From Drawdown to ISA

So those of us without a crystal ball shouldn't use your ISA strategy?

Ie you pay more is tax in total using a pension.

Yes it is. It's the percentage tax paid on the way in & way out that's important, not the actual amount. If you compare the actual amounts, then that is very misleading, and you know it.

Yes you are. That "extra tax" is part of the amount you're including in your "after about 9 - 13 years you will have paid more income tax than you saved" statement.

I understood you perfectly well.

In message , Andy Pandy writes

No, that is an incorrect deduction from my statement.

You seem to be looking at this in a strange way. My statement which I repeat above is correct and is not misleading. It is fact.

Youve lost me completely. The word 'extra' is purely in your imagination.

No. You have put your own spin on it.

In message , Andy Pandy writes

Of course.

Exactly right. Whats the income got to do with it?

I think you forgot to subtract the profit and contingency elements.

Take a look at some gilt rates and long term annuity rates.......

Let me make this as simple as possible.

The only reason that your statement "after about 9 - 13 years you will have paid more income tax than you saved" is true, is because the deferred tax has grown in value.

You need to disregard any tax you pay purely because the deferred tax has grown in value to compare like with like. The ISA strategy would never see that part of the investment in the first place.

If you disregard it, then your statement is no longer true. Therefore the statement is misleading and of no value in deciding investment strategy.

So the pension strategy would give you a greater income than an ISA which you then use to buy gilts.

People tend to want income in retirement.

True but not massively significant.

Annuity rates are higher (level annuities obviously, if we're comparing with gilts).

So let's try to compare like with like. Suppose you analyse what happens to £1000 earned 10 years before you retire.

Plan A: You take the £1000 as income, pay £220 tax on it and invest £780 in a gilts ISA growing at 6%pa. After 10 years it's worth £1397.

Damned message sent itself before I had written it all. Continued:

Plan B: You stick the £1000 in a pension plan which invests in gilts growing at 6%pa. The plan is administered with 100% efficiency by managers who take a 0% annual fee. After 10 years it's worth £1791, of which you can take £447 tax free. With the remaining £1344 you buy an annuity (again administered charitably) calculated on the lore of averages to wind down to zero after 20 years, and since it will be funded by the same 6% gilts, the annuity rate will be about 8.7%. Hence after tax, the annuity will pay out 0.78x0.087x£1344 £91 per year.

If whatever we'd have done with our Plan B TFLS we also do with £447 of Plan A's £1397, then if we drew down the remaining £950 at the same 8.7%, we'd get only £83 per year.

That does seem to make the pension look better. Or does it?

Sounds like a nasty virus. Doesn't seem to have affected your maths though....

And the tax is about 26 a year (0.22*0.087*1344). So as per JB's statement - after

9 years you will have paid more tax than you saved. So his statement is quite factually correct. However.....

Correct.

It does. So despite paying more tax overall, the pension strategy makes you better off (in this case, with the same tax rates before and after retirement, this is purely down to the TFLS, without that the outcomes would be the same).

This is because the deferred tax grows in value. This can be demonstrated by considering the pension investment as two separate investments, one of the net investment and one of the tax relief.

If we amend plan B to be two separate investments of B(i) 780, and B(ii) 220. So B(i) is exactly the same amount as the total of plan A.

B(i) - The 780 will grow exactly as plan A to 1397.

B(ii) - The 220 will grow to 394.

The ratio between B(i) and B(ii) stays constant, obviously, as it's invested in the same thing. So B(ii)/[B(i) + B(ii)] will always remain at 22%.

So if we ignore the TFLS, when you draw benefits, all of B(i) goes to you - exactly the same as plan A, and all of B(ii) goes to the taxman, as B(ii) is always 22% of [B(i) + B(ii)]. Any growth in B(ii) benefits the taxman, not you, so the growth in B(ii) results in you paying more tax. But you would never have had B(ii) in the first place had you gone the ISA route.

So the *only* reason that the statement "after about 9 - 13 years you will have paid more income tax than you saved" is true, is because of the growth in B(ii), ie the growth in money *you wouldn't have had* had you gone the ISA route.

Therefore it is a highly misleading fact to use in a discussion comparing ISA's with pensions.

In message , Andy Pandy writes

No, you have missed my point. My statement is 'stand alone' it is not one that is linked to, or in favour of ISAs. What you say about ISAs is correct, as is my statement about Pensions.

In message , Andy Pandy writes

So they think. For larger than average pensions pots they generally dont want more taxable Income. It then becomes a wealth preservation exercise rather than income provision.

Oh stop digging. You clearly used that statement to justify your position that pensions are a bad deal for people who pay the same tax rate before & after retirement. You either hadn't thought it through properly, or you were attempting to mislead. Which was it?

If they're in a competition to see who can be the richest person in the cemetery?

In message , Andy Pandy writes

?!*?!

Neither. Go and lie down in a dark room and come back next month. You have made a serious pre-judgement. loosen up, otherwise we are in danger of falling out.

Hey, that's fighting talk! Let us know the time and place, guys, and how much the tickets will be.