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  • FIRST POST
    • Steadijim
    • By Steadijim 10th Mar 17, 6:25 PM
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    Steadijim
    Stocks & Shares ISA with SIPP
    • #1
    • 10th Mar 17, 6:25 PM
    Stocks & Shares ISA with SIPP 10th Mar 17 at 6:25 PM
    I've been reading the pages about SIPP's and S&S ISA's. I have one of each and have had for a couple of years.

    There are a couple of points i'm not too clear about.

    1) I'm aware there is a capital gains allowance outside of ISA's but going over that limit within the ISA allows you to avoid that tax. However, are you required to pay income tax on gains made from funds within a S&S ISA? I understood that whatever you gained within the ISA was tax free?

    2) Given that there is an allowance of £40k per year which can go into a SIPP before tax, what would be a good balance with regard to how much you put each year into the SIPP vs what goes into the ISA? I realise that releasing funds from the SIPP is a whole different affair to an ISA, but I'm looking at long term savings and growth. Is the SIPP better than the ISA etc?

    3) What are the tax implications on each when you release funds? What taxes do you pay on your pension from a SIPP when you release it and do you ever have to pay taxes on your ISA savings?

    All very confusing...!
Page 1
    • dunstonh
    • By dunstonh 10th Mar 17, 6:54 PM
    • 88,125 Posts
    • 53,350 Thanks
    dunstonh
    • #2
    • 10th Mar 17, 6:54 PM
    • #2
    • 10th Mar 17, 6:54 PM
    1) I'm aware there is a capital gains allowance outside of ISA's but going over that limit within the ISA allows you to avoid that tax. However, are you required to pay income tax on gains made from funds within a S&S ISA? I understood that whatever you gained within the ISA was tax free?
    The only tax ISAs are subject to is inheritance tax.

    2) Given that there is an allowance of £40k per year which can go into a SIPP before tax, what would be a good balance with regard to how much you put each year into the SIPP vs what goes into the ISA? I realise that releasing funds from the SIPP is a whole different affair to an ISA, but I'm looking at long term savings and growth. Is the SIPP better than the ISA etc?
    That would be a personalised outcome depending on your objectives and circumstances. There is no one-size-fits-all level here. You would need to work it out.

    3) What are the tax implications on each when you release funds? What taxes do you pay on your pension from a SIPP when you release it and do you ever have to pay taxes on your ISA savings?
    ISAs are tax free except for IHT.
    Pensions are not subject to IHT but 75% of what you draw is treated as income (so amounts above personal allowance are taxed).
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • masonic
    • By masonic 10th Mar 17, 6:57 PM
    • 9,126 Posts
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    masonic
    • #3
    • 10th Mar 17, 6:57 PM
    • #3
    • 10th Mar 17, 6:57 PM
    1) Correct
    2) There is no difference in growth between one and the other. There is a difference in tax treatment on the way in and on the way out. How much to pay into each will depend on your own personal circumstances - such as your current income, your income in retirement, when you want to retire, whether you need access to the funds before you retire.
    3) Both currently grow tax free. There is no tax for you withdrawing from your ISA and beyond the tax-free lump sum, money withdrawn from your pension is treated as income and taxed at your marginal rate (currently). There are no guarantees current tax treatment will continue.
    • Steadijim
    • By Steadijim 11th Mar 17, 1:05 AM
    • 3 Posts
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    Steadijim
    • #4
    • 11th Mar 17, 1:05 AM
    • #4
    • 11th Mar 17, 1:05 AM
    Thanks for the replies. That's great news. It would seem to make sense to make as much use of the ISA as possible to avoid withdrawals being treated as income in the long run, then. Would that be a fair point?
    • p00hsticks
    • By p00hsticks 11th Mar 17, 1:53 AM
    • 5,418 Posts
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    p00hsticks
    • #5
    • 11th Mar 17, 1:53 AM
    • #5
    • 11th Mar 17, 1:53 AM
    Thanks for the replies. That's great news. It would seem to make sense to make as much use of the ISA as possible to avoid withdrawals being treated as income in the long run, then. Would that be a fair point?
    Originally posted by Steadijim
    It depends. ISAs are (typically) funded from income that has already been taxed, but with no tax to pay on the way out. With a SIPP you get tax relief on the way in, but taxed on 75% of it the way out.
    • Steadijim
    • By Steadijim 11th Mar 17, 2:29 AM
    • 3 Posts
    • 0 Thanks
    Steadijim
    • #6
    • 11th Mar 17, 2:29 AM
    • #6
    • 11th Mar 17, 2:29 AM
    Thanks. I think it makes sense to be taxed on the way in, then grow the profits in a tax-free environment, rather than growing the profits and being taxed on the increased amount at the end.
    • bowlhead99
    • By bowlhead99 11th Mar 17, 3:30 AM
    • 6,408 Posts
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    bowlhead99
    • #7
    • 11th Mar 17, 3:30 AM
    • #7
    • 11th Mar 17, 3:30 AM
    Thanks. I think it makes sense to be taxed on the way in, then grow the profits in a tax-free environment, rather than growing the profits and being taxed on the increased amount at the end.
    Originally posted by Steadijim
    That is a bit of misconception.

    Imagine you have £10k spare salary and pay 50% tax on it, which is £5k. You have £5k remaining to invest in an ISA.
    The investments quadruple in value to £20k.
    You take the £20k out tax free to pay for stuff in retirement.

    Alternatively
    You have £10k spare salary and decide to put it into a pension, avoiding tax by taking the tax relief. You invest that £10k into investments within the pension.
    The investments quadruple in value to £40k.
    You take the £40k out but have to pay 50% tax on it because it hasn't been taxed yet. You pay £20k tax so are left with £20k remaining to pay for stuff in retirement.

    The 50% tax rate is just arbitrary picked out of the air - you could use 20% if it's more realistic. The point is, in the first example it didn't "make sense to be taxed on the way in and pay a small amount of tax, instead of growing it and paying a large amount of tax on the larger pile of assets". The simple maths says the results were identical. You get £20k to spend in retirement either way.

    In the real world, pension can be a lot better, because for example:

    - when you do eventually end up paying the tax on the £40k received in retirement, you can take an initial 25% lump sum tax-free, so only three quarters of the £40k is actually taxable.

    - and you might find that your tax rate in retirement on the £40k spread over a few years is much lower than the tax relief you claimed when you first invested, e.g. your marginal rate might have dropped from 40% while working to 20% when retired, or perhaps from 20% when working to close to 0% in retirement because some or all of the money fits into your annual personal allowance with no tax to pay at all if you're smart about when you take it (e.g. after giving up work but before state pension kicks in).
    • p00hsticks
    • By p00hsticks 11th Mar 17, 9:34 AM
    • 5,418 Posts
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    p00hsticks
    • #8
    • 11th Mar 17, 9:34 AM
    • #8
    • 11th Mar 17, 9:34 AM
    Thanks. I think it makes sense to be taxed on the way in, then grow the profits in a tax-free environment, rather than growing the profits and being taxed on the increased amount at the end.
    Originally posted by Steadijim
    But you need to bear in mind that as you will get tax relief added to any SIPP contributions, the amount growing in your SIPP will be larger than that growing in your ISA. And you only potentially pay tax on 75% of withdrawals from the SIPP.
    • masonic
    • By masonic 11th Mar 17, 10:39 AM
    • 9,126 Posts
    • 6,271 Thanks
    masonic
    • #9
    • 11th Mar 17, 10:39 AM
    • #9
    • 11th Mar 17, 10:39 AM
    But you need to bear in mind that as you will get tax relief added to any SIPP contributions, the amount growing in your SIPP will be larger than that growing in your ISA. And you only potentially pay tax on 75% of withdrawals from the SIPP.
    Originally posted by p00hsticks
    The bolded bit is irrelevant. For identical investments, the growth rate will be the same. The only difference that needs to be considered is the comparative tax rate.

    For example, £8,000 of net income -> £10,000 after 20% tax relief. Assume this grows by 200% over 25 years, The £10,000 becomes £30,000. If this were now taxed at 20%, it would become £24,000.

    £8,000 of net income in an ISA (having been taxed at 20%), after growth by the same 200% would also be worth £24,000.

    The difference is that not all of the money coming out of the SIPP will be taxed, but the disadvantage is that it cannot be accessed until an arbitrary date in the future, which may or may not correspond to when you actually want to retire.
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