Do I go for ISA or pension top up? I am 43 years old with a small WP pension. I want to invest £15,000.00 long term.

10 February 2022

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Question by Jeremy

I am 43 years old with a small WP pension. I want to invest £15,000.00 long term. Do I go for ISA or pension top up?

Answered by Rachel Efetha

Hi Jeremy,

Thanks for your question. My first point would be to check that your existing WP pension is still fit for purpose. Since the tech bubble burst at the turn of the millennium and WP providers exhausted their reserves to maintain bonuses, a lot of the WP funds have been paying extremely low bonuses, some as low as 1%. This would be particularly true if the original pension provider is no longer in business and has been bought out by Phoenix or Reassure. Having said that, you sometimes find a rare jewel that has a guaranteed bonus of 4% written into it, which is worth keeping as a risk free return or there might be other 'safeguarded benefits' that are worth keeping.

As to the question of going for a pension or ISA, I can't give you specific advice without knowing all or your circumstances - for instance, you might have a credit card balance or other debt to consider paying off with your £15,000. However, assuming that you don't have other needs for this money and it is quite simply a pension vs ISA question - if you can afford to 'tie' the money up until you reach the age of 57, then pension wins every time. £15,000 into an ISA is £15,000 invested. £15,000 into a pension is £18,750 invested thanks to basic rate tax relief, (with the caveat that you have earnings of more than £18,750 plus whatever regular payments you're making into pensions to obtain the tax relief). So, you get a bonus of £3,750 on day one, plus 14 years investment returns on that £3,750. If you're a higher rate tax payer, then you'll get a further £3,750 higher rate relief when you complete your tax return - it's a no brainer!

Given my comment about WP above, it's probably better for you to set up a new pension plan for this money in a simple 'off the shelf' multi asset fund that is aligned to how much risk you want to take - and go slightly out of your comfort zone with the risk, you've got at least 14 years to ride it out.

My final point would be that this would be a good time to sit down and actually have a good think about retirement. What age do you want to have the financial freedom to be able to stop working (but equally carry on working if you're still having a good time)? What do you want to do in retirement? How much money do you need in retirement to cover the basics, and how much money do you want to cover the fun stuff? That's where a Financial Planner can really add value - the pension or ISA is just a vehicle to get you to that point.

Please feel free to contact me if you'd like to discuss this further.

Answered by

Rachel Efetha

Chartered Financial Designer

Rachel has nearly 30 years’ experience in Financial Services, with the last 21 years advising clients. She advises on a holistic basis but particularly enjoys Cashflow Planning to see when her clients can afford to retire, and has reduced grown men to tears twice by telling them they could afford to resign right now. As a divorcee herself, Rachel loves coaching women going through divorce to take financial control, and has successfully argued with solicitors to gain her clients a much bigger slice of the pension pie.