Cash or S&S ISA for pension savings?

[Heatherbell1978]

I'm a wee bit ahead of myself but from next year I'll be putting money in an ISA to fund retirement. Already have pensions on the go, what I want to do is fund a pot to draw down on for a few years until DH and I start accessing pensions from around 65. So enough to last 3-5 years. Hoping over 15 years to build around £200k

I'm very risk averse so I am thinking Cash ISA but keen to understand if I'm missing a trick by not investing in a S&S ISA instead. What do people normally do for ISA income in retirement?

You can access your pension from 57 so usually best to save into this from salary to get the tax relief. (Unless you have a defined benefit pension?)

But in answer to your question investing over 15 year period will get you better returns overall than fixed interest. So S&S.

Yes I'm saving into pensions too. This is in addition to that as I'd prefer not to access the pension pot until later than 57.

With all the tax and other benefits of saving into a pension, why would you just not increase your payments (assuming you have not already maxed out)?
You can have more than one pension and although the rules are changing (and could again in the next 15yrs), you should be able to access it long before 65.

I retired last year at 57 and have accessed one of my pensions leaving the others and all our savings (inc. ISA's) until later life or when we want to make significant purchases.

What pp said. If you want to keep your other pensions separate for whatever reason then start a new one. But you can draw down pension from 57/58 (depending on when you hit that age given moving pension age) and the tax benefit of saving extra pension contributions makes it a no-brainer if you have annual allowance to spare

Thanks good advice. I guess I feel quite comfortable with the level of DC pensions we are projected to have - between us we're putting in around £3.5k a month and I have a small DB pension too worth around £8k a year. Planning to repay mortgage at 57 with tax free lump sum so will access them then for that.

I like the thought of having a flexible pot of money I can draw down without paying tax alongside it. We may use it to help DC as well, depending on the size of it

What age are you? If you're under 40, a S&S LISA could be a good option for you. Similar to you, I'm currently saving in a S&S LISA and S&S ISA in addition to my pension, with the hope of being able to retire slightly earlier, or at least be able to fund a role change/part time work. Really though, it depends with what you're comfortable with. I recommend doing some research to familiarise yourself with your options - MSE, meaningful money podcast for example. It also doesn't need to be either/or. You can have both S&S and cash ISA, so long as you keep under the 20k pa limit combined.

You get a personal tax allowance when you take out your pension, just like with any other income. So you could take out £12,570 a year from the age of 57 until you start accessing your other pensions at 65 and not have to pay tax on it. You’ll get tax relief when you put the money in and won’t pay tax taking it out - it’s a no brainer.

That won’t give enough income for what you are planning, but you could set up that pension alongside whatever ISA you decide.

Good idea but I'm not sure I'll be in a position to start withdrawing at 57. We will need to work until at least 60, probably 62. So any money we withdraw (out with the 25% tax free) will be taxed.

It all depends on the relevant tax rates.

It sounds as though your intention for this pot is to use it to live on between retirement at 60-62 and drawing down pension age 65.

If you have no other income in this period of time, then funding via isas is likely to be tax inefficient - as you wouldn't make use of your personal allowances.

If you drew this down as income (drawing down say 50k per year in total gross) you'd pay no tax on half of it via 2x personal allowance, and 20% on the remainder.
Whereas if it comes from an isa you pay no tax on taking it, but have already paid income tax at your marginal tax rate to put it in there.

The downside of having it all in pensions is obviously a lack of access to it before 57, and a higher potential tax bill if you want to take a big chunk at once

@Heatherbell1978 I would do a mixture of cash and investment.

In general the longer you leave the money invested the bigger the return. When you come to withdraw the money, if the investment ISA has taken a dip you could leave it there to recover and use the money in the cash ISA.

I have approx 70% invested and 30% in cash. I am 55.

I have a DB pension as well so I would be making use of my tax free allowance. It will be around £9k.

I would recommend a S&S ISA, to benefit from the stock market ups and downs. If you select a number of different funds, you will spread the risk. Plus you can take out as much or as little as you want when the time comes, leaving the remainder to carry on growing.

I have 2 DB pensions (predicted to be around 6/7k each at 65, but I may take one early), some DC pots and a S&S ISA.

I finished work at 58 (now nearly 61) and have been drawing down from a DC pot, to the tax allowance, topped up from my ISA. I am leaving my DBs as long as possible so as to drawdown as much as possible from my DC pots.

I have realised that once I get the DBs and state pension, I will be well within 20% tax band, so will use ISA for any extra needed, as more tax efficient than pulling from the DC pots.

ISA growth and drawdowns are tax free
Pensions attract tax relief on the contributions plus the first 25% is tax free on withdrawal, then taxable at your marginal rate. It IS exactly what you want - a flexible pot you can draw as and when you need.
You need to spreadsheet it but the pension will often work out better if you are a BR tax payer. If higher rate, a mix of pension withdrawal and ISA drawdown is often best.
If I were you I would do a full plan of annual expenditure per year, annual income, what the gap in and how to plug it with a mix of ISAs and pension drawdowns.

@Heatherbell1978 it sounds like you’re saying you want to put cash into ISAs now to pay off your mortgage in 10 years time to avoid paying tax on pension drawdown? Why not just pay the spare cash against your mortgage now? If you’re paying tax at a higher rate then I think pensions first to benefit from the tax relief (up to 69.5% in Scotland, I think up to 62% benefit in RUK). You’ll also benefit from the compounding effect on the tax saved. Once pensions are maxed out then pay down the capital on your mortgage and once that’s exhausted only then go to ISAs. If you need cash before you want to access your pension, instead of ISAs, remortgaging is your backup plan as you’ll have increased your equity due to those extra payments.

Not quite - my plan is to repay the mortgage at 57 with tax free lump sum from pension. So putting quite a lot into the pension to get tax benefit as opposed to overpaying. Based on responses here looks like I can get smarter with drawdown though. Was planning to live completely off ISAs before drawing down pension but sounds like I'd be better off drawing down to the tax free amount then topping up with ISAs. I have a small DB pension that will take up some of that allowance though.
And yes I could not fund the ISA but fund my mortgage instead but that Cash ISA will also serve as a bit of an emergency pot of accessible funds.

Wouldn’t you save more paying off mortgage earlier? As you will save loads on the interest payments

@Heatherbell1978 think ISAs work if you plan to retire early (eg age 50), to cover the gap between having employment income and being able to access your DC scheme at 57 (or 58). If you don’t plan to retire until at least 57/58 and are a higher/additional rate tax payer I see ISAs as much less attractive and would prefer to put more cash into pensions now to benefit from the tax relief. ISAs would need to see a huge return on investment to outperform what I can get from putting that untaxed money into my pension. You then benefit from a larger tax free lump sum (25% of a larger pot) so once you’ve paid off your mortgage you have more left over. If it’s a choice between ISAs now and paying off my mortgage now, I’d definitely go for paying the mortgage. That assumes you already have an emergency fund set aside.

I pay 4% on my mortgage but whatever I put in my pension receives tax relief and I'm a higher rate tax payer. So my money is working harder for me going into my pension. The plan in 11 years time is to access my pension to repay the mortgage.

If you’re a higher rate taxpayer then surely adding more to your pension rather than using an ISA is a no brainer, especially if you remain within the basic rate in retirement.

You get 40% tax relief now, then later get 25% tax free cash and pay 20% tax on income.

@Heatherbell1978 yeah, but you don’t pay 4% once do you, you pay 4% interest on whatever left every month for 10+ years.
we only had a 1.6% when we first took out mortgage and I think it still would have been about 80k in interest over 20 years (on 250k mortgage)

The way that the benefit of tax relief on SIPP was explained to me was that you are gaining growth on the 25% or 40% tax free amount. Think of it as additional compounding.