Pensions v ISAsFebruary 22nd, 2013 • 2 Comments
Face it. You are all going to get old and die. The only dilemma you have is how long you are going to have to live with no money before you die.
Of course, you will have your State Pension to rely on, but as we all know, that’s not even going to come close to paying your heating bill by the time you’re in your dotage. Recent figures estimated that you will need to add a pension pot of £270,000 to the state offering to give you a living wage of around £14,400 (in today’s terms).
The Government are still trying to get people to think about the future and save all the spare cash they’ve got for their twilight years. While the occupational pension is on the decline (anyone under 40 with a final salary pension scheme is a very smug person indeed), ways to save into a personal pension are getting easier all the time. Just think of those jolly adverts, reminding you that we’re in the new age of workplace pensions, where someone will start nicking some of your wages to save for your retirement whether you like it or not.
Now, forward planning is rarely a bad thing, and it makes economic sense to put some spare cash away when you have it, to save for the times when you won’t have any. Of course, the operative assumption here is that you have any spare cash. But that aside, are pensions the best vehicle for retirement saving?
The Government would have you believe that, and if you are a higher or additional rate taxpayer looking to generate a generous pot, the tax relief on pensions may mean they are the clear choice. But the biggest downside to a pension is that you are not allowed to access your money until a Government-specified date. And they might just decide to change that date, like changing the minimum pension age from 50 up to 55, and there’s naff all you can do about it.
Investment ISAs have often been put forward as a possible alternative to personal pensions, particularly if, like many people, the maximum pensions saving you could afford would be £752* a month or less. So in case you were wondering, we drew up a quick table comparing ISAs and pensions so you can see for yourself what might suit you better.
* ISA annual limit of £11,280 divided by 12 months = £940, less 20% tax relief = equivalent pension contribution for a £940 monthly investment.
** you will die after retirement. Or before.
I think it is a bad idea to recommend ISA’s for saving.
At the moment the rates for ISA’s are terrible and also if someone is not a savvy saver then they might spend the money before they retire. so Pensions are the only sensible way.
This living wage figure of £14,400… does that include rent/mortgage payments?
Obviously most people would think it ideal to have their mortgage paid off before they retire. But as a (relatively) young person – that is, a member of the generation who will probably never be able to afford to buy a house – should I be setting aside more? Or should I sacrifice pension payments to get on the property ladder?