ISA's, Pension, retirement prep etc

[neonplanet40]

I wasn't sure where best to post this haha

Anyone here have experience of stocks and shares ISAs, AVC’s, pensions etc?

I should start this by saying that I am not looking people to make financial decisions etc for me. I am just looking to have a conversation and learn anything that others know. Part of my info gathering phase so to speak. Likewise, I imagine I will get a financial advisor going forward. But as I am in the initial phases, I’m just looking to hear others views and experience.

So, I am starting to take a bigger interest in my retirement. A bit of info on where I’m at:
• Age: 38
• Job – Teacher
• Salary – About £55,000
• Mic: I have life insurance and income protection insurance should they ever be needed.
• Family – Wife and 1 Kid (4).
• Retirement views: I would like to either retire at 55 or go part time and phase down to full retirement. I know that this age is likely to rise to 57 as government has changed the age to take out pensions etc.
• Scottish Teacher Pension – I pay 10.4% into it. I have been paying in for about 12 years or so. Employer pays quite a bit more than this in.

Rough outline of my pension:
Benefits accrued on a Career Average Revalued Earnings (CARE) basis.
Normal pension age linked to your State Pension Age.
Pension accrual rate of 1/57th of pensionable earnings each year.
Benefits for active members revalued each year using the Consumer Prices Index (CPI) plus 1.6%.

As part of my pension scheme, I am able to buy Additional Voluntary Contributions (AVCs). I have just started doing this at £150 a month. Last month was the first month. I will be putting this up in future after my cycle2work scheme is complete. This helps me avoid some of the higher tax rate in Scotland as it’s a salary sacrifice.

I am now starting to pay into a Vanguard Stocks and shares ISA. £100 a month on the Lifestrategy 80 equity fund. It starts this month. Again, as time moves on, I would aim to pay more into this.

I am aiming to open a Junior Stocks and shares ISA for my kid. I will begin by paying £25 a month into this. But will aim to do more in future. Again, this starts this month.

1. So, a few questions. Am I doing anything glaringly silly? Or overlooking anything?
2. If I decide to add more money going forward – would I be best putting it in my AVC via salary sacrifice, or would it be better going in the Vanguard S&S ISA?

I am researching a lot now. There is a lot to take in. Hence my post here. It’s always good to get other viewpoints etc.

Thanks folks

[Kanoe]

I would say it's hard to give advice when not being a trained and regulated financial adviser so I would always speak to one before making any major decisions.

Having said that I am always wary of them as in most cases any products or services they recommend are going to be providing a commission to them so there can be a feeling that if they have a couple of products that would be suitable are they recommending the best one for you or for the commission they will get.

As such I tend to try and do some independent research on anything they put forward.

Some of the choices will also come down to the risk profile you are prepared to accept, which is highly personal.

I notice you mentioned that you are looking at making AVC's for your teachers pension. If I understand that correctly, whilst your main pension is a defined benefit, AVC's go into a defined contribution scheme that is going to be subject to investment returns and annual management charges.

I think there is another option for teachers of buying additional pension instead which is closer to a defined benefit, if this is a possibility it may be worth looking at instead as the additional pension you are buying is more defined. Again, financial adviser might be able to look at the pro's and con's of Added Pension vs AVC's.

You also asked about extra pension contributions vs ISA, I guess the main things with that are with pension contributions as well as (any) investment returns you are saving the tax and NI (if you do it via salary sacrifice) which you don't get the benefit of for investing in the ISA but with the ISA you can access the money if you need to whereas from the pension you can't just cause you have some unexpected bills.

Although it's been said a few times in here it almost feels like a need a disclaimer at the bottom in caps:

PLEASE DO NOT TAKE THE ABOVE AS ADVICE AND ALWAYS SEEK ADVICE FROM A TRAINED AND REGULATED ADVISOR ETC ETC ETC......

[cptwhite_uk]

Youtube channels to check out:



DamienTalksMoney - younger lad who makes informative and entertaining videos. Highly recommended.
MeaningfulMoney - Another superb UK focussed channel, he's a registered financial advisor, and the focus is more towards financial planning and pension prepartion / pension options

Both are excellent sources of free financial advice.

As a general comment on the investment strategy I think what you're doing is spot-on. Maximise the perks of your pension contributions first, then it's a toss up between extra going to your VACs or Vanguard Stocks and Share ISA. This is exactly what I have, and it's a hands off approach (except I have a 100% equity / 0% bonds on my ISA, which long term will deliver slightly better returns, in theory).

A few points to remember:

1) A pension sees you receive a tax rebate (as well as employer contribution), so it's effectively got a +20% (40% if you're on higher rate?) growth head start of the stocks and shares ISA + the employer contribution, so effectively even higher.

2) A pension is taxable at the point of withdrawl, like an income, so that tax you got back will now be somewhat reclaimed. However its by far the most efficient way to grow your personal wealth with low risk over the long term.

3) The tax you pay on your pension still only kicks in after the tax free allowance, like a wage, so the first X amount (£12,570 currently) is not due any tax. So if you can live off £25,000 in retirement, it's effectively about 10% tax on the total amount, compared to the 20% (40%?) you saved when you were building the pension.

4) Pensions have limitations around them (obviously), you can't draw on them until 15 years before the state pension applies to you (presently), you can only get 25% of their value from the age of 55, tax free I believe (need to check these details are still correct), but the general point is there are limitations to the pension pot which restrict when you can access it.

5) S&S ISA - You're effectively paying into these after having already paid income tax, so they're not as efficient as a pension

6) Now for the benefit of S&S ISA The growth in the account is tax free, and has no onwards tax implications for yourself. There might also be considerations around inheritance you wish to consider comapred to a pension.

7) An ISA has no restrictions unlike a pension, so the money can be used how you want, went you want, in any amount with zero tax implications.

8) Money from the Vanguard S&S ISA can be back in your bank within 2 or 3 business days.

I have been investing heavily into my Vanguard S&S ISA for 5 years, but also reasonably into my pension. I'm 42 so at a similar point in life with 2 young ones (age 7 and 10 presently). They also have their own Junior ISA with Vanguard, as does my wife.

I recommend setting an ISA for your wife as well so effectively between you, you can invest upto 40K per year and get it into a tax free wrapper like an ISA. If you get any inheritance you'll have the account ready to go to be able to drop it in. Remember the tax year for the 20K allowance per person ends 5th April, so the allowance renews from that date every year.

As a general rule invest in pension for long term - retirment, and ISA for medium term (5-15 years), eg. refurbing the house, new cars, university fees, deposits for the kids house, potentially

[Jonatron]

You're asking what's frequently asked on /r/ukpersonalfinance, and they made a flowchart: https://flowchart.ukpersonal.finance/

[Saracen999]

I'm certanly not the one to advise. I did it, by conventional thinking, all wrong. My pension, as such, is laughable. Having been self-employed for all but about the first 7 or 8 yeas of my working life, and having already been burned TWICE by disappearing pensions that I had contributed into, I went a different route, which was essentially investments. The result was a pension income (and state entitlement) now that's miniscule, but it doesn't bother me as there's a healthy capital nestegg to rely on.

I wouldn't necessarily recommend that path, but it worked for me. It wouldn't (IMHO) be right for anyone in a 'conventional' job with good 'traditional' pension provision. So I have nothing on which to base any useful or relevant advice or experiences.

[neonplanet40]

Thanks for the comments folks. Some of the youtubers linked I have already been watching. I am also in teh Reddit group that was linked.

My current pension (without AVC/State Pension/ISa's etc is set to be about:

£33k a year (if I don't take a lump sum) and £21k ish if I do. Although a lot can change between now and then, especially government interferance. And thats if I retire at 60. I don't want to stay till i'm older that than. Again, maybe I will change my mind by then.... But ideally I am looking to go part time at 55 (although I know this ISA rules etc show 57 as being the new minimum withdrawal age for my AVC's etc.

Given what my pension (even before AVC's or anything else) is likely to be, I know I will be taxed in retirement.

I guess it is all about the correct balance. And maybe that is how I will view it going forward. Half and half. I do need to speak to a financial advisor but I am a little wary. I just want impartial advice without a sales pitch.

One of the areas I wasn't sure about was whether to put more money into my AVC or put it into my ISA. AS has been stated, my AVC is a salary sacrfice which has those benefits. However, I guess it is locked until I retire. Whereas the ISA isn't.

[badass]

Thanks for the comments folks. Some of the youtubers linked I have already been watching. I am also in teh Reddit group that was linked.

My current pension (without AVC/State Pension/ISa's etc is set to be about:

£33k a year (if I don't take a lump sum) and £21k ish if I do. Although a lot can change between now and then, especially government interferance. And thats if I retire at 60. I don't want to stay till i'm older that than. Again, maybe I will change my mind by then.... But ideally I am looking to go part time at 55 (although I know this ISA rules etc show 57 as being the new minimum withdrawal age for my AVC's etc.

Given what my pension (even before AVC's or anything else) is likely to be, I know I will be taxed in retirement.

I guess it is all about the correct balance. And maybe that is how I will view it going forward. Half and half. I do need to speak to a financial advisor but I am a little wary. I just want impartial advice without a sales pitch.

One of the areas I wasn't sure about was whether to put more money into my AVC or put it into my ISA. AS has been stated, my AVC is a salary sacrfice which has those benefits. However, I guess it is locked until I retire. Whereas the ISA isn't.

Just a couple of things to add: Whilst taking the lump sum reduces your pension, provided it isn't more than 25% of the pot and less than £268,275 (if it's defined benefit scheme then IIRC the pot is calculated as it's 20x annual earnings) it's entirely tax free - because you didn't pay tax on the contribution in the first place and it's not taxed as a lump sum.
Potentially you could then invest the maximum amount allowed in an ISA and the rest in tax paid investments and siphon those into your ISAs over the next few years. You would be exposed to income tax/CGT over the "non ISA" gains during that time but it might reduce your tax compared to taking less lump sum and the whole lot as income for example.
To better explain, Imagine you have a £200,000 lump sum and your return is exactly 5% annually on all investments:
Year 1 - invest £20,000 in the ISA and £180,000 into the Tax paid investments. Returns are 5% on both
Year 2 - Invest £20,000 in the ISA - due to gains, the ISA is worth £41,000 - all tax free. The £20,000 you move to the ISA you must "crystalise" - i.e. pay on the gains for that part of the investment - i.e. £1,000 of income must be added to your tax return. You don't usually have to pay tax on the entire amount.
Total: ISA, £41,000
Taxable investments - £180,000 * 105% = £189,000
Taxable interest so far: £1000 (minus allowance)
Year 3:
ISA: £63,050 - i.e. £3050 gains completely tax free.
Taxable account: £178450 - effectively
Taxable interest on crystalised £20k transferred to the ISA: £1859 - i.e. £1859 of the £20,000 withdrawn is profit.
Taxable interest this year only: £1859
Total taxable interest since retiring: £2859

There will get to be a point where you have drained your taxable investments entirely into your ISA with zero tax on it for future years. Additionally, the money can be withdrawn at a moments notice unlike a pension. Governments are less likely to mess around with that kind of money as they can't change the rules without providing a lot of notice unless in extreme circumstances.

Of course, there is no such thing as guaranteed returns of any percentage, money may be lost as well as gained etc....