Pension VS ISA

[zomex]

Hello all,

This has been something that's been bothering me for quite some time.

I have a LTD company of which I pay into a SIPP. There is no employer match as I am the employer. I will be honest and say that I do not like pensions but I was convinced 13 years ago to open one. The results have been below average return as when I started I stuck to the default low risk investments. As I've learned a lot over many years, 2 years ago I invested in my own choices.

Looking back I wish instead of the pension I used my personal money to put it in a ISA instead. I suppose I'm posting this to see if I am insane or if I have a point.

Pension (in my case LTD - no company match).

Pros:
- No tax on the way in. Save on Income tax and potentially dividend tax

Cons:
- Potentially taxed on the way out
- High fees (current mainstream service which I plan to move soon)
- Can't access money until x years old. Rules can and will change by the time I'm close to retirement age.
- Money is invested when it has it's highest value and withdraw when it's at its lowest. Talking about inflation of course. The current rate is 3% which I honestly do not believe for a second. The true inflation rate is easily 10%+

ISA:

Pros:
- No tax on the way out
- Can access funds at anytime
- Low fees/more investment choices
- Control/freedom

Cons:
- Taxed on the way in as it's personal money. So would haves seen income and dividend tax.

Jack

 

[LPB 123]

Pension (in my case LTD - no company match).

Pros:
- No tax on the way in. Save on Income tax and potentially dividend tax

As well as the ISA route being on already taxed income, obviously the company is saving on corporation tax on all contributions on the SIPP route as they are an allowable expense.

Get your accountant and an IFA to have a meeting altogether so you can map your best route as it's likely probably a combination.

 

[pentel]

The choice of funds should be the same for both ISA and pension. Somewhere like interactive investor or AJ Bell offer the same funds / ETFs /shares / gilts for both. Costs are broadly similar as well. No need to be in a high fee pension fund if you are choosing your own investments.

 

[WaveJumper]

I too hate the pension con a lot of institutions making a great deal out of your money and giving very little in return, but that's a whole other story. In your position agree with above you need to sit down with your accountant and financial planners to make sure you are making the most out of the "system".

Yes ISA's are a great way to build up very sizeable portfolios if you know what you are doing investment wise and more importantly have the time to devote to them.

Like all things there's risk, Trading 212 is good for holding ISA's (keep an eye on Rachel Thieves who could be changing the rules in next budget) Interactive Investor are good for SIPP both have very easy to use platforms and their App's are great for keeping an eye on things when on the move.

Please DYOR

 

[DontAsk]

Come off it! where's the con?

I (and many people I know) have done very well out of pension investments managed by pension providers. Far better than I would ever have done by managing them myself.

 

[pentel]

I (and many people I know) have done very well out of pension investments managed by pension providers. Far better than I would ever have done by managing them myself.

I have done far better on my own than any of the pension providers I have used in the past following a very simple process. I ran parallel portfolios alongside them initially.

 

[zomex]

Thanks for the replies everyone.

Yes I forgot to mention another big pro of the pension which is tax relief on contributions. So it is a huge incentive to put money in a pension and on the surface it seems stupid not to. However, there are so many hidden draw backs to a pension. If an employer is matching I do think it's a no brainer. But in my situation with no match I personally believe the pros of a ISA over the long term outway the initial tax incentives of a pension.

As for my own investment ability I am very hands on and been very successful. As my business became more successful my biggest fear was wasting the blood sweat and tears I put in. By that I mean loosing the profits I was generating. So a good 10 years ago I starting putting a lot of time into learning about money, investing, wealth protection etc I am very knowledgeable in all areas and have a very diversified portfolio.

I disagree about speaking to a professional. There is really no need. The information is out there, I know the differences. It comes down to my own personal situation and what I value less vs more.

My pension is with Aviva. 13 years ago a lot of the SIPP options today did not exist. That's why the fees are high and investment options limited.

My ISA is with Trading 212. As soon as they introduce a SIPP (there are talks about it) I will be moving from Aviva.

 

[zomex]

Come off it! where's the con?

I (and many people I know) have done very well out of pension investments managed by pension providers. Far better than I would ever have done by managing them myself.

And that is the exact point of a pension. It's perfect if you have no interest or time to manage your own money a pension is a solution to that. It's also vital for the majority of people who cannot save money.

If however you do have time, energy, discipline, knowledge you can certainly do a better job than a pension provider. Keep in mind most pension providers such as Aviva in my example default to very poor investments. bonds, UK stocks (significantly outperformed by US stocks).

I've got multiple different types of investments. All of them have performed significantly better than my pension has.

For anyone reading this who's young. Learn from me now 34, open a stocks and shares ISA as soon as you can.

 

[DWS]

Thanks for the replies everyone.

Yes I forgot to mention another big pro of the pension which is tax relief on contributions. So it is a huge incentive to put money in a pension and on the surface it seems stupid not to. However, there are so many hidden draw backs to a pension. If an employer is matching I do think it's a no brainer. But in my situation with no match I personally believe the pros of a ISA over the long term outway the initial tax incentives of a pension.

As for my own investment ability I am very hands on and been very successful. As my business became more successful my biggest fear was wasting the blood sweat and tears I put in. By that I mean loosing the profits I was generating. So a good 10 years ago I starting putting a lot of time into learning about money, investing, wealth protection etc I am very knowledgeable in all areas and have a very diversified portfolio.

I disagree about speaking to a professional. There is really no need. The information is out there, I know the differences. It comes down to my own personal situation and what I value less vs more.

My pension is with Aviva. 13 years ago a lot of the SIPP options today did not exist. That's why the fees are high and investment options limited.

My ISA is with Trading 212. As soon as they introduce a SIPP (there are talks about it) I will be moving from Aviva.

But if you are a Director of your own Ltd Co why would you not pay Employers contributions into your pension, no need to match what you do personally just pay straight in and get relief on Corporation Tax.
Always consider anti avoidance rules of course, but if part of your remuneration then should be no problem.

 

[zomex]

But if you are a Director of your own Ltd Co why would you not pay Employers contributions into your pension, no need to match what you do personally just pay straight in and get relief on Corporation Tax.
Always consider anti avoidance rules of course, but if part of your remuneration then should be no problem.

That's what I've been doing for 13 years. The point of this thread is to highlight that if I could go back and choose Pension or ISA I would have chosen ISA.

That's my personal take based on my own situation. There's no right or wrong but for me I value the pros of a ISA more than the pros of a Pension.

Also let's be honest. Another solution is to do both which is what I am currently doing.

 

[UKSBD]

A lot depends on your pension scheme too.
My daughter has a NHS pension scheme where they contribute nearly 24% of earnings.

 

[DontAsk]

There is no employer match as I am the employer.

But in my situation with no match I

But if you are a Director of your own Ltd Co why would you not pay Employers contributions into your pension,

That's what I've been doing for 13 years.

No you haven't. You have said twice you are not making employer contributions. You seem to be confused and/or missing the point.

You can be an employee of your Ltd and get tax relief on your personal contributions. The company can make matching employer contributions and save Corporation tax. Obviously, consider your individual circumstances personal and company), but it could be a no-brainer win-win situation.

 

[zomex]

No you haven't. You have said twice you are not making employer contributions. You seem to be confused and/or missing the point.

You can be an employee of your Ltd and get tax relief on your personal contributions. The company can make matching employer contributions and save Corporation tax. Obviously, consider your individual circumstances personal and company), but it could be a no-brainer win-win situation.

Sorry I understand what you mean now.

Yes, I am not adding personal contributions.

To me the tax incentives as great as they are don't out-weigh the negatives of a pension vs an ISA. I'm going to be focusing on my ISA going forward but I will keep the pension as is with nothing to loose.

 

[zomex]

A lot depends on your pension scheme too.
My daughter has a NHS pension scheme where they contribute nearly 24% of earnings.

Absolutely agree

 

[Daybooks]

No you haven't. You have said twice you are not making employer contributions. You seem to be confused and/or missing the point.

You can be an employee of your Ltd and get tax relief on your personal contributions. The company can make matching employer contributions and save Corporation tax. Obviously, consider your individual circumstances personal and company), but it could be a no-brainer win-win situation.

The devil is always in the detail. Well done for your perseverance.
Makes you wonder….

 

[NortonBishop]

The true inflation rate is easily 10%+

If you really believe that "the true inflation rate is easily 10%+" then you'd be better off buying now whatever it is that you think goes up 10% every year

 

[pentel]

That's my personal take based on my own situation. There's no right or wrong but for me I value the pros of a ISA more than the pros of a Pension.

I am a lot older than you and used to feel the same way, went through a period of feeling that pensions were the way to go but am now back in your court.

The difficulty of pensions is that once the money is in there is nothing you can do to mitigate changes of rules. Once the money is in the pension how much and when you can take any out is down to the government of the day who can change the rules at any point.

I have experienced major rule changes on a regular ( every 5-10 years) basis.

Governments, especially this one, cant resist any substantial fund that they can raid.

 

[WaveJumper]

Come off it! where's the con?

I (and many people I know) have done very well out of pension investments managed by pension providers. Far better than I would ever have done by managing them myself.

I am a lot older than you and used to feel the same way, went through a period of feeling that pensions were the way to go but am now back in your court.

The difficulty of pensions is that once the money is in there is nothing you can do to mitigate changes of rules. Once the money is in the pension how much and when you can take any out is down to the government of the day who can change the rules at any point.

I have experienced major rule changes on a regular ( every 5-10 years) basis.

Governments, especially this one, cant resist any substantial fund that they can raid.

Exactly its not really your money anymore, yes various methods of draw down, generally most will opt for a monthly income until they pass, maybe ongoing provision for the wife if she out lives you, which will mean a lower monthly figure overall, then they keep your pot of money.

if (and I just pick a figure) they giving you say a 3% return on your money in handouts how much do you think they making on everyone's pots of cash?

Once you are invested in the "pension cycle" you can't really get out and for the vast majority they will be quite happy. Going it alone its not for everyone, but I would suggest before anyone jumps in look at the alternatives

I admit i trade for a living so possibly have a different view and its not for everyone, but I learnt a long time ago everyone who wanted to advise me about where i should save / invest for the future, wanted to take a bit for themselves ........and that was never going to happen

 

[DontAsk]

Exactly its not really your money anymore, yes various methods of draw down,

Which is very flexible.

generally most will opt for a monthly income until they pass, maybe ongoing provision for the wife if she out lives you, which will mean a lower monthly figure overall, then they keep your pot of money.

That's only if you buy an annuity.

According to Moneyweek the number of people using drawdown is almost 3.5x those purchasing annuities.

So, no, "most" will not opt for a monthly income where the provider gets to keep whatever is left of your money.

Drawdown is something very different, and the remaining fund can be passed to your descendants. The rules change at age 75 and, of course, could be changed, e.g., IHT may encompass these funds in the future.

 

[pentel]

e.g., IHT may encompass these funds in the future.

From 6 April 2027

 

[DontAsk]

From 6 April 2027

Yes, that's the current intention. It might change again. That's why I said "may"

 

[numbersrule]

Personal contributions get tax relief on the way in, maybe 20% or more if higher rate payer.
Employer contributions don't get tax relief on the way in but do reduce corporation tax by whatever your rate is, maybe 19%.
The Tax Man always gets his money every which way.
Do people really believe there is any clever way round this?

 

[zomex]

Personal contributions get tax relief on the way in, maybe 20% or more if higher rate payer.
Employer contributions don't get tax relief on the way in but do reduce corporation tax by whatever your rate is, maybe 19%.
The Tax Man always gets his money every which way.
Do people really believe there is any clever way round this?

It's a question of tax efficiency vs control.

You can give me all the tax relief you like but putting money into a pension where it's going to be locked away for many years, taxed on the way out and the government can and will constantly change the rules on it over time is not something that excites me.

I much prefer the ISA route with full control. Once it's in its tax free. If the government change the rules say in 10 years. I can pull my total money out with no tax at anytime. Sounds like a much better deal to me.