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How do I know if my work DC pension is on track?

foolishdecisions
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How do I know if my work DC pension is on track?

#200501

Postby foolishdecisions » February 11th, 2019, 11:00 am

Hello fools

Many years ago I started investing in my workplace pension when I started a new job following advice from the helpful Fools on the boards of the old motleyfool website, I'm now coming up to 12 years service with my employer and checked my pension account online and can see it's currently valued at £166k.

I'm 38 years old, I'm just trying to work out if my pension is on track and what I could be looking at on retirement (assuming I get that far!). I don't think my job will last forever as there's always outsourcing/insourcing in my sector, but thankfully I haven't been touched so far by the many rounds of restructuring I've seen.

Employer matches contributions of up to 11.5%, and I'm contributing that at the moment(in the past it's been less according to circumstances, one year I dropped to 3%) so approx. £5k from me and £5k from my employer.

My pension is pretty much my only form of savings so keen to get the most out of it.

Urbandreamer
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Re: How do I know if my work DC pension is on track?

#200522

Postby Urbandreamer » February 11th, 2019, 11:54 am

I don't have a simple answer, as it's not a simple question.

Here is what I do. I have a simple (and I do mean simple) spreadsheet.
In it I track the current value of my employer DC pension, my SIPP, my ISA's and an old DB scheme.
I use the standard functions (fv) to predict, given my rate of contributions and an assumed rate of growth what the size of my pot will be when I retire.
I can then estimate the natural yield on that sum to give me some idea if I'm on track.

However, as I said, that's a simple solution and hence probably wrong.

On top of that I use an online calculator which uses a different methodology.
I like this one, but you do have to be careful to answer the questions correctly or it will give you a shock.
https://www.firecalc.com/
Sure it's in $'s, but for my purposes I can just pretend that $1=£1.

Your £166k is not a king’s ransom. but at 38 it's not a bad amount.

I would however point out that you are 17 years away from being able to access it. I would strongly urge that you think about some other form of additional savings, just in case. Even if it means reducing your pension contributions until you have a significant emergency fund.

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Re: How do I know if my work DC pension is on track?

#200568

Postby vrdiver » February 11th, 2019, 2:49 pm

Urbandreamer wrote:I would however point out that you are 17 years away from being able to access it. I would strongly urge that you think about some other form of additional savings, just in case. Even if it means reducing your pension contributions until you have a significant emergency fund.

Seconded.

On the plus side, your employer contributions probably make this the best savings scheme available to you, in terms of cost of cash to you v cash in the pot.

On the downside, you are at risk if the government change the rules on pension tax or access.

You haven't mentioned what the DC scheme charges are, or what your annualised growth has been over the last 12 years. To get a feel for how well your money is performing, you might set up a spreadsheet with one column for the date of payment and the next for the amount paid in, then use the Excel XIRR function and compare what you get vs what the stock market would have got over the same period (imagine you had put the money into a FTSE all share tracker instead).

You may have literature from the scheme that suggests your employer pays all or most of the admin costs, which would imply you're getting a good deal, but unless you know the performance of the scheme vs the real world, it's really hard to know if you actually are.

With the spreadsheet comparison against the FTSE, inflation rises will have been baked in (i.e. the FTSE figures will show the effects of historic inflation on their values) so you can ignore inflation and just look at the relative performance of your DC pot v the FTSE. Looking forward, if you assume your pay, and therefore your contributions, will rise at the same rate as inflation, you can ignore it again for future contributions, just take off your estimate of inflation from the rate of growth of the current pot.

Eventually you'll end up with a spreadsheet that will tell you, roughly, what sort of pension you might expect at your chosen retirement date. Then you need to compare that pot's value with your required pension: assume you can take 4% of the pot as pension (i.e. a pot of £1m will pay £40k a year) and the capital will grow by inflation so preserving the value of your £40k in real terms. Nb - very broad assumption, but a place to start!

Alternatively, start with how much money you need to retire on, divide it by 4% and that tells you the size of the pot you're aiming for. Now you just need to project your current pension pot, plus future contributions, to see when it will get to that size. Keep tracking each year to see if you are staying on target, falling behind or getting ahead, and try to make provision accordingly.

The variables (pay rises, 4% withdrawal rate, % growth rate of the pot itself) can all be tweaked and will cause big swings in the answers, and of course the actual journey won't be a linear curve from now to retirement, but the exercise will help you understand whereabouts you are on the plan and whether you need to do something to change where you are to where you want to be...

Let us know what you conclude!
VRD

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Re: How do I know if my work DC pension is on track?

#200584

Postby Alaric » February 11th, 2019, 3:17 pm

Urbandreamer wrote:I use the standard functions (fv) to predict, given my rate of contributions and an assumed rate of growth what the size of my pot will be when I retire.
I can then estimate the natural yield on that sum to give me some idea if I'm on track.

However, as I said, that's a simple solution and hence probably wrong.


It's how DC illustrations have always been done, with the exception that an annuity rate would have been used to estimate the resulting income.

If salary increases are anticipated, even if only due to inflation. you get increasing rather than level contributions. You have to compare the resulting pension income to the likely salary after inflationary growth.

foolishdecisions
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Re: How do I know if my work DC pension is on track?

#200642

Postby foolishdecisions » February 11th, 2019, 6:57 pm

Thank you for your responses, plenty of food for thought

Urbandreamer wrote:Your £166k is not a king’s ransom. but at 38 it's not a bad amount.

I would however point out that you are 17 years away from being able to access it. I would strongly urge that you think about some other form of additional savings, just in case. Even if it means reducing your pension contributions until you have a significant emergency fund.


Yes absolutely. I should have explained a bit more, I'm not living hand to mouth but I don't have much resistance for a big shock. I managed to save £6k recently but I overpaid my mortgage with it and have a mortgage debt outstanding of £131k. I'm the only earner in my family, 3 kids under the age of 8. On the plus side I have no other debts, I do use credit cards for monthly spending but pay off in total every month.

I haven't been able to save consistently though apart from last year and that was through a lot of overtime. I am likely to continue wanting to pay down the mortgage. I have opened up a Stocks and Shares ISA and hope to invest a bit over the course of the year, I'll be reading the sharedealing sections of the board with interest.

vrdriver wrote:You haven't mentioned what the DC scheme charges are, or what your annualised growth has been over the last 12 years. To get a feel for how well your money is performing, you might set up a spreadsheet with one column for the date of payment and the next for the amount paid in, then use the Excel XIRR function and compare what you get vs what the stock market would have got over the same period (imagine you had put the money into a FTSE all share tracker instead).


I hadn't even considered the charges (or growth for that matter), I've just checked and it's apparently 0.535% with a 0.770% discount from the standard price because of my employer.

I will start looking at records of previous contributions to try and build out my spreadsheet along the guidelines you have given. I think it's been transferred a few times, so it might be difficult to work out exactly what was contributed when, but I think I can work off historic payslips as well.

Will have a go over the next few days and let you know what I come up with. Thanks again.

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Re: How do I know if my work DC pension is on track?

#200666

Postby Urbandreamer » February 11th, 2019, 7:51 pm

foolishdecisions wrote:I managed to save £6k recently but I overpaid my mortgage with it and have a mortgage debt outstanding of £131k. I'm the only earner in my family, 3 kids under the age of 8. On the plus side I have no other debts, I do use credit cards for monthly spending but pay off in total every month.

I haven't been able to save consistently though apart from last year and that was through a lot of overtime. I am likely to continue wanting to pay down the mortgage. I have opened up a Stocks and Shares ISA and hope to invest a bit over the course of the year, I'll be reading the sharedealing sections of the board with interest.


That sounds like a plan and a good start.

foolishdecisions wrote:I hadn't even considered the charges (or growth for that matter), I've just checked and it's apparently 0.535% with a 0.770% discount from the standard price because of my employer.

I will start looking at records of previous contributions to try and build out my spreadsheet along the guidelines you have given. I think it's been transferred a few times, so it might be difficult to work out exactly what was contributed when, but I think I can work off historic payslips as well.

Will have a go over the next few days and let you know what I come up with. Thanks again.


I recomend that you look at who it's invested with and what information they provide. I know that Aviva and Scottish Widows provide web based information about company pensions held with them. My company "Group pension scheme" is currently with Aviva. Online I can get a current valuation. See how it has been performing over the last 12 months. What it's invested in and even, were I to choose to do so, change from the high octain choices that I made 7 years ago. Indeed I do need to give the latter some serious thought, being somewhat nearer retirement.

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Re: How do I know if my work DC pension is on track?

#200764

Postby xxd09 » February 12th, 2019, 9:37 am

Great that you have started to take Control
Lots of reading to do .Try the Monevator board too for more info
You are in a reasonable place at the moment and have a Plan
Some thoughts
0.5% Pension costs are high compared to posters here
£100000 Savings buys you approximately £3500 income at 65- have you saved enough?
Get a State Pension forecast for you and your wife- another source of income
If saving use an ISA- your wife can start one too
Etc etc
Good luck
xxd09

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Re: How do I know if my work DC pension is on track?

#200799

Postby UncleIan » February 12th, 2019, 11:21 am

foolishdecisions wrote:I haven't been able to save consistently though apart from last year and that was through a lot of overtime. I am likely to continue wanting to pay down the mortgage. I have opened up a Stocks and Shares ISA and hope to invest a bit over the course of the year, I'll be reading the sharedealing sections of the board with interest.


Also consider the money saved in interest on your mortgage, depending on charges and interest rates. To my mind if you are being charged say 5% on a mortgage, but are scrabbling around for 3-4% and your capital is at risk, then it might be more prudent to pay the mortgage off first. Of course, payments off the mortgage will compound. I.e. if you've got a standard repayment mortgage, paying off that £6k extra will mean more of your monthly payments are paying off capital, as the amount of interest paid is reduced.

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Re: How do I know if my work DC pension is on track?

#200803

Postby kempiejon » February 12th, 2019, 11:35 am

UncleIan wrote:
foolishdecisions wrote:I haven't been able to save consistently though apart from last year and that was through a lot of overtime. I am likely to continue wanting to pay down the mortgage. I have opened up a Stocks and Shares ISA and hope to invest a bit over the course of the year, I'll be reading the sharedealing sections of the board with interest.


Also consider the money saved in interest on your mortgage, depending on charges and interest rates. To my mind if you are being charged say 5% on a mortgage, but are scrabbling around for 3-4% and your capital is at risk, then it might be more prudent to pay the mortgage off first. Of course, payments off the mortgage will compound. I.e. if you've got a standard repayment mortgage, paying off that £6k extra will mean more of your monthly payments are paying off capital, as the amount of interest paid is reduced.


UncleIan,

Exactly right, why invest for 3 or 4% when you have 5% of borrowing costs. However others mileage may vary - you can get a mortgage for 5 years fixed at 1.89 or 7 years for 2.04%, my investments have historically beaten that by a good margin. However it doesn't detract from the feeling of being mortgage/rent free. For me the numbers are the only relevant issues here, compounding of borrowing and rent probably wouldn't sway it and if one could borrow at 2% and invest at 5% why not?

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Re: How do I know if my work DC pension is on track?

#201809

Postby melonfool » February 16th, 2019, 5:47 pm

I use a several pronged approach.

On the one hand I assume a 3%-4% return on investments - I don't need a spreadsheet for that, I can do 4% in my head. (I do have a spreadsheet though :D )

So, assume an income of up c£6,500pa.

Can you live on that? Probably not.

You seem to be adding £10k pa - so over the next 17 years, that's £170k (I ignore growth as I assume growth and inflation will fairly well match and cancel each other out, so I only work on today's numbers) - so that would give you £336k * 4% = c£13,400 - can you live on that? Probably not.

So, at this stage we have you aged 55, with an assumed income of £13,400 in today's money, and eleven/twelve (?) years until state pension. If state pension is £8k, can you live on £21k? Quite possibly.
You also have £336k of capital which you can draw down (you don't have to only take the income) and of that you can take 25% tax free (under current rules).

To my mind, in that case, from age 55 if you have that sum assured, any more you add is a bonus. But you are not set to give up work early!

However, this may not be what you WANT to live on! And that's when you start doing the reverse calcs - 'I want to have £40k income, how much do I need to ensure that' - and work backwards. If £8k of that is state pension, you need to secure £32k yourself. £800k? Starting to sound quite a lot now! :) Worse if income is 3%. But it could be, say, 8% of course.

Take account of the capital and decide what rate you can draw down by.

On balance, I am trying to get to somewhere over £400k.

Next - look at where the money comes from and its tax treatment.

If your employer matches up to 11.5%, you simply must pay in 11.5% - if not, you're just throwing money away. No-one is going to give you that money any other way. So, grab that.

Next - look at your tax rate - are you a 40% tax payer? I try to put as much in the pension as I can and keep under the 40% tax band. This is, quite simply, the best return I could ever get for my money. If I have savings in an account paying 3%, I am better off spending that and putting income into the pension. This is, of course, capped at £40pa or your salary whichever is lower.

If your employer pays into pension by salary sacrifice then you are also saving NI. If, by any sweet chance, your employer rebates some of the employer's NI to your pension then this is also a massive boost. My last employer rebated 50% of employer's NI, which is 13.5%, so 6.75% extra into my pension, as well as the 40% tax saving and the 2% NI saving. The upshot of this is that the money goes into your pension costs you a lot less than its value.

BUT - if you are not a higher rate tax payer, once you have taken account of your employer's contribution, other than the 25% tax free draw down, I actually think it's better to take the money taxed at basic rate and put it in an ISA. This is especially true if you expect to be a tax payer in retirement as you'd be paying tax on your pension drawings, but not on any ISA drawings. ISAs are also more flexible while you are under 55.

I am 51 this year so I now view the pension as a medium term savings vehicle and I intend to put £40k-£50kpa into it for the next three years (using unused previous year's allowance) and from then the £40k allowed. If I manage this for 4-5 years I'll be over the £400k I want.

I intend to try to get to £20k secured income (I have £2k from an old DB scheme too) and then downgrade my job and do something more useful. At that point I will hope to still earn an income but not need to pay into the pension (but will still take account of any employer contribution available, of course!).

On top of this, I aim to have £100k in an ISA (currently at about half that).

I'm quite clearly never going to be rich. But those are the inputs I use to make my decisions.

Mel

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Re: How do I know if my work DC pension is on track?

#201846

Postby vrdiver » February 16th, 2019, 10:30 pm

melonfool wrote:once you have taken account of your employer's contribution, other than the 25% tax free draw down, I actually think it's better to take the money taxed at basic rate and put it in an ISA.

Mel

Absolutely agree.

If you treat both ISAs and pension pots as "pension" then the ISA element can be accessed at whatever age you want. In my case, that was from age 50.

In an ideal world I'd have just spent the dividends from both pots, but what happened was that I sold shares from the ISA pot whilst buying them back in the pension pot (using the dividends I couldn't access). The net effect was that I spent dividend income whilst the capital value of my ISAs shrank and my pension grew. Had I invested everything into the pension pot, I wouldn't have had the choice to retire until age 55, and even that would be at the whim of the government, should they have chosen to change the rules*.

Of course, if you don't trust yourself to not spend the ISA cash (I deserve a new car etc etc...) then the pension is a nice vault that will stop you spending future-self's freedom, but if you have the discipline to save, then ISAs can create choice that the current pension regime doesn't offer.

VRD


*which suggests the ISA pot will need some slack, depending on how long you need it to last before accessing pension funds - the more time the government has to meddle, the greater the risk that they will throw a spanner in the works.

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Re: How do I know if my work DC pension is on track?

#201853

Postby JohnB » February 16th, 2019, 10:59 pm

When modelling, I try to ignore inflation, as it muddys the water and makes the numbers unreal. So you need to pick 2 figures, the dividend rate for your investments, and the capital growth over inflation. Say for the FTSE 3.5% and 1%, then run that forward with your annual contributions. Those contributions should jump dramatically in your 50s as you get promotions, pay off the mortgage and your children become more self-supporting. People often talk about compound interest meaning early investment is key, but don't beat yourself up if the money is not there now

If you are worried about a contraction in your job market, make sure you have a buffer to allow for retraining. either as a 1 year emergency fund, or better the ability to remortage/offset to get the money.

Once you have a model, check it for sequence of returns risk, the market falling 20% in a year, then rising at 5% for 5 years.

If using historical data, remember the raw index number is no use, look for Total Return numbers, and apply inflation figures too.

Check if your DC scheme allows partial transfers out. If it does then consider whether running an additional SIPP could be better, as you'd likely save a lot in fees

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Re: How do I know if my work DC pension is on track?

#201863

Postby melonfool » February 17th, 2019, 12:14 am

I have £6k in a cash ISA, on 1.5%. I've not fully used this year's pension contributions and I will be paying some tax at 40%. I have income to cover it.

If I move the £6k into the pension I can save on income tax.

But I have trained my mind so well that you never take money out of ISAs that I'm really struggling to do it!

Mad, isn't it?

I do need to do some maths and work out exactly how much I still need to put in to save the 40%. I was on top of it but I've just had a payrise, so it's changed!

Mel

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Re: How do I know if my work DC pension is on track?

#201864

Postby Itsallaguess » February 17th, 2019, 5:33 am

JohnB wrote:
When modelling, I try to ignore inflation, as it muddys the water and makes the numbers unreal. So you need to pick 2 figures, the dividend rate for your investments, and the capital growth over inflation. Say for the FTSE 3.5% and 1%, then run that forward with your annual contributions.

Those contributions should jump dramatically in your 50s as you get promotions, pay off the mortgage and your children become more self-supporting.

People often talk about compound interest meaning early investment is key, but don't beat yourself up if the money is not there now.


There's a lot of sense in that, but whilst we might consider 'early-investment' to be less important when compared to the potential for much more substantial sums to be invested later in life, as in your 50's example above, I think one of the key elements of 'early investment', even with quite small sums of regular cash savings, is that it instils the very-much-required long-term discipline that ultimately benefits that '50's' stage of our lives, when there's the potential for those larger sums of investible funds to then become available...

That 'discipline' is likely to come in many forms, such as the much-discussed long-term habit of not allowing our lifestyles to grow in an overly-extravagant way with each annual pay-rise, and instead ensure that the bulk of any increases in income are filtered off into larger and larger regular investments...

It also helps to set an early drum-beat with regards to investment-management; whether that's to do with ensuring that our annual ISA allowances are utilised (it's really surprising how much we can squirrel away inside tax-free wrappers if we start to do so as soon as we possibly can...), or with regards to re-investment of dividend income and suchlike - it all simply sets us up for the necessary habits that we will benefit the most from when those later years can hopefully deliver the much more serious capital amounts that may then become available for investment too.

So whilst early-investment might not necessarily get a massive benefit from your compound-interest example, I think beginning to turn investment into a habit from as early an age as possible has other much more wider-ranging benefits, and it's possible that not instilling those good habits until later in life might well hamper the ability to achieve what we'd like to achieve if and when that 'later-years-capital' hopefully becomes available...

Cheers,

Itsallaguess

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Re: How do I know if my work DC pension is on track?

#201956

Postby melonfool » February 17th, 2019, 5:55 pm

"whether that's to do with ensuring that our annual ISA allowances are utilised (it's really surprising how much we can squirrel away inside tax-free wrappers if we start to do so as soon as we possibly can...),"

There's just no point any more.

ISAs have terrible rates currently and up to £1k of interest is untaxed outside an ISA now. (£500 for higher rate tax payers, another reason to stay under that 40% band)

I've found that setting up a few (2, currently, though I really must find another one) regular savers is better. I also use Chip which I now have at 3% and you can get up to 8% (I think the limit is £100pw saved there). Feel free to use my code if you want to try it! 4RUZAS

I do have c£27k in a fixed rate ISA finishing next year at 2.5%.

Course, if you mean S&S ISA that's different, I like my S&S in the ISA just to avoid the paperwork of the tax treatment for any kept outside one!

Mel

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Re: How do I know if my work DC pension is on track?

#201960

Postby JohnB » February 17th, 2019, 6:32 pm

Anyone who ignores ISAs will regret it later. The 1% interest rate is an anomaly. If rates return to 4%, modest cash savings will be caught. Similarly the £2k dividend allowance and 7.5% rate has a fair chance of going to 0 and 20%, leaving your equity being taxed. And a modest inheritance would have its income taxed for years until you managed to shelter it all.

Regular savers seem a lot of work, and until you get a chain going, the interest you get is half the headline figure

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Re: How do I know if my work DC pension is on track?

#201976

Postby melonfool » February 17th, 2019, 8:49 pm

JohnB wrote:Anyone who ignores ISAs will regret it later. The 1% interest rate is an anomaly. If rates return to 4%, modest cash savings will be caught. Similarly the £2k dividend allowance and 7.5% rate has a fair chance of going to 0 and 20%, leaving your equity being taxed. And a modest inheritance would have its income taxed for years until you managed to shelter it all.

Regular savers seem a lot of work, and until you get a chain going, the interest you get is half the headline figure


I think that's a very presumptuous comment, especially if you note I was ONLY talking about cash ISAs - the current ISA limit is £20k, not many people can save that a year. My current ISA savings are £3k pa so no I won't 'regret' not filling them up as I don't have the money to fill them up anyway (due to being a higher rate tax payer I am concentrating on my pension).

And if I suddenly get some money, I can put it in the current year's ISA.

This did spur me to open another regular saver though - just opened the HSBC account with £150 reward (better than pretty much any interest rate), having opened the NatWest one in Dec, got their £125, will now use that to be the current account switch one to HSBC, then will transfer the required £1,750pm from my Santander account where my pay goes, of that £250 will go to the HSBC 5% regular saver, and £1,500 back to my Nationwide account which is the account I really use.

Once it's set up to happen automatically it will be no bother at all. And I'll be saving £9kpa which i can then either out in an ISA or the pension.

Mel

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Re: How do I know if my work DC pension is on track?

#201979

Postby Urbandreamer » February 17th, 2019, 9:32 pm

Haven't we come a long way from the title of the thread?

Seriously, of course we have to adopt a "holistic" approach. However while I thought that the OP was ignoring his current situation, he corrected my misunderstanding. We should mostly be looking at long term savings.

Of course cash is important, and of course there is a valid discussion between using ISA's for long term savings with respect to pensions (I would argue that each is right at different times in a persons life). However should we really be arguing the merrits of different cash savings given that the thread clearly is about pensions? The government has a policy of 2% inflation, hence cash is trash. In simple terms, any cash that you own, or cash accounts that pay below the intended 2% should be expected to be costing you money!

Ps, we haven't mentioned salary sacrifice. It makes a real difference to those who currently are standard rate tax payers or those who can becone so. Suddernly the see-saw may tip back to pensions from ISA's.

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Re: How do I know if my work DC pension is on track?

#201990

Postby melonfool » February 17th, 2019, 10:33 pm

Er, I think you'll find I mentioned salary sacrifice actually.

Mel

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Re: How do I know if my work DC pension is on track?

#202000

Postby Itsallaguess » February 18th, 2019, 4:51 am

melonfool wrote:
Course, if you mean S&S ISA that's different, I like my S&S in the ISA just to avoid the paperwork of the tax treatment for any kept outside one!


Apologies for the late reply Mel, as I didn't realise you'd quoted me in one of your posts - you'd not used the normal quote feature, so I didn't get an automatic notification that a reply had been made.

Although I didn't mention it specifically, I was really discussing ISA's in an investment sense, rather than really talking about cash ISA's.

I appreciate your point regarding meagre interest rates negating some of the advantages of cash ISA's, but as another poster has already said, these things change, and once we've lost an opportunity to utilise our annual ISA allowance, in either cash or investments, then that chance has gone, and these non-tax-wrapping opportunities do really add up over the years.

We can of course transfer cash ISA's to investment ISA's too, which, depending on our future plans, may be another advantage to ensure we make use of these opportunities.

Actually, a quite sizeable chunk of my current ISA investments were originally in cash ISA's, which I transferred to my investment ISA's a few years ago now, when I'd made provisions elsewhere for some of my 'fluid capital' requirements, and wanted to ensure my cash-ISA capital was working a little harder for me. I was glad I'd taken the chance all those years ago to get that cash inside those wrappers.

Totally agree about the S&S ISA paperwork-avoidance advantages, but given the meagre cash-interest and dividend-allowance we're currently 'allowed', we should probably always try to get everything we can inside these tax-free accounts, to help avoid that type of potential-paperwork too..

Cheers,

Itsallaguess


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