks and shares ISA this week. I'm slowly working through the paperwork. It's projections are that if I contribute 120K over 10 years I should get 150K. Which minus charges is about a 3K yield per year. Is that true, that sounds like only growth of 2-3% ??? Or am I missing something
Spoiler alert - you need both
Yeah most people wouldn’t go too far wrong if all they held was an ISA and a pension.
If you do the 20% tax payer example manually you will find that IDAs and pensions are in fact equivalent. The difference, I suspect, is that your model assumes the pension withdrawals are taxed after the tax allowance is taken. In other words the first 12.5k is free of tax. But in the real world a state pension consumes most of the tax free allowance. So I think your example is misleading
Hi there. They are not equivalent… Pensions allow a 25% tax free lump sum withdrawal as well, so even if the personal allowance is exceeded the effective tax rate (assuming all basic rate) is 15% on partial crystallisation withdrawals. In addition, the state pension doesn’t start until 66 (rising to 67), whereas private pension withdrawals are available from 55 (rising to 57). There is therefore an opportunity to use the full personal allowance for withdrawals before the state pension kicks in. Even afterwards, a full state pension currently uses about 75% of the personal allowance, not all of it.
@@chrisbourne-retirementplanner Thank you for that clarification. Very useful. How do LISAS compare for a basic rate tax payer as a form of pension saving? You get a 20% uplift on the way in and 100% tax relief on the way out. So LISAS are better?.?
@@DK-oy6ee LISAs can be useful. You actually get 25% on the way in, but your contribution level is restricted to just £5k gross per annum. Also, you can't access them until 60 for retirement purposes, and higher and additional rate taxpayers still only receive 25% relief as opposed to 40% or 45% on pensions respectively.
What we know is that things will change over time. I reduced my pension contributions in my 30s to put the money into a pension which better provided for my family should I die early, the extra available cash I put into share options with my company, which a few years later funded the kids through university and a deposit on a rental property. When they stopped offering options I then upped my ISA and pension contributions allowing me to retire at 59. My pension pot is close to the lifetime allowance, ISA is growing in Vanguard ETFs, a Vanguard general account provides capital gains each year within the annual tax free allowance, rental property is still let, and there is enough in a cash account to live comfortably on for a couple of years. Any one of these could go wrong, due to market conditions or changing legislation, but most will continue to provide funds for myself and a nest egg in future for the family. Diversification is great if you can afford it. Now if only COVID would go away and allow me to enjoy it all.
You planted the seeds and now you’re harvesting the benefits of your efforts.
Ive been Supping Cocktail's on a beach for the last 14 years ,why haven't you ???? I am 50 now and not a financial advisor . I went see a financial advisor 25 years ago , he worked full time in a Shitty little office and had a shit car ??? Why is he advising me??? Anyway I am sure you're different . Thanks for the Video .
I agree that people should only take financial advice from those who are financially successful themselves. Never trust a broke financial adviser.
@@chrisbourne-retirementplanner Just watching another of your videos ,thanks . Your good.
So you retired at 36, that’s unbelievable, well done
Pension 100% due to the tax relief.
Yeah in most cases this will lead to it winning Ryan. It’s generally when high taxable income from other sources, such as rental income or DB schemes for example, make tax free income sources such as ISAs potentially preferable.
I think pensions win unless you want the option to retire early and will be a high rate tax payer in retirement. I've also been thinking about reclaiming my income tax (and recycling that over the years) as I'm happy with my current pension contributions. An SEIS/EIS/VCT comparison would be amazing and much appreciated! :)