My pension v ISA dilemma
How to check out the tax benefit options when making the most of your nest egg
QI AM 50 and looking to increase my pension. My employer and I each pay nine per cent of my basic salary into my company pension plan, a defined contribution scheme. At the moment, I save £750 a month into an ISA as well. Would it be better for me to put this money into my pension plan direct from my pay and take advantage of the tax breaks? I am looking to boost my pension as I retire at 60. Any help would be appreciated.
AIF my answer to this question sounds a bit vague it’s only because the limited information in your question doesn’t allow me to give a full answer. I don’t mean that as a criticism but if I list some of the information that would have helped it might be useful for other readers when they write to me. You didn’t tell me how much you earn and therefore I don’t know how much is being paid into your pension on a monthly basis. Neither do I know how long your pension has been in force and how much it is projected to be worth when you get to 60. I don’t know whether this is your only pension or whether you have other benefits from previous employers.
This information would all be necessary in order to give you a full answer to your question.
But I do have enough information to give you some general tips and hopefully anyone else reading this answer will benefit from these tips as well.
Firstly, I would say that it is great to see you taking your pension planning seriously.
You and you employer are paying in 18 per cent of your salary and this is a healthy contribution. Of course, it could be that you were a late starter to pension payments and you need to be contributing at this level in order to produce a fund that will buy you the income you need when you get to 60.
If so, then again it’s great that you have recognised the need to be paying at this level.
Of course, it does beg another question.
What would you do if you get to 60 and discover that you don’t have enough in your pension fund to give you the income you need to live on?
You have a choice but it’s one that you need to make sooner
rather than later. You need to look at the projection you receive from your pension company and decide if the money you are paying in now, the 18 per cent of your salary, is sufficient to give you an adequate income.
If it’s not then you need to either decide to retire later than 60 or pay in more money now.
And this is where the £750 that you are currently paying into an ISA comes into play.
I said right at the beginning that your question has no right answer and no wrong answer.
What I meant by that is that you could invest in an ISA or a pension and have your cash invested in the same fund, it’s just the tax treatment of the two savings vehicles that will be different.
With an ISA, you don’t get tax relief on the money you pay in but you don’t pay tax when you take money out and you can do that whenever you like.
With a pension, you get tax relief when you pay money in and at your highest rate of tax – but you pay tax on most of the money you take out of a pension – also at your highest rate of tax.
So £1000 invested in an ISA will cost you £1000 but £1000 invested in a pension will be eligible for tax relief at your highest rate of tax. You can take money out of an ISA whenever you like but you need to be at least 55 before you can take money out of your pension, and this age is likely to increase in the future.
You mention that you could put money into your ISA direct from your pay but this only works for your pension, not your ISA.
So if you continue to pay £750 a month into your ISA it is most likely going to come from your own bank account and therefore will be paid after tax, whereas your pension contribution can be paid before tax, as explained above.