DIY InvestorMagazine
/
March2014
DIY InvestorMagazine
/
March2014
36
37
THEFINALWORD
AN ISAORA PENSIONTHAT
IS THEQUESTION...
In the first of his articles designed to deliver simple answers to the questions facing those new to
investing Daniel Hawkins weighs up the relativemerits of ISA and Pension saving
Many investors have strong views on themerits of
either or both of thesemethods of saving, normally
combinedwith a view on investment in property. The
TV commentators give some guidance, but aremainly
just encouraged to see people are actually looking to
save.
If the questionwere ‘an ISA or a payday loan’ then I
think the answer is somewhat easier to articulate. So
what is our view on this barely asked but frequently
answered question? Simple, have both.
If your boss offers you a workplace pension inwhich
they are going to put some of their money it is rare
that this isn’t the best thing to do.
It is, of course, not as simple a decision as towhether
you just accept freemoney, there is normally a catch -
most pension arrangements offered by your employer
also insist you contribute as well. Youmay have seen
the slightly condescending TV ads the government
paid for including the super-rich Theo Paphitis telling
us all that “I’m in” to the new pension arrangements to
whichmany will be automatically enrolled. The normal
deal is the boss puts in 3% of your salary, provided you
put 5% in; not quite freemoney, but generally not to be
sniffed at.
Most importantly the taxmanwill increase your
contribution by adding basic rate tax relief whilst high
rate tax payers can claim the higher rate back as part of
self-assessment.
Why not just put 5% of your salary in to an ISA?
Well you probably should, there are limits on howmuch
you can put in to an ISA but few of us are lucky enough
to earn such huge salaries that 5%would get close to
this limit (£11,520 in 2013/14 rising to £15,000 in July
2014). Why the ISA? Accessibility is the key driver here,
ISA rules state that even a fixed rate cash ISA has to
allow the customer to be able towithdraw their money
within 30 days of requesting it; the likelihood is you’ll
be penalised for this but youwill be able to get hold of
your investment should a rainy day occur (definitely a
better option than a 3000% APR loan).
Your pension arrangement isn’t so forgiving if you need
to get hold of cash - pensions were designed in amore
paternalistic era when the nation couldn’t trust people
not to squander their savings (and importantly the extra
bit of tax the government gives the pension saver).
Instead your pensionmoney is normally locked away
at least until you’re 55, but if you decide to cash in at
this point, take a lump sum and pay off the last of the
mortgage or buy the Harley, youwill probably seriously
reduce the amount of regular income your pensionwill
give youwhen you decide to give up work. So an ISA is
more flexible but easier to fritter away as a result, your
pension gives you a bit more security when you retire
as it’s harder to blow on a Caribbean cruise or Tarquin’s
university fees but raises the problem of annuity versus
income drawdown versus any other method of drawing
an income from your pension pot. What I seem to be
saying here is what my father always said tome “put
10% of your salary away for a rainy day”. Realistically
saving any less than this will mean you are unlikely to
retire on an income close to the one youwere enjoying
during employment.
As a guide, at age 20 if you target a retirement fund of
£300K and growth is 5% youwill need to save £165 per
month until your 68th birthday, start 10 years later it
will cost you £275 per month. However, this seemingly
large pot of money will currently buy you littlemore
than an income of £18K per annum.
However, GeorgeOsborne’s 2014 Budget speech drives
a coach and horses through the annuity business as
from April 2015 it is proposed that pensioners should
be able to take their entire pot to do as they wish
with, thereby avoiding the pitifully low annuity rates
that have resulted from five years of rock-bottom
base rates. How do you buy your pension income?
What do you dowith your ISA cashwhen you decide
to stop working?
All subjects we will cover in the future. In the next
edition I will look at how youmight set about
constructing a portfoliowithin your ISA or Pension
wrapper and help you navigate through the jargon
that oncemade investing impenetrable to a large part
of the population.
AS AGUIDE, ATAGE 20 IF YOU TARGETA RETIREMENT FUNDOF £300KANDGROWTH IS
5%YOUWILL NEED TO SAVE £165 PERMONTHUNTIL YOUR 68TH BIRTHDAY, START 10
YEARS LATER ITWILL COST YOU £275 PERMONTH.
