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  • FIRST POST
    • ian-d
    • By ian-d 19th Apr 17, 6:35 PM
    • 367Posts
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    ian-d
    I'm told "you are doing it the wrong way around"
    • #1
    • 19th Apr 17, 6:35 PM
    I'm told "you are doing it the wrong way around" 19th Apr 17 at 6:35 PM
    I have a large pot of Cash ISA (6 figures). I squandered the opportunity to invest in S&S's 10 years ago when all hell broke loose and thereby missed out on potentially a lot of interest!

    I'm now trying to correct this by investing in a LISA, and a S&S ISA, transferring some across, and contributing new money too, to maximise my ISA allowance - the investments are multi-asset funds fyi.

    However, I'm being told that because I don't have a pension, I shouldn't be focused on ISA's at all!!! Surely it is better to have the full amount in ISA's still; I can always contribute outside of that to a pension (SIPP or whatever).

    Any suggestions on what I should be doing? I'm a basic band tax payer (mainly dividends) through a limited company I'm the owner/director of. I have avoided the pension because I was trying to build upon short term wealth of myself personally and the business, but now need to refocus on getting older!
Page 1
    • grumbler
    • By grumbler 19th Apr 17, 6:50 PM
    • 51,388 Posts
    • 21,755 Thanks
    grumbler
    • #2
    • 19th Apr 17, 6:50 PM
    • #2
    • 19th Apr 17, 6:50 PM
    You can find some comparison in MSE articles:

    Lifetime ISAs >> A pension's likely to beat a LISA
    Pension need-to-knows >> Is a pension really worth it?
    Last edited by grumbler; 19-04-2017 at 6:53 PM.
    We are born naked, wet and hungry...Then things get worse.

    .withdrawal, NOT withdrawel ..bear with me, NOT bare with me
    .definitely, NOT definately ......separate, NOT seperate
    should have, NOT should of
    .....guaranteed, NOT guarenteed
    • bowlhead99
    • By bowlhead99 19th Apr 17, 8:08 PM
    • 6,605 Posts
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    bowlhead99
    • #3
    • 19th Apr 17, 8:08 PM
    • #3
    • 19th Apr 17, 8:08 PM
    There are plenty of articles on the relative merits of ISAs and pensions with the major difference being accessibility (and all that comes with - i.e. accessible to creditors, being within scope of means tests, counting as part of your 'estate' for inheritance taxes etc) vs inaccessibility as the price for additional and lucrative income tax relief as a pension contribution.

    Building your accessible wealth and reinvesting company profits in your business rather than locking away money until your late 50s can be a very useful thing to do. But at the end of the day life is about balance - you will be disappointed as a retiree with no pension pot of income to use up your annual income tax allowance, but you will also be disappointed as a retiree with no home to call your own and having had low lifetime earnings because you never retained any cash within the business to grow it and you never spent money buying a house and creating an emergency fund etc etc while at working age because you were busy stuffing the pension. So the key to long term wealth generation is a mixture of using different vehicles to make the most of all kinds of opportunities.

    If you control your own company, pension contributions can be very useful. For example, if you take the money out of the company as a dividend, first the company has to make profits, then you have to pay corporation tax on those profits, and then out of what's left, you can pay dividends, and when you receive the dividends you'll be paying dividend tax once you've burnt through the £5k allowance (dropping to £2k allowance next year).

    Whereas if the company makes lower profits because it had the expense of making a pension contribution for you, it saves corporation tax, and you don't need to pay tax on the dividends because you don't get them - you just get the gross untaxed cash in your pension. When you get to your late 50s you draw cash out of the pension and a quarter of it is entirely tax free and the rest is taxed at your marginal rate which might be zero, depending on what other taxable income you have at that point in your life. So, there can be some serious savings to be made.

    The amount of tax saved is much more impressive if you are a higher rate taxpayer (i.e. saving corporation tax and high rate dividend tax is a lot more tax relief than corporation tax and lower rate dividend tax). But unless you expect to become higher rate taxpayer in future it seems a shame to be avoiding the opportunity to stuff your pension if your business is generating more cash than you need.

    By using a pension,(assuming you can draw a lot of it out at 0% in retirement), the saving of corporation tax plus lower rate dividend income tax is going to be a bit better than the 25% 'bonus' you get on a LISA and is available on a lot more than £4k per year. So, well worth considering ahead of 'normal' S&S ISA for money that you don't need to keep 'accessible' - unless you fully expect to be a high rate taxpayer further down the line, in which case doing S&S ISA now and using it to fund pension contribution later, is quite possibly better (subject to the other pros and cons and potential tax legislation changes).
    • ian-d
    • By ian-d 20th Apr 17, 7:57 AM
    • 367 Posts
    • 87 Thanks
    ian-d
    • #4
    • 20th Apr 17, 7:57 AM
    • #4
    • 20th Apr 17, 7:57 AM
    Thank you again and as always bowlhead99.

    I appreciate the current limits of £40k per annum, but what are the restrictions on balance between personal contributions and LTD company contributions? Must they be paid from the salary I get paid; or can in theory I pay in £100 per month and my LTD company pay in £1,000 per month?

    The question remains, if I go the route of a SIPP, what should I do with the 6 figure pot of Cash ISA? Is there any merit in transferring into a SIPP, or should I keep it locked up in the ISA wrapper (I don't need the funds releasing but it might limit what I can put in a SIPP). I ask because whilst I can transfer across some to a LISA (might as well have one I guess), I don't wish to be investing everything I have from the Cash ISA in a S&S ISA, as well as investing through a SIPP also; that would be too much risk for me personally.
    • bowlhead99
    • By bowlhead99 20th Apr 17, 9:03 AM
    • 6,605 Posts
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    bowlhead99
    • #5
    • 20th Apr 17, 9:03 AM
    • #5
    • 20th Apr 17, 9:03 AM
    Thank you again and as always bowlhead99.

    I appreciate the current limits of £40k per annum, but what are the restrictions on balance between personal contributions and LTD company contributions? Must they be paid from the salary I get paid; or can in theory I pay in £100 per month and my LTD company pay in £1,000 per month?
    Originally posted by ian-d
    Your company could pay in £40k and you could put in zero if you like.

    Effectively your personal contributions are limited to your earnings - because they don't want you to effectively have a negative net salary (though if your salary is under £3600 they will still let you contribute £3600 gross, as a floor level for everyone in the country regardless of earnings). But company contributions are not limited to anything other than the £40k aggregate annual max.

    For example say your salary was £30k with a £10k employer pension contribution. You could make a personal gross contribution of £30k to get the whole £40k in the pension. Or, say your salary was £10k with a £30k employer contribution. You could make a personal gross contribution of £10k to get the whole £40k in the pension. HMRC are not fussed either way. They are happy for your employer to spend £40k on your total compensation for working for them and for it all to go into a pension if you would like.

    The split of pension to salary is down to you and your employer; obviously you may be caught by minimum wage rules and you probably want to have a salary​enough to qualify for national insurance credit for the year. But once you've decided the gross number for your salary, you could put all that salary into a personal pension yourself (by contributing 80% of it into a pension and having the pension provider claim basic rate tax 'relief at source'); and then the employer can put the difference between the gross number and £40k, directly in to the pension as well.
    The question remains, if I go the route of a SIPP, what should I do with the 6 figure pot of Cash ISA? Is there any merit in transferring into a SIPP, or should I keep it locked up in the ISA wrapper (I don't need the funds releasing but it might limit what I can put in a SIPP). I ask because whilst I can transfer across some to a LISA (might as well have one I guess), I don't wish to be investing everything I have from the Cash ISA in a S&S ISA, as well as investing through a SIPP also; that would be too much risk for me personally.
    You can move some into a S&S LISA, some into an S&S iSA, and use some for general spending - the latter presumably needed to compensate yourself for the fact that the money now flowing out of the business to your bank account has been significantly curtailed - i.e. because you are only taking a bare minimum salary (which is all being put into a pension) and enough dividends to use up the annual personal allowance and dividend allowance, ensuring you pay no dividend tax or other income tax.

    Obviously, leave enough cash back in your ISA or bank account to ensure you are not "over-invested and under-cashed" with respect to your own risk tolerance / capacity for loss.
    • ian-d
    • By ian-d 20th Apr 17, 9:35 AM
    • 367 Posts
    • 87 Thanks
    ian-d
    • #6
    • 20th Apr 17, 9:35 AM
    • #6
    • 20th Apr 17, 9:35 AM
    Effectively your personal contributions are limited to your earnings - because they don't want you to effectively have a negative net salary (though if your salary is under £3600 they will still let you contribute £3600 gross, as a floor level for everyone in the country regardless of earnings). But company contributions are not limited to anything other than the £40k aggregate annual max.
    Originally posted by bowlhead99
    I only have a salary of just over £8k, to meet with usual tax and NI requirements; the rest is paid in a side line self-employment business (not cost effective but working on that) and the remainder in dividends. I assume none of these affect the ability to pay in a decent amount of money over the £8k salary, or would that be my limit?

    You can move some into a S&S LISA, some into an S&S iSA, and use some for general spending - the latter presumably needed to compensate yourself for the fact that the money now flowing out of the business to your bank account has been significantly curtailed - i.e. because you are only taking a bare minimum salary (which is all being put into a pension) and enough dividends to use up the annual personal allowance and dividend allowance, ensuring you pay no dividend tax or other income tax.
    Originally posted by bowlhead99
    But would removing ISA funds for daily expenses be considered a foolish move with the long term tax exemption benefits of an ISA? It shouldn't come to that, I think I can pay into a pension, keep the full ISA contributions in tact, and still have enough from other savings to keep me going for a few years yet!

    Once a SIPP is in place, it cannot be touched until 55 years old right? (or whatever it may have increased to at that time!).

    PS - I already own my house, cars, no debts etc.
    • bowlhead99
    • By bowlhead99 20th Apr 17, 10:35 AM
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    bowlhead99
    • #7
    • 20th Apr 17, 10:35 AM
    • #7
    • 20th Apr 17, 10:35 AM
    I only have a salary of just over £8k, to meet with usual tax and NI requirements; the rest is paid in a side line self-employment business (not cost effective but working on that) and the remainder in dividends. I assume none of these affect the ability to pay in a decent amount of money over the £8k salary, or would that be my limit?
    Originally posted by ian-d
    *You* can only put £8k gross into your pension (which you would do by contributing £6.4k into a pension and the pension provider grossing it up to £8k for standard basic rate tax relief which HMRC allows them to do -whether or not you actually paid any tax on the £8k earnings in the first place).

    *Your Company* can put [£40k annual limit less the £8k gross that you already put into your pension] into your pension. That cost of providing a pension for its employee / director is a legitimate expense of running its business and it doesn't matter if the pension contributions it chooses to make are well in excess of the current year salary it agrees to pay. In paying large pension contributions it will make less profits and pay lower corporation tax ; and the reduced earnings of the company as a result will leave the company with less available to pay to you as a taxable dividend.

    But would removing ISA funds for daily expenses be considered a foolish move with the long term tax exemption benefits of an ISA? It shouldn't come to that, I think I can pay into a pension, keep the full ISA contributions in tact, and still have enough from other savings to keep me going for a few years yet!
    You didn't mention you had a load of other savings that weren't in ISAs. Yes, you can use those other savings for living costs and keep the ISAs intact.

    Some non-ISA​ savings are very lucrative (e.g. regular saver accounts paying 5% on £500 a month here or £300 a month there) and will bring you a larger return per pound than a cash ISA. Once the amounts get large, it is hard to keep them all in "best buy" accounts and so if the option is to have a small cash ISA and large unwrapped savings vs large ISA and small savings, the latter probably wins. However depending on what you're earning in your sideline self employed business perhaps you don't have enough bank interest to pay any tax on the interest anyway.

    Also, if there's a sideline self employed business, the taxable profits from that count as relevant earnings for pension contributions too. So as long as you don't go over the £40k max, you can put in all your gross salary into a pension, and all your self employment profits into a pension, and top it up with a company pension contribution to get to the £40k limit.

    Once a SIPP is in place, it cannot be touched until 55 years old right? (or whatever it may have increased to at that time!).
    Correct.
    • ian-d
    • By ian-d 20th Apr 17, 11:17 AM
    • 367 Posts
    • 87 Thanks
    ian-d
    • #8
    • 20th Apr 17, 11:17 AM
    • #8
    • 20th Apr 17, 11:17 AM
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    Last edited by ian-d; 21-04-2017 at 11:30 AM.
    • ian-d
    • By ian-d 21st Apr 17, 11:29 AM
    • 367 Posts
    • 87 Thanks
    ian-d
    • #9
    • 21st Apr 17, 11:29 AM
    • #9
    • 21st Apr 17, 11:29 AM
    Just wanted to say a huge thank you to bowlhead99 (and others) for the help; you are a true asset to this community and I'm incredibly grateful for the time you've spent answering my questions, as well as so many others on here.

    For now, I've decided that the pension (SIPP) should absolutely be my first priority, so I've registered an account, put a nominal amount in, and will now set up contributions from my company to cover the largest proportion of the pot. The chosen fund is VLS60, as I don't have the knowledge yet to play a riskier game on other funds/shares, but may do once I'm confident.

    Only now have I realised that whilst taking a salary and dividends from my own LTD company is great, I get taxed, where as if I make pension contributions from the LTD company, yes I get taxed (on 75% of it) at the time of retirement, but what doesn't happen is the additional 20% corp tax and any tax associated with drawing down money (usually 7.5% through pensions). This 100% makes it worth while doing.

    It means even if I only put £100 per month in personally (or nothing at all), the LTD company, which is in the fortunate position of being cash rich, can contribute £1k per month, or even more, building up a healthy pot over time.

    I'm yet to decide what to do outside of the pension. The LISA was intended to be used for a high risk fund strategy (because the amounts are relatively small), but that means tying MORE money in for what is actually a smallish interest amount when considered over the years until retirement (I assume no 25% between age 50-60, just investment interest if lucky). For that, I could probably just use a S&S ISA, yes, I would gain the extra interest, but I'll have the comfort of knowing if I have to, the money can be taken out. Not sure how logical this is, but I have time to work that out.
    • bowlhead99
    • By bowlhead99 21st Apr 17, 1:00 PM
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    bowlhead99
    Making long-term S&S fund investments via a LISA is actually pretty good deal if you are only a basic rate taxpayer - where your aggregate pension tax relief from avoiding corporation tax and dividend tax is "only" in the 20-30% range.

    With the pension, as you say, you get taxed on 75% of it when you draw it, although as discussed your practical amount of tax suffered on that 75% might be close to zero on a very large chunk of it, because you will have years of being able to draw out income up to your annual personal allowance before your state pension kicks in and starts to consume your personal allowance by itself.

    However, with the LISA, you get the initial boost when you make your £4k contribution each year between now and age 50, which is comparable with the boost from pension tax relief (ie you get £5k in the LISA for a £4k contribution, just like a £5k gross pension contribution "costs" you a bit less than £4k of net money)... but then when you draw it out age 60+ there is *no* tax on the way out regardless of your income level when you take it.

    So for example if you have £100k of pension assets age 55 you will get £25k tax free and then you can draw the remaining £75k out within your annual allowances quite easily over a prolonged period with hardly any tax to pay. But with LISA if you have £100k age 60 you can take it all out in a single year to buy your mid-life crisis convertible sports car if you want, with no tax to pay because withdrawals from a LISA are tax free and penalty free once over age 60.

    LISAs and pensions can both invest in the same types of investment funds, so it makes sense to use a mixture of both in your planning (the LISA maxes out at a relatively smaller amount per year of course).

    An advantage of LISA is that the money is not actually "locked up", because if your planning has gone wrong you can pay a penalty, give up the bonus, and get access to the funds in an emergency before normal pension age. Though the accessibility can be a double edged sword as the money is within your estate for means testing of benefits, for inheritance taxes, and your creditors (or those of your self-employed business ventures) can chase you for it.

    Assuming you won't actually need to access the funds, LISA beats traditional S&S ISA because if your contributions to a normal S&S ISA would result in £100k proceeds to spend age 60, the exact same money into a LISA in same investments would be £125k proceeds.
    Last edited by bowlhead99; 21-04-2017 at 1:04 PM.
    • eskbanker
    • By eskbanker 21st Apr 17, 1:51 PM
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    eskbanker
    if your contributions to a normal S&S ISA would result in £100k proceeds to spend age 60, the exact same money into a LISA in same investments would be £125k proceeds.
    Originally posted by bowlhead99
    Not strictly true, because the 25% LISA bonus is only applied to contributions throughout the growth phase rather than a one-off bonus at the end, so the later bonuses won't have had the chance to achieve the same compounded growth.

    I agree with the principle though!

    Edit: ignore all that, bowlhead's figures are right as usual!
    Last edited by eskbanker; 21-04-2017 at 3:33 PM.
    • bowlhead99
    • By bowlhead99 21st Apr 17, 3:05 PM
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    • 11,682 Thanks
    bowlhead99
    Not strictly true, because the 25% LISA bonus is only applied to contributions throughout the growth phase rather than a one-off bonus at the end, so the later bonuses won't have had the chance to achieve the same compounded growth.
    Originally posted by eskbanker
    Eskbanker, that's a misconception.

    Every pound you put in, would get a 25% government bonus boost the same year you put that pound in (in practice, a months lag between when the principal starts growing and the bonus starts growing, but that is one month lag on cash which is deployed for (on average) a couple of hundred months, so it's inconsequential).

    So for every £1 that would be placed in the account and starts growing in an S&S ISA, you would have £1.25 in the account and growing if it was a LISA instead.

    So for example, OP is age 37 now and will do 14 years of contributions until he is age 50. This year, he gets £5000 in (which would only be £4000 if it was a normal ISA). Say he gets 4% growth on that over the next year, his £5000 turns into £5200. If it was only £4000 with no bonus it would turn into £4160.

    Then he puts in the next year's £4000 cash and gets another £1000 bonus on the £4000 contribution so there is £5000 of new investments on top of the £5200, which is £10200. Over the year that follows, it grows another 4% to £10608. Whereas in the normal S&S ISA it would just be £4000 new money on top of £4160 leaving £8160, which would grow at 4% to £8486.

    We can repeat again the next year. He adds £4k and £1k bonus to his Lisa and so now he has another £5000+the existing 10608 = 15608 of investment funds. They grow again at 4% to £16232. By comparison using a normal non-LISA, he'd be adding £4000 to his £8486 to be £12486, which would grow at the 4% to give him £12986.

    If you keep checking as we go, you can see that 5200 is 25% greater than £4160, just as 10608 is 25% greater than 8486, and 16232 is 25% greater than £12986.

    If you repeat ad nauseum, after his contribution age 50 plus another years growth, the LISA funds are valued at £95k while the non LISA would have only been worth £76k. The £95k is 25% greater than the £76k.

    Going forward after that, there are no more contributions, so it's clear that if you are continuing to keep the money invested in the same things for a decade between, say, year 2031 and 2041, and you start 25% higher with a £95k pot instead of a £76k pot, you will end up 25% higher. E.g. - assuming the 4% annualised real terms growth continues, you'd get £140.8k in the LISA ; being 25% higher than the £112.6k you'd have got in a normal S&S ISA.

    You could work out through with a spreadsheet or calculator and paper if you disbelieve it. The only simplification as mentioned is assuming the bonus arrives in real time rather than with a 1 month lag (e.g. £4000 arrives March, £1000 bonus arrives April).

    A 1-month delay on the investment returns commencing for the £13-14k of free money versus the investment returns commencing on the principal deposits, is not a big amount in the context of a £140k ending pot. If the returns are only 4% a year and it's only a twelfth of a year's delay, then even if the £14k bonus grows to something like £30k with all the growth over the couple of decades, a twelfth of 4% of £30k is only £100, entirely immaterial in the context of £140k ending value.

    HTH
    • eskbanker
    • By eskbanker 21st Apr 17, 3:32 PM
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    eskbanker
    OK, you win! I wasn't ascribing any significance to the trivial timing delay but was looking at it from the perspective that the later fixed-value bonuses would be proportionately smaller relative to the cumulative balance than the earlier ones, but yes, that doesn't negate the overall 25% variance.

    As you were....
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