Use an ISA or pension for retiement?
|Retirement | Stakeholder Pension
Asked by Nickgejo, submitted
23 February 2012.
I am looking at a stakeholder pension but need advice to see if it is the best path to follow.
I am 36 and work for the civil service and have a civil service pension, however my retirement age has been changed to at least 67 (which could increase further) and I have some health problems, the treatment, for one of which could reduce my lifespan/ affect my ability or want tto work to my new retirement age.
I will be buying a property next year as a first time buyer and my savings to date are itnedned as the 10% deposit on a modest flat. I will have £100 set aside to save each month after buying my property (after all bills, civil service conttibutions and modest savings in a long bond etc).
Is it worth investing in a stakeholder pension (roughly £20 p.a. to start with) alongside putting £50 in a stocks/shares ISA each month and £25 in a cash ISA or would I be better off investing more in a stocks and shares ISA or roughyl half/half in a Cash Isa and stocks and shares ISA.
My Dad was a banker/financial adviser and I have spoken to him on this; he thinks ISAs are better as they are more flexible, especially given the charges for pensions, but I would appreciate some impartial advice.
Answered by Justin on 02 August 2012
There's no doubt ISAs are more flexible, you can access the money anytime, whereas pensions are tied up until at least age 55 and at retirement the money must be used to provide an income for life - although you can take a quarter of the fund as tax-free cash.
Tax benefits are the other big consideration. Pensions benefit upfront with tax relief on contributions (when a basic rate taxpayer puts in £80 it's 'grossed up' to £100.) whereas ISAs offer an income that's not subject to tax. Assuming tax rates stay the same these two benefits are effectively equal (see an example on our ISAs page). Although, if you become a non-taxpayer in retirement then your income won't be taxed anyway, making the ISA less appealing. The ability to take a quarter of the pension fund as a tax-free lump might also give pensions the edge in the tax efficiency stakes.
But perhaps the biggest consideration here is your health - if you don't expect to live that long past retirement age then a pension will likely prove poor value. The usual way to provide pension retirement income is to buy an annuity, i.e. you swap your pension fund for an agreed income for life. This is basically a gamble on how long you'll live - those living long lives will do well, those with shorter lives less so. It's possible to build in an income for a surviving spouse when buying the annuity, but this will reduce the income you receive.
Given the uncertainty over your health, your suggestion to save the majority into ISAs and the balance into a pension makes perfect sense. As for the split between stocks & shares and cash within ISAs, it's really down to how much risk you're comfortable taking and whether you'll need extra cash for furniture etc when you buy a home. In the current volatile climate a 50/50 split might be prudent, or more still in cash if you want to boost your house purchase fund. You can always transfer the cash ISA into a stocks & shares later on if you wish.
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