Pension vs ISA

[DustSalad]

Just looking ahead a couple of years to when my mortgage is finished. In theory I will have about 1-1.5k per month to invest in either pension or ISA or a bit of both. So I will be massively making up for lost time on saving for old age. Looking for advice please on how to split the cash. I'd like to balance the tax advantage of pension saving with the easier accessibility of the ISA. (Conscious of what happens if I get ill or something prior to the age when I can access pensions)
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PROJECTED SITUATION
Age 45. Single, no children. Good health. Secure WFH job. Earning 45k pa.
Fairly modest lifestyle so won't be drawing down enough from pension to pay much income tax but have 2-3 "big" holidays on my bucket list.
Flat worth 200k. (Owned outright as if a freehold (we don't do leaseholds in Scotland) 2nd floor and no lift so may need to move when I get elderly)
Cash savings 5k
Premium Bonds 5k
Stocks & Shares ISA 40k
Pension with current employer pot of 20k (bog standard SIPP type thing, they only do statutory minimum contributions)
SIPP 70k (my previous workplace pensions combined)

If you feel you ISA at that stage is a bit low, then I would do BOTH for a while. Then shift to doing as much as possible to pension.

m.youtube.com/watch?v=y-4s1wqwQ7k

I've always gone with a fairly even split between the two, partly due to the issue of access, which you mention in your post, but also because you never know what future governments will do in terms of tinkering with the system, so I think it's best not to have all of your eggs in one basket. You can always make adjustments in the future as things evolve.

One issue that often gets forgotten is temperament. Are you likely to be tempted to withdraw from the ISA to fund pre-retirement expenditure? If so, then the fact that the SIPP money is locked away is useful as it imposes discipline.

Anyone with children may favour SIPPs as these can currently be passed on tax free on death, but this does not apply in your situation.

But before making a decision...

Are you comfortable with your current level of emergency cash savings? With interest rates now at a reasonable level, you might want to consider building up your cash reserves before, or alongside allocating more to investments. Advice is to hold anywhere between 3 - 12 months' worth of income. Your job may be secure for now, but that could change. Or you might have to contribute to a major repair on your building, for example.

Since you are not a high rate tax payer there is a diminished benefit in contributing to a pension but you do still get the compounded benefit of investing the gross amount (rather than the net amount in an ISA). Obviously you have to pay tax on your pension when you draw it but it still works out better to invest your spare cash in a pension IF you are definitely going to use the money to support you in retirement. You also get the benefit of moving 25% out of the pension tax free when you are 57 (check the age on that, I am not 100%). Pensions are obviously less flexible than ISAs though so you sacrifice flexibility for a slightly better financial situation upon retirement.

Thanks all.

Good points about

• major repairs to building/need more emergency cash
• is easy access to ISA too tempting.
• Governments always increasing age at which you can access your SIPP or even take the 25% lump sum

I guess the older you get, the more the balance tips in favour of the pension because you are locking away the money for less time but still getting the tax benefit.

There was a v helpful poster on here who originally taught me about ISAs and Vanguard etc about 4 years ago. She was based in the States and had a reference to that in her username iirc. Does anyone know who I mean? I'd like her to know how far I've come!

Obviously nothing is as tax-advantaged as a pension, provided you don’t mind waiting to access it.

I'd major on pension first because the tax benefit on the way in will benefit you in compound interest.

What is your sick pay like? Any income protection or critical illness provision?

I just get statutory sick pay. No income or illness cover.

I've just remembered it was "Miss Conduct USA" who got me started on the right path! (Several name changes ago) I can't seem to tag her tho.

I've found you, @MissConductUS

Well done tracking me down, @DustSalad ! I am still here and still a Boglehead (Vanguard supporter). I'm so pleased that my advice back then was helpful to you. Can you post a link to that thread so that I can see what I said?

And of course, a massive well done on your current financial status. You've done really well with building your wealth and security.

By the way, I wouldn't worry about the easy access to the ISA, making it too tempting to tap into it. If you really need the money, it's good that it's there. If you don't need it you'll leave it be, considering the effort it took to build it.

Hey @MissConductUS, i'm so glad you're still here! Oh gosh, I've done a search there but struggling to find it. It was pre-covid.

It was just a very straightforward post by you, just a few sentences explaining about Vanguard/index funds/S&P 500 on someone else's thread. There was something about the way you wrote it that just made a lightbulb go off in my head. And I was like "OMG, it's that easy?!!"

I sent you a few PMs and you kindly helped me. (I think we chatted about Maine/NY as well?) It was a few MN incarnations ago so I no longer have access to the actual messages but I recall I just went ahead, followed your advice and opened a Vanguard account I also read JL Collins' the Simple Path to Wealth which I found really good - he said for a GBP investor, VWRL may be slightly better than S&P 500 so I've done a bit of that too.

I'd be interested in any thoughts you had about my balance between ISA and pension, albeit I appreciate you are a USA bod rather than a British bod.

Haha, cross post!

Since I haven't changed user names I'll have a look for it tomorrow.

I think ideally people should have both a pension and an ISA, as you do.

I couldn't find the thread, but I think I found our message exchange, @DustSalad. Were you Kenzobaby about three years ago?

@MissConductUS yes that's right! And Kenzo (cat) is still my baby, even though she's 18.