Is it worth having a pension?

[G37y]

62 year old self employed standard rate tax payer, paying some CGT most years, putting maximum into ISA every year, with no pension. Is it worth opening one? Will the charges and hassle outweigh the benefits? I intend to retire in a 2 to 4 years time and MAY need some or even all of my non ISA portfolio to purchase more real estate. Could I invest in a pension which would give me the flexibility of a complete withdrawal at that point if required while still reaping the tax advantages in the short term? I am particularly aware of the tax treatment of US stock held within a ISA paying 15pct withholding tax even after filling in a W8Ben form and that a SIPP would alleviate that cost.

[Urbandreamer]

I'm no expert.

However it is worth remembering that 25% of a pension is currently free from tax. And that since pension freedom was introduced you can simply regard the rest as a sum upon which you may have to pay income tax upon when you take it.

Note the word may. If your only form of taxable income at that point is the state pension* then you could top that up to the level of the personal allowance without paying income tax at all. For most people the income tax is entirely dealt with at source and certainly is for those with no other taxable income.

Finally there is the size of the pot. If you put £80 in an ISA and have no growth, you have £80. If you put £80 in a pension and have no growth, you have £100. Because the government tops it up by the standard income tax paid and allows you to reclaim the rest of the income tax.

The above all seem good reasons to use a pension, even if for only a very short time.

Some other points and thoughts.

if you choose to withdraw the total pension all at once you might pay significant income tax as you might put yourself in a higher income tax band. Something to be aware of. That way you could time things to reduce the tax, ie do it over two or more tax years. It's also easier for tax purposes if you take regular amounts instead of lump sums.

Pensions do cost more than ISA's, but can be quite cheap on the scale of things if you have a modest pot. This is because many charge fixed fees for the administration.

*Check that you have been paying the right NI "stamp". If you have not, then you have dramatically impacted your state pension rights. Check that out. You need a certain minimum amount of qualifying payments to get anything. However above that it may be well worth correcting any NI mistaken choices and paying the last 3 years correct NI. This could be worth significant amounts.

[Urbandreamer]

Some further thoughts.

I've checked my records and the SIPP that I started 5 years ago has become a significant sum. This is in part due to my ability to fund it which I do by not funding my ISA's and recycling some of my ISA dividends into the SIPP (I have taxable income to cover the contributions). Though it has also benefited from significant growth.

I can run down the ISA's because I don't plan on funding large purchases and the money effectively moves out of my estate for IHT.

Which brings me back to the statement that you wish to purchase more real estate.

Some forms of real estate can be purchased and held within a pension fund (ie a SIPP). There are less providers willing to offer such SIPP's and they charge a fair amount more. However it may be an option if you wanted the real estate for comercial reasons rather than to live in or as gifts for any children.

http://alternativeinvestmentcoach.com/r ... rty-rules/

[mc2fool]

62 year old self employed standard rate tax payer, paying some CGT most years, putting maximum into ISA every year, with no pension. Is it worth opening one? Will the charges and hassle outweigh the benefits? I intend to retire in a 2 to 4 years time and MAY need some or even all of my non ISA portfolio to purchase more real estate. Could I invest in a pension which would give me the flexibility of a complete withdrawal at that point if required while still reaping the tax advantages in the short term?

I take it you are aware that the most you can put into a SIPP each year (and get the +25% boost on the way in) is 100% of your earnings, up to £40K?

If you put £80 in an ISA and have no growth, you have £80. If you put £80 in a pension and have no growth, you have £100. Because the government tops it up by the standard income tax paid and allows you to reclaim the rest of the income tax.

True, but if you are a BRT on withdrawing it you'd get 25% tax free then the rest taxed at 20%, so you'd get £85 back. Still better than nowt of course...

[Urbandreamer]

If you put £80 in an ISA and have no growth, you have £80. If you put £80 in a pension and have no growth, you have £100. Because the government tops it up by the standard income tax paid and allows you to reclaim the rest of the income tax.

True, but if you are a BRT on withdrawing it you'd get 25% tax free then the rest taxed at 20%, so you'd get £85 back. Still better than nowt of course...

Indeed. However do you, or in this case the OP, need to be a BRT? I intend not to be between the age that I retire and 67 when I shall become one once again. It is possible that I could even avoid that, but it isn't worth my effort, the costs or the risks.

Paying income tax is based upon taxable income. Money from ISA's and VCT' dividends doesn't count. A few years ago as a laugh the magazeen Money Observer calculated that, with the capital, you could easily have a huge income and not pay income tax. The portfolio was unsuitable for anyone, it's sole remit was to effect income tax without consideration of investment risk.

We know next to nothing about the OP. It is possible the OP is a landlord, as CGT and real estate are mentioned. In which case there would probably be taxible income in retirment. However we don't know that. We are not sure that they will get the state pension nor do we know that they don't have any VCT's. I certainly can't claim to know that he will not be or is not a higher rate tax payer and will be in the BRT band when he retires.

[mc2fool]

We know next to nothing about the OP.

Indeed, and one of the things we don't know is how much they know. So, while not disagreeing with anything you've said, I just wanted to point out that common case.

[GrandOiseau]

Bit puzzled by the OPs question.

If you are going to retire (says in 2 to 4 years time) you need an income. That income is driven by a pension pot and a vehicle to invest/withdraw from that pot.

The OP talks about "ISA" and "non ISA portfolio". Cab we take it this is the pension pot? Are you asking how to convert this to an income in retirement?

Maybe I missed something...?

[Urbandreamer]

Bit puzzled by the OPs question.

If you are going to retire (says in 2 to 4 years time) you need an income. That income is driven by a pension pot and a vehicle to invest/withdraw from that pot.

The OP talks about "ISA" and "non ISA portfolio". Cab we take it this is the pension pot? Are you asking how to convert this to an income in retirement?

Maybe I missed something...?

Possibly you are.

After all, despite the comment about "the common case", there is no requirement that everyone falls into the common case.

Indeed it use to be the case that the self employed could not HAVE a pension, other than the state pension. Personal pension plans were introduced by the 1988 finance act. When the OP was 30.
Obviously people had to plan for their old age before that date, or even before the state pension. One common method was to become a landlord, either of pubs or rented accomedation. Alternatively you could own farmland and rent it out rather than work it. Finally you could just collect National savings certificates or Gilts. Just because they invested for their old age, didn't mean that they ever had a pension.

Pension has quite specific meanings and I'm quite willing to accept that the OP doesn't have a pension.

Try this definition, remembering that the OP is self-employed.
https://www.collinsdictionary.com/dicti ... sh/pension

[Alaric]

Indeed it use to be the case that the self employed could not HAVE a pension, other than the state pension. Personal pension plans were introduced by the 1988 finance act.

i rather think pension plans for the self employed have been around since 1956. What changed in 1988 was the notion that someone employed, even with access to an employer sponsored scheme, could also take out a Personal Pension.

https://api.parliament.uk/historic-hans ... f-the-self

[G37y]

Thank you for the replies regarding pensions, the sector seems to thrive on confusion marketing, what I was hoping to achieve was a relatively small pension pot which I could access in conjunction with my non ISA portfolio to buy more land if any ever came available. As a farmer rather perversely if I retired now and let out my farm I would actually receive more in rent than I currently make in profit. I do not expect to ever need the money I currently have invested to live on. I was rather hoping that if I had a small amount invested in a SIPP that I may be able to access 100% without penalty not just a 25% lump sum if I ever needed it, Is that possible? If so how small would the pot have to be?

[Alaric]

I was rather hoping that if I had a small amount invested in a SIPP that I may be able to access 100% without penalty not just a 25% lump sum if I ever needed it, Is that possible? If so how small would the pot have to be?

If you want to avoid paying tax on the withdrawals, you would have to keep the amount withdrawn in excess of 25% below any remaining personal allowance. It's possible to withdraw 100% from a SIPP, but HMRC expect their cut of the proceeds.

[Urbandreamer]

Thank you for the replies regarding pensions, the sector seems to thrive on confusion marketing, what I was hoping to achieve was a relatively small pension pot which I could access in conjunction with my non ISA portfolio to buy more land if any ever came available.

IF it were a DB pension, that is a final salary pension, you could take pots worth under £30k as a tax free lump sum. That's not the case with DC, money purchase, schemes such as you could easily start. I think that the limit there is £10k, but it's messy and looks complicated to me. As I said, I'm not an expert.

https://www.pensionsadvisoryservice.org ... h-lump-sum

Ps, thanks for correcting my date when the self-employed became able to have a pension. My point remains that a pension is something quite specific and not just any means of support in later life.

[taken2often]

I think at your age it is to late for pensions as a low rate tax payer. In fact as a low taxpayer I think ISA is the best route, but more prone to political change. You end up paying dearly for your initial 20% tax benefit as you end up paying tax on the other 80% of your own money. Pensions tend to work for high rate tax payers.

With regards to US investing you would not have a significant sum to invest in a SIPP and there is high FX charges on the purchase/sales and on dividends coming in.

I sold all my ISA US stocks. 15% tax is still tax so not worth it.

If placed side by side over say a 30 year period I think the ISA would out perform a pension. Think about it a tax free income for say 20 years of retirement and total control of your funds. The IHT is the only problem unless you get married then it can be transferred, so no cut in pension.

[Urbandreamer]

If placed side by side over say a 30 year period I think the ISA would out perform a pension.

There are calculations that show this not to be the case for a standard ISA over a 40 year period, all things being equal. The reason is that growth over that time happens on a larger sum within the pension than in the ISA*. Hence better compounding. This is even true for BRT's, though the outperformance is slight in that case.

https://www.ii.co.uk/analysis-commentar ... l-ii510812

That said, I personally think that things are never equal. At the time that I started my "ISA", well actually it was a PEP, other than the tax free lump sum, personal pensions or free standing additional contributions had to be used to pay for an annuety. The state loves to fiddle with the pension rules and you simply can't predict what things will be like in 30 or 40 years time.

*The lifetime ISA acts like a pension for younger BRT's with several differences. Basically it's NOT a pension so ISA rather than pension limits and rules apply. You can use it to buy your first house. You also can't access the money as early except to buy that first house without very hefty penalties.

[taken2often]

Thanks for responding. Your points are valid. The problem is always the unknown and the choices in investment, how much is being creamed out in charges. I was the same started with PEPs. No idea how I put in, but a lot less than the value now. Not great growth because I have invested for income
so I no linger bother about the capital sum only the growing income. Natural yield at the moment is 4.85% which is very good at this time.

I feel that the loss of tax compounding over the years, may balance out due to the tax on the greater sum in the pension depending on how long you live. The fact that you can pass on a ISA to a Spouse is significant.

[XFool]

If placed side by side over say a 30 year period I think the ISA would out perform a pension.

There are calculations that show this not to be the case for a standard ISA over a 40 year period, all things being equal. The reason is that growth over that time happens on a larger sum within the pension than in the ISA*. Hence better compounding.

May I stick my oar in here? (!)

This notion of "better compounding" is false, IMO. I remember seeing this notion yonks ago in the time of PEPS. One day I decided to try and understand it using simple financial equations as models (also comparing PEPS to Pensions). I decided it was (polite) nonsense - likely used as a selling point by some people selling PEPS, or simply a misunderstanding.

Briefly: Compounding is compounding. It works the same way on £1 as it does on on £1,000,000. In the old days, before PCs, and in financial textbooks, you could see various financial tables laid out. Mortgage schedules, compounding tables, annuity tables. They were the computed values of the related financial equation, so you could use one to say work out the final amount of regular savings at a given interest rate. They were either given as a real number or scaled to say £1000. The point is, the compounding values are independent of the amount of money, which is simply applied as a scaling factor. Your 10x £100 is somebody elses 10x £1,000.

Mind you - this is neither here nor there as to whether an ISA or Pension is "better"! I leave that to others to decide for themselves.

[Lootman]

I think at your age it is to late for pensions as a low rate tax payer. In fact as a low taxpayer I think ISA is the best route, but more prone to political change. You end up paying dearly for your initial 20% tax benefit as you end up paying tax on the other 80% of your own money. Pensions tend to work for high rate tax payers.

I am not sure I agree that ISAs are more prone to political change. In fact in 34 years the rules have become more flexible and generous. It is unlikely that any future change to ISAs would be retrospective, and so the worst case is that at some point in time they convert to a taxable account. But I doubt that would happen as it would greatly complicate tax reporting for millions, and therefore the workload for HMRC.

And of course pensions are constantly being fiddled with by the government, which cannot resist meddling with any form of captive funds.

With regards to US investing you would not have a significant sum to invest in a SIPP and there is high FX charges on the purchase/sales and on dividends coming in. I sold all my ISA US stocks. 15% tax is still tax so not worth it.

It is 15% of dividends only, with an exemption for retirement accounts. The real point of US investing is for growth and there the tax situation is neutral. Sure there are some FX frictional costs but that can be managed.

If placed side by side over say a 30 year period I think the ISA would out perform a pension. Think about it a tax free income for say 20 years of retirement and total control of your funds. The IHT is the only problem unless you get married then it can be transferred, so no cut in pension.

I have always taken the view that ISAs are the better choice. I do have three pension plans, all in deferral mode right now, but that was because they were basically free money from my employer on a "use it or lose it" basis. Otherwise I made a conscious choice of PEPs and ISAs and, right now, that is a £800,000 tax-free personal pot.

And another key benefit is that it can be instantly cashed in tax-free at any time or age, and the capital deployed or relocated.

[ursaminortaur]

If placed side by side over say a 30 year period I think the ISA would out perform a pension.

There are calculations that show this not to be the case for a standard ISA over a 40 year period, all things being equal. The reason is that growth over that time happens on a larger sum within the pension than in the ISA*. Hence better compounding.

May I stick my oar in here? (!)

This notion of "better compounding" is false, IMO. I remember seeing this notion yonks ago in the time of PEPS. One day I decided to try and understand it using simple financial equations as models (also comparing PEPS to Pensions). I decided it was (polite) nonsense - likely used as a selling point by some people selling PEPS, or simply a misunderstanding.

Briefly: Compounding is compounding. It works the same way on £1 as it does on on £1,000,000. In the old days, before PCs, and in financial textbooks, you could see various financial tables laid out. Mortgage schedules, compounding tables, annuity tables. They were the computed values of the related financial equation, so you could use one to say work out the final amount of regular savings at a given interest rate. They were either given as a real number or scaled to say £1000. The point is, the compounding values are independent of the amount of money, which is simply applied as a scaling factor. Your 10x £100 is somebody elses 10x £1,000.

Mind you - this is neither here nor there as to whether an ISA or Pension is "better"! I leave that to others to decide for themselves.

Yes the compounding makes no difference between an ISA and a SIPP (or other DC pension) as if you are paying in to a pension at the same tax rate as withdrawing the uplift (and its compounding) are exactly cancelled out.

The advantages of a pension come from the

1) 25% tax free lump sum (which means that some of the uplift on contributions and the compounding of that is not wiped out when withdrawing).
2) You get a similar advantage if you can arrange to get a higher uplift on contributions due to being in a higher tax band when contributing to the pension than when you are withdrawing (ie you are at the time of withdrawal in a lower tax band)
3) For an employee you can get your employer to pay into an occupational pension whereas they cannot contribute to an ISA.

The disadvantage of a pension is that you cannot withdraw anything before age 55 (likely to raise to age 57 shortly) and if older than that and you withdraw anything more than the tax free lump sum then further contributions are severely limited.
Whereas with an ISA you can withdraw whatever you wish at any time and also later still contribute upto the standard ISA limit. (I'm ignoring for these purposes the LISA ISA variant with its various limitations).

[Lootman]

For an employee you can get your employer to pay into an occupational pension whereas they cannot contribute to an ISA.

The US has what i think is a wonderful solution to this and other related dilemmas. Employer pension plans come in two forms. One is like the UK system where there is tax relief on the way in but full taxation as income on the way out. (Paying income tax on what is really a capital gain is really annoying).

But there is also an option which is more like a UK ISA: no tax relief on the way in but tax-free on the way out. The latter is called a Roth plan after William Roth, who was the GOP senator for Delaware for much of the same time that Joe Biden was the other one.

The same choice comes with individual US pension plans, called IRAs, which come both in a before tax and after tax form (Traditional versus Roth, in their lingo).

Moreover a traditional plan can be converted at any time to a Roth plan, although there is tax on that. The reverse is not possible as far as I know.

[ursaminortaur]

For an employee you can get your employer to pay into an occupational pension whereas they cannot contribute to an ISA.

The US has what i think is a wonderful solution to this and other related dilemmas. Employer pension plans come in two forms. One is like the UK system where there is tax relief on the way in but full taxation as income on the way out. (Paying income tax on what is really a capital gain is really annoying).

But there is also an option which is more like a UK ISA: no tax relief on the way in but tax-free on the way out. The latter is called a Roth plan after William Roth, who was the GOP senator for Delaware for much of the same time that Joe Biden was the other one.

The same choice comes with individual US pension plans, called IRAs, which come both in a before tax and after tax form (Traditional versus Roth, in their lingo).

Moreover a traditional plan can be converted at any time to a Roth plan, although there is tax on that. The reverse is not possible as far as I know.

I think that is what Osborne hoped the LISA ISA variant would turn into eventually. One problem though is that a lot of people would be worried that the no tax on withdrawal might suddenly disappear in the future under a different government.