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Additional Pension Or ISA?

Discussion in 'Retirement' started by diddydave, Jan 8, 2020.

  1. diddydave

    diddydave Established commenter

    I've been asked a few times if Additional Pension is a good investment...as ever I don't feel qualified to give a definitive answer to this but offer my analysis for people to make up their own minds...

    To this end I have a spreadsheet that compares buying £1000 worth of additional pension against investing the cost in an ISA. For this comparison I set inflation at 2% and the ISA return at 1.7%. I took a person aged 54 buying NPA60 benefits with the family benefit included.

    A larger gap between inflation and the ISA interest rate favours the additional pension.

    The lump sum invested in the ISA would be 20% less than the cost of the Additional Pension due to tax-relief.

    https://docs.google.com/spreadsheets/d/1hbQc1RbI2B5ri27mKMBlIFuMhKwKp0yGfSG7knjxB2o/edit?usp=sharing

    These are my conclusions:
    • Investing in an ISA means you retain access to the lump sum, and your estate gets it when you die.
    • If you die the family benefits are half the annual amount and end when your beneficiary dies with no lump sum passed on
    • It took 3 years of additional pension benefits (60-63) to exceed the ISAs interest from 8 years (54-63)
    • It took until the age of 82 for the additional pension benefit to return more than the ISA (Initial Capital amount + Interest)
     
  2. diddydave

    diddydave Established commenter

    Missed one point
    • If you spend the ISA generated interest it will lower the future interest payments, this isn't the case with additional pension benefit payments.
     
  3. letap

    letap Occasional commenter

    A third option:

    A SIPP - for example with Vanguard:
    https://www.vanguardinvestor.co.uk/...t/get-ready-for-the-vanguard-personal-pension

    I believe the funds within the SIPP can be passed on and you retain the tax efficiency that you have with additional pension contribution within the teachers scheme.

    You could invest in a fund such as this one:
    https://www.vanguardinvestor.co.uk/...retirement_targetretirement2025fund_fund_link

    Mr Money Mustache has some very interesting ideas:
    https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
     
  4. mustntgrumble

    mustntgrumble New commenter

    Good analysis.

    The problem with ISA's and why they are dying is that you are limited to £20k investment a year. This means at 2% you can only get a £1000 a year return after you have taken three years to invest £50k

    On top of that, all savings in the UK are tax-free up to £1k for most people. A simple savings account is better than an ISA because you can get the money in and out quick.

    Index linking is very important on the additional pension. The world economy does see "corrections" every decade or so with a hike in inflation. These have been better contained recently but even so, we've seen 4% inflation in the last decade. One of these blips can destroy any gains in an ISA and if this happens early on in the cycle then your money is pretty much locked in.

    IMO, if you are above 50 then additional pension (in the final scheme) is a no-brainer. I'm unsure about tapered members but I think the benefit there is still good.

    I spent nearly thirty years using the stockmarket to very good effect. I have been out of it for nearly a decade and that call was right and I don't see things changing. Seriously - avoid the stock market however much a fund manager pretties it up with words like "tax-free". Personally, fixed-rate bonds, savings accounts (and additional pension) is where I am at.
     
  5. Luvsskiing

    Luvsskiing Occasional commenter

    All good advice from the above. My 2p as someone who retired from full-time teaching at 50 after getting lucky and fortunate with investments: don't pick one or the other. Diversity is the right way to go. That means by all means buy extra blocks of pension but also set up a SIPP and use that, and you might as well have an ISA as well, and if you really are flush with cash, think about a second property. Each has advantages and disadvantages but spreading both your approach to investments and your actual investments means you are less likely to fall foul of law changes, catastrophic events like a stock market crash, an oil war etc.

    Other things? Well for one, if you have parents who are getting on a bit, you really need to think about seeing if they will gift the property to you. There are various issues to think about but they ought to see a solicitor and get some advice about this path. If they go into a care home, they can lose a fortune to care home fees in a matter of years as things stand at the moment. There is also the ability for them to start gifting cash - another thing for them to take advice about.

    The other obvious one is make sure you are up to date with NI contributions. The state pension is probably the best investment, when you compare what you put in to what you get out.
     
  6. letap

    letap Occasional commenter

    Diddydave,
    Just downloaded your data and realised the ISA does not have any drawn down. Thus this is not a fair comparison of the benefits of an additional pension - which has a useable income each year from the age of 60.
     
  7. diddydave

    diddydave Established commenter

    It is a bit of comparing apples with pears in some respects, hence my conclusions at the end of post #1 and in #2. It is only a basic comparison in this respect.

    For instance if you take money out of the ISA it will be overtaken sooner by the Pension. Similarly if we treated them on an equal footing of not spending any money from either then the Pension income could be invested, in an ISA even, which would help it reach the ISAs return faster.
     
  8. letap

    letap Occasional commenter

    Sorry just missed your second post!
    I going to play about with your data to see what happens with equivalent draw down.
    The Pension should overtake the ISA fairly quickly.
    I suppose you could make an argument for turning your pension into as much of a lump sum as possible at 60, investing into an ISA and seeing how much draw down you could get from a variety of growth rates.
     
  9. diddydave

    diddydave Established commenter

    Personally I would favour the pension over the ISA as it has been rare to find a safe investment that pays inflation or better rates of return. Certainly if you take the interest out and spend it then the lump sum that remains dwindles in value due to inflation. Indeed if we used the numbers in the sheet and did not spend the pension money then by the time you reach 82 you have the same amount of money that would be in the ISA saved, probably in an ISA, AND the income from the pension.

    One other aspect that favours the ISA that I omitted is the tax status. The pension, if it is part of a larger income, is likely to be taxed at 20% whilst the ISA is not.
     
  10. letap

    letap Occasional commenter

    Draw down from the ISA - with the same payment from the pension (net of 20% tax) would last you to 78 according to my calculations.

    As a 40% taxpayer you could put the money into a SIPP instead of an ISA.
    I have already linked to this - but it is an interesting read - he argues with a investment portfolio involving diversification you could achieve a safe withdrawal rate of 4%, without losing capital.

    https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

    The capital can be gifted/inherited after death - it is hybrid of both the ISA and TPS additional pension, having both income and retained capital.
     
  11. diddydave

    diddydave Established commenter

    It's an interesting read and I notice the main thrust of his piece is to ensure that you NEVER run out of money...so if you don't need the capital then a lifetime of index-linked income is pretty much his nirvana.

    Having had recent experience of sourcing nursing homes for elderly relatives I can see that they'd very quickly go over the 4% and demolish the capital in very short order!
     
    Luvsskiing likes this.
  12. HannahD16

    HannahD16 New commenter

    Can anyone tell me (as a member of both FS pension AND Care scheme) if I can buy additional pension for my FS scheme as opposed to being required by scheme rules to buy it in the CARE one?
    Any advice appreciated
     
  13. diddydave

    diddydave Established commenter

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