Keep savings in ISA or put some in pension?

[theministerscat]

Hello - I could do with some thoughts from someone more financially-savvy than me please.

I’m 56 and quite recently divorced. I’m lucky enough to now own a small flat with no mortgage. I don’t earn a huge amount (work in the arts/charity sector) so salary is £29k per year. I don’t have a brilliant pension pot either - currently £41k in NEST via my employer (plus I add a little myself every month).

I also now have £40k of savings in a cash ISA. The rate is 3.99%. I think of this as my emergency fund for the rest of my life, as I don’t have a huge amount left from my salary every months after tax, living expenses, etc. What I could do with some advice on is whether I should keep it all in the ISA, where it’s keeping pace with inflation but not much more, or perhaps put some into my pension now, and then take it out as a tax-free lump
sum again when I turn 67 in 11 years’ time.

Or is there something else I should be considering? I have a lot of fear around investing - this is all the money I will ever have now (apart from state pension) and I’m already planning that I will have to continue to work a bit part-time after 67 to have any in standard of living, as my current NEST pension projection shows £4k per year. I can’t afford to lose these savings. Thank you for reading and for any advice.

I'm following this with interest as I am in pretty much the same boat. I'm 54 and started my life financially again at 44 when I left my husband. I have about 80k in my pension pot but in the next year will be inheriting enough to pay my mortgage off and hopefully have some left over so I'm wondering whether to put extra funds into an ISA or something or whack into my pension. I'm sure you'll get some good advice here.

At 56, when you have immediate access to pension funds if required, I'd go for putting the max you can into pensions (by salary sacrifice if that's an option).

I am 64, if I could go back in time, I would have put more into my pension. Can you at least pay in the interest you receive from ISA into pension each year.

I'd probably split between pension fund and a stocks and shares ISA. Over time the stocks and shares ISA may outperform cash. Do some research, obviously there's a risk that has to be balanced but growth is key. There are funds that are low fee and managed. It's not difficult either.

The very best thing you could do is improve your financial literacy so you can make educated decisions on risk.

If I was in your shoes, I would see your biggest risk as loosing tens of thousands of pounds in growth by keeping 40k in cash for 10+ years

I would keep 10k accessible in a cash isa and then put the remaining 30k in in a stocks and shares isa (transfer it directly to keep your isa allowance), invested in a global tracker. That way you have an easily accessible emergency fund to see you around 6 months, and 30k you could access if absolutely needed.

Putting money in a pension is investing, so you're already doing that. And you'll be able to see the provable growth of that over the years. So that might reassure you about setting up a stocks and shares isa

Once you know a bit about investing, I would also check on the funds your invested in your pension to make sure they are appropriate to your goals. Standard funds tend to be very low risk and low reward.

As you own your home outright and I presume no other debt, I would be trying to save 20% of your income. You do need to invest but not single stocks a stock and shares ISA which is like A whole market tracker vanguard do a FTSE 100tracker

over the past 70years the UK stock market has averaged 8%a year which is double a cash ISA I would transfer at least half to a shares ISA and drip feed a 100 a month into it or more.

The best thing you can do is start today just saving as much as possible without deprivation or some fun. Make a budget and yourself first ( is put savings aside just like it was a bill)

Have a look at the Rebel Finance School, via Facebook. Learning includes a wealth of Youtube videos, to help us all understand our financial situation and the range of investments available.

Great in that it does not ‘sell’ you anything or make decisions for you.

Interesting that others suggest ISA over pension. The advantage of the pension is up front tax relief. Invest £800 in an ISA and the growth will be based on £800. Invest £800 pounds in a pension, tax relief is £200 so £1000 to grow. ISA is tax free when taking money out but pension will be taxed assuming you get the full state pension.

Keep 6 months spending in your emergency fund.

Thank you so much to everyone who has made suggestions so far. I know I’m very risk-averse - I grew up poor and occasionally homeless so I really do get the fear around losing this money. I feel like in more ‘normal’ times, I’d be less worried about stocks and shares and other forms of investment, but the world seems like such a bloody mad and unstable place right now, which feels incredibly risky in terms of finances.

Please do keep the suggestions coming - it’s very helpful. I’ve been meaning to watch the Rebel Finance School for a while now so must do that. I get a bit of a sense of ‘cult of personality’ around it though so that has put me off a bit!

Your pension is being invested by NEST. A S&S ISA works in the same way - the money is invested. The benefit of putting money into a pension over a isa is the tax relief. But ISA withdrawals are tax free, whereas only 25% of your pension can be taken tax free.

If you choose to put some of your savings into your pension you should note thay Nest charge an admin fee for contributions in (most other pension providers do not but most will charge a managment fee) so so may be better off opening a SIPP with another provider but you should check the fees for that.

Your pension is very small, so I would be looking to maximise that. If you took 4% per year in retirement, you would only have £1640 per year. I would be looking to get at least £25k into a pension and get £5k tax relief added on top from the government. Then put as much as you can save into the pension and isa's going forward. 29k with no mortgage is not a terrible income.

Will you be eligible for the full state pension?

I have cash ISAs and intellectually know I need to move to stocks & shares.

I am just about to finish the Rebel Finance School course and my view is there is a lot of padding with engaging with those watching along live making each episode 2 hours long.

However, the basic messages and tools are sound. I would take the plunge and give it a go but fast forward through the bits where they are interacting with viewers.

You’re confusing two different things - whether to save or invest, and whether to use an ISA or pension.

The difference between an ISA and a pension is around how it’s taxed and how much you can take out every year.

Keeping the money as cash you know about. Investing means buying something with your cash which will hopefully go up in value until you’re ready to sell it and turn it back to cash. You can invest as part of a pension or an ISA.

The Rebel Finance School explains all this stuff really clearly. Sounds like watching it could really build your confidence and help you to work out what’s best for you.