ISAs aren’t the best choice for retirement – at least not rationally…

You pose a question, but where is the answer??

You have entirely ingnored the legalised theft known as Purchase Annuities. One's whole pensions pot is removed from one's control the moment an annuity is purchased. The rates are so stacked against the purchaser that it is virtually impossible to "beat" the provider in terms of total inflation adjusted benefit received.

Pensions are a con-trick, nothing more.

Frankly the pensions debate is an esoteric exercise in navel gazing by the pampered middle classes. For the vast majority of the population on average salaries pensions are a serious non-subject. If 13 years of Nu Labour promoted the notion that society doesn't need to address the vast income inequalities that blight this country and create a sullen proleteriat who consider all politicians to be self serving crooks it is unlikely that candy floss Cameron and his privileged public school boy accolytes will do any thing to seriously address the financial concerns of hard working people let alone pensioners. A

I think if you create a finacial model , over 25 years the benefits of investing in an ISA vs a pension, the ISa comes out on top. This does not include benefits such as ability to access cash during its lifetime and also not having to buy an anuity at the end. No brainer really, ISAs are better!!!

I couldn't agree more with Andrew McDonald.Apart from purchasing pensions

to keep myself out of the higher tax bracket,all my spare cash went into ISAs

andnow at the age of 80 I am well satisfied.

I

According to my model, there two significant differences between ISAs and Pensions: tax-free lump-sum and charges. £4,000pa invested at x% compound with no exit tax yields exactly the same result as £5,000pa invested on the same terms with income tax on exit (unless the income tax allowance is used).

ISA charges are lower but only 75% of a Pension fund needs to be taxed.

If you argue that this is unimportant because only the better off care, you rather miss the point that the more those better off care the easier it is to provide state benefit to the less well off. We call it the welfare state.

I generally agree with the above comments but cannot fathom Andrew McDonalds 25 year model. If he is referring to pension funds as opposed to a SIPP then he is probably right because fund managers are obliged to 'play it safe' and anyway what do they care if the investments do poorly - they get their commission on what is invested not on how it performs. On the other hand if you are dealing with a SIPP then assuming the investor is consistent his SIPP must do better because on day one the taxman increases his investment by 20% at least and that 20% goes on growing for the next twenty five years.

Yes, you then hit the setback that your pension fund is treated as though it belongs to the government and they let you borrow it with severe limitations until you die.

If you are five years or less from retirement then forget pension investments as the disadvantages outweigh any potential gains from the tax relief.

I think a good example of the downside of pensions is that say you had SIPP and an ISA funds each with £100,000 invested and you had a good year making 20%( this is not exceptional). You could take £15,000 from your ISA for that car, holiday or whatever leaving £5000 to cater for inflation. If you have already taken your 25% tax free from the SIPP then you cannot touch the fund until your five year review and then you will only see a small raise in your income at best.

Whatever you may say,the TEE framework model for ISA is superior to

EET.

ISA s definitely surpass !!

Surely the best savings approach is a combination of both. Put aside enough in your pension to give you an income that uses up all your tax allowances for when you start drawing (after having taken your 25% tax free lump sum) and then put the rest into an ISA so that you don't get drawn into higher rate tax.

I think this is what Barry Walker above is advocating.

This one thing or the other approach is over simplistic.

The argument for ISAs works until you factor in that there are some of us lucky enough to enjoy employer contributions into a GPP (and I am ignoring completely DB schemes) which we would lose if we re-directed our pension savings solely to ISAs.

I fully accept that there are millions of people who do not have the priviledge to enjoy this benefit but any argument needs to take this into account. However a merging if the most 'owner flexible' elements of both pension and ISA regimes would encourage saving for later life.

I think that Steve's point about the self limiting effects of coping with daily life are well made, I also agree with the points raised in respect of annuities. USP seems to work well so why not have some form of drawdown as the norm rather than the exception.

The flaw in this reasoning is that EET isn't EET any more. Since the Brown raid it is ETT, which completely upsets the mathematics of comparing pension funds with ISA savings.

If Gordon Brown could raid supposedly tax-exempt pension funds, then why shouldn't a future Chancellor raid supposedly tax-exempt ISAs, whether for some useful purpose such as paying off the national debt, or for some Nu-Labour fantasy.

There is no right or wrong answer ... and a mixture may well suit the client??

Have a look at our blog for the maths ....

http://paulcfp.wordpress.com/2010/03/05/whats-so-wrong-with-an-annuity/

Welcome to the 21st Century, Mr Bee. As I have argued for some time now pensions, as currently structured are dinosaurs, making money mainly for the rich and the practitioners.

The main pension problem is at the lower end of the market. If the moderately wealthy and the rich can't save for retirement, that is choice. It is not choice at the lower end of the income spectrum, were living is about day to day survival.

At the upper end the ISA is a perfectly adequate incentive. All examples are spurious because they are straight line assumptions, and nothing ever works like that, but for the sake of providing figures, assume £100 per month, net, invested for 40 years, and tax and interest rates at current nominal levels. Assume also a growth rate of 6% pa, which is reasonably conservative.

The pension route would provide a fund of £239,620, giving TFC of £59,905 and an after tax income of £820 per month.

An ISA would provide a fund of £192,440. For comparability take the TFC, and use the balance to provide exactly the same level of net income as the pension. On this assumption there would still be money in the kitty at age 90, though it would run out soon after. But that will cover a majority of pensioners.

There are choices to be made. Remember that this option would be for the better off, so it is possible that they would not withdraw consistently from the ISA, leaving more in that pool at death to pass on to family. An option not, currently, available with an annuity, and barely available under DrawDown.

Money would be accessible from the ISA at other times, so it can be used an emergency fund.

And there is no massive legislative and administrative burden sucking the costs out of the fund.

But there are some risk factors, e.g out living the income stream. But it would still be possible to purchase a Life Annuity, which actually has a better net of tax income position than a Pension Annuity.

Which leaves the less fortunate. Basic Pension and NEST together should account for a significant portion of this segment - especially if there is no tax burden on the retired below say £15,000, in current terms.

Some will need additional aid, but this can come through from the "tax relief" that is not being given to the rich.

Pension schemes were an important factor in life when people did not have houses, share option schemes, savings schemes etc. Life has moved on. So should the retirement industry.

The two main stumbling blocks to such advancement? Firstly, the current entrenched pensions industry, which is making ever such a nice living, and, secondly, and probably more importantly, the chaps and chapesses residing in Westminster who have recently had their second (undisclosed) income dramatically reduced. I note they are now getting fractious about the new expenses regime, so I dread to think how they would react to the threat of losing their pension rights.

Dinosaurs outlived their usefulness; gas lighting was brilliant, but superseded; With Profit policies were a great invention, but now obsolete; let's try some euthanasia on pension policies - and the end of year panic. Tax is trying to wag an increasingly bloated dog.

The question for most respondents here is 'would you recommend between ISA or Pension without a full fact find?'. If the answer is 'No' this is all so much hot air. Most people don't use an adviser. They' want to reach simple judgements and get on with their lives. The call for simplifying the messages is therefore the right one.

The point about ISA for Mr and Mrs average, is that the temptation to cash in early and buy a new car because they need cheering up is very real. The pensions regime ensures that the money is there for retirement and the government has to encourage that if we're not to lose control of the social security budget.

For me, the hybrid solution would be pension based on EET with the ability to cash in within certain limits after a probationary period. This identifies and rewards the arrangement for the 'long term', which is what we need to promote, but with an escape mechanism to cater for changes in circumstances.

Sorry Mr B but unless there is an employer contribution or the client is a higher rate tax payer ISAs are better by my calculations. The problem is that most basic rate tax payers can not live long enough to pass the break even point of an ISA portfolio.

Yes I know that messing around with NI etc enhances the case for pension but for the vast majority of basic rate tax payers with less than £10200 pa to invest I would expect ISA to come before pension.

I was going through some old notes and found a reference to a Savings and Retirement Account (SaRa). This idea was mooted in 2006.

Does anyone remember it, or even have details of the suggestion?

Seems like we have been debating this topic for some time without making any headway. How unusual!