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  • FIRST POST
    • Larry_M
    • By Larry_M 8th Oct 17, 9:39 AM
    • 27Posts
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    Larry_M
    SIPP or ISA for spare cash and endowment?
    • #1
    • 8th Oct 17, 9:39 AM
    SIPP or ISA for spare cash and endowment? 8th Oct 17 at 9:39 AM
    I have approximately £3000 spare cash, and in two years time my endowment policy (approx. £17000) will be maturing, so I'm wondering what the best thing would be to do with the £3000 now and then the endowment money later, either stick it into my existing S&S ISA or open a SIPP.

    My situation: I'm 50, in the LGPS, standard rate tax payer, mortgage paid off, currently packing my Prudential AVC with as much as I can afford each month. I have £10000 in a cash ISA for emergencies, holidays etc, and £18000 in a S&S ISA.

    Having read a bit on the subject of S&S ISA vs SIPP I'm inclined to think I should open a SIPP for these sums in order to gain the tax relief (even though it would be taxed later when drawing down, except for 25%), but would be grateful for any thoughts.
Page 1
    • Apodemus
    • By Apodemus 8th Oct 17, 10:01 AM
    • 958 Posts
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    Apodemus
    • #2
    • 8th Oct 17, 10:01 AM
    • #2
    • 8th Oct 17, 10:01 AM
    One question might be how long have you been in LGPS and what proportion of your required post-retirement income is LGPS projected to provide. Also your intentions on retiral date might be relevant.

    I used part of my mortgage endowment pay-out to make lump-sum APCs into the LGPS itself, rather than AVCs through Prudential or SIPP/ISA. My situation is unusual though and, with relatively few years total LGPS, I wanted the certainty of return on this money to balance against the risk of underperformance of other investments. So for me the APC is acting a bit like an annuity, and the rates seem OK.
    • ermine
    • By ermine 8th Oct 17, 10:18 AM
    • 623 Posts
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    ermine
    • #3
    • 8th Oct 17, 10:18 AM
    • #3
    • 8th Oct 17, 10:18 AM
    Putting it into a SIPP gives you options for early retirement, if you front-run that ahead of your LGPS. You don't say what the retirement age for that is, but you usually take an actuarial reduction for drawing it early relative to scheme retirement age. So by running down a SIPP flat ahead of it an early retiree gets to take out £11000 tax-free each year on money you saved 20% tax going in, or 40% if you are a HRT taxpayer. And you get these options in five years time when you are 55.

    If you aren't looking to retire early and you will be earning or getting a pension of more than the personal allowance then the greater freedom of keeping it in an ISA has a lot to be said for it. So it depends on how you see your retirement plans panning out.
    • OldBeanz
    • By OldBeanz 8th Oct 17, 10:20 AM
    • 703 Posts
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    OldBeanz
    • #4
    • 8th Oct 17, 10:20 AM
    • #4
    • 8th Oct 17, 10:20 AM
    You have not given any details of how much pension you need, are due to receive, whether you want to retire early, wife, kids, inheritance etc all of which could skew your planning.
    As a starter, I would be ensuring that my AVC would pay out the maximum amount (tax relief in, tax free out); my LGPS pension was sufficient to meet my needs in retirement (guaranteed and inflation proof); then a SIPP to retire early.
    • Larry_M
    • By Larry_M 8th Oct 17, 10:41 AM
    • 27 Posts
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    Larry_M
    • #5
    • 8th Oct 17, 10:41 AM
    • #5
    • 8th Oct 17, 10:41 AM
    One question might be how long have you been in LGPS and what proportion of your required post-retirement income is LGPS projected to provide. Also your intentions on retiral date might be relevant.

    I used part of my mortgage endowment pay-out to make lump-sum APCs into the LGPS itself, rather than AVCs through Prudential or SIPP/ISA. My situation is unusual though and, with relatively few years total LGPS, I wanted the certainty of return on this money to balance against the risk of underperformance of other investments. So for me the APC is acting a bit like an annuity, and the rates seem OK.
    Originally posted by Apodemus
    Thanks for the reply. I've been in the LGPS for 30 years, hope to retire at the earliest opportunity but realistically that would be at age 60, at which time I reckon the LGPS pension would be enough to live on.
    • Larry_M
    • By Larry_M 8th Oct 17, 10:44 AM
    • 27 Posts
    • 1 Thanks
    Larry_M
    • #6
    • 8th Oct 17, 10:44 AM
    • #6
    • 8th Oct 17, 10:44 AM
    You have not given any details of how much pension you need, are due to receive, whether you want to retire early, wife, kids, inheritance etc all of which could skew your planning.
    As a starter, I would be ensuring that my AVC would pay out the maximum amount (tax relief in, tax free out); my LGPS pension was sufficient to meet my needs in retirement (guaranteed and inflation proof); then a SIPP to retire early.
    Originally posted by OldBeanz
    I reckon the LGPS pension would be enough to live on if I retired at age 60, plus the AVC of course. so at the moment I'm thinking that a SIPP would just give me some extra options at age 55, not to retire early as I wouldn't be able to get enough into it for that, but maybe some extra cash.
    • Larry_M
    • By Larry_M 8th Oct 17, 10:55 AM
    • 27 Posts
    • 1 Thanks
    Larry_M
    • #7
    • 8th Oct 17, 10:55 AM
    • #7
    • 8th Oct 17, 10:55 AM
    So by running down a SIPP flat ahead of it an early retiree gets to take out £11000 tax-free each year on money you saved 20% tax going in, or 40% if you are a HRT taxpayer. And you get these options in five years time when you are 55.
    Originally posted by ermine
    Not sure that I understand this bit, no doubt due to my lack of knowledge. If I wanted to take money from the SIPP at age 55 wouldn't it be taxed at 20% (apart from the first 25% of it) given that I'd already be over the personal allowance via my salary?
    • OldBeanz
    • By OldBeanz 8th Oct 17, 11:12 AM
    • 703 Posts
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    OldBeanz
    • #8
    • 8th Oct 17, 11:12 AM
    • #8
    • 8th Oct 17, 11:12 AM
    It is kinda accepted on here (as much as anything is accepted apart from DB pensions being great) that drawing a DB pension 8 years early is not the best thing to do (assuming there are no health issues and other funds are available. You need to know how much your pension will be nobbled by retiring at 60 - tables are available online. It will be roughly 5% per year so given your retirement age will be 67ish then you are looking at losing 35% of your pension (with subsequent reduction of your AVC lump sum).
    What Emrine is alluding to is that if you pay £13,332 into a pension then given that the tax allowance is going up to £12k you would be able to withdraw all (£16,666) tax free each year and regain 5% on your pension for each year you can manage this.
    • Larry_M
    • By Larry_M 8th Oct 17, 11:37 AM
    • 27 Posts
    • 1 Thanks
    Larry_M
    • #9
    • 8th Oct 17, 11:37 AM
    • #9
    • 8th Oct 17, 11:37 AM
    It is kinda accepted on here (as much as anything is accepted apart from DB pensions being great) that drawing a DB pension 8 years early is not the best thing to do (assuming there are no health issues and other funds are available.
    Originally posted by OldBeanz
    The rough plan I had was that I believe I would be entitled to take flexible retirement at 60 under the LGPS (given my service), which would enable me to carry on working a couple of days a week if I wanted to.

    What Emrine is alluding to is that if you pay £13,332 into a pension then given that the tax allowance is going up to £12k you would be able to withdraw all (£16,666) tax free each year and regain 5% on your pension for each year you can manage this.
    Originally posted by OldBeanz
    OK, still trying to get this clear in my poor old head. Are you saying that:
    1) the 25% tax free withdrawal from a SIPP is 25% tax free PER YEAR?
    and
    2) the personal tax allowance re the SIPP is looked at separately from the personal allowance being used against my earnings? Can't get two lots of personal allowances surely so I'm guessing this must be wrong
    and
    3) I could just recycle money in and out of a SIPP to take advantage of all this? I thought there were various complicated rules around recycling?
    • ermine
    • By ermine 8th Oct 17, 11:37 AM
    • 623 Posts
    • 924 Thanks
    ermine
    Not sure that I understand this bit, no doubt due to my lack of knowledge. If I wanted to take money from the SIPP at age 55 wouldn't it be taxed at 20% (apart from the first 25% of it) given that I'd already be over the personal allowance via my salary?
    Originally posted by Larry_M
    You have stated you want to retire early. You're in a great position to do just that Take your LGPS at 60. From 55 you can take your SIPP. You have roughly 20k to lob into your SIPP. Taxman will top this up by 5k (more if you are a HRT taxpayer). You can retire early by as much as 25k can last you. Ideally take it out over two years, where you can get it all tax-free and to top up with savings to maintain your spend rate.

    That may not be enough to maintain your lifestyle, there's not enough information to say. Though note you won't be saving into a pension and any costs of getting to and from work are gone. Presumably your AVCs work with the LGPS so you can take the entire AVC tax-free (many civil service schemes seem set up like this) it would not be unreasonable to borrow against this to smooth your income (unless you have some other purpose for this) since you are mortgage free.

    Sadly one of the best ways to borrow against a pension commencement lump sum is to keep your mortgage longer and discharge the capital with the PCLS, although it probably isn't worth taking one out on your house due to all the one-off costs As a general rule, early retirees with DB lump sums coming - don't pay your mortgages down early - there speaks the voice of bitter experience.
    Last edited by ermine; 08-10-2017 at 11:50 AM. Reason: Drat. Oldbeanz put it much more succinctly in the post above;)
    • ermine
    • By ermine 8th Oct 17, 11:46 AM
    • 623 Posts
    • 924 Thanks
    ermine
    The rough plan I had was that I believe I would be entitled to take flexible retirement at 60 under the LGPS (given my service), which would enable me to carry on working a couple of days a week if I wanted to.



    OK, still trying to get this clear in my poor old head. Are you saying that:
    1) the 25% tax free withdrawal from a SIPP is 25% tax free PER YEAR?
    Originally posted by Larry_M
    No. Absolutely not. It is 25% of any money you put into the pension. You can either draw it as a lump sum, or using something called UFPLS draw it out over time and 25% of every year's withdrawal is effectively tax-free. For the sums you are looking at that amounts to almost the same thing


    2) the personal tax allowance re the SIPP is looked at separately from the personal allowance being used against my earnings? Can't get two lots of personal allowances surely so I'm guessing this must be wrong
    Originally posted by Larry_M
    No - one personal allowance amount per year. If you have retired you aren't earning from work. Part-time working doesn't play well to getting as much out from a SIPP quickly, unless you have longer to do it. e.g earn 6k and you can draw 6k form your SIPP before hitting the personal allowance if it were 12k, if you do it UFPLS you can draw another 1.5k form the SIPP tax-free per year (but you get no pension commencement lump sum)


    3) I could just recycle money in and out of a SIPP to take advantage of all this? I thought there were various complicated rules around recycling?
    Originally posted by Larry_M
    take a look at this flowchart. Yes there are such rules, in practice they probably won't apply to you. They're designed to catch out bigger fish.
    • Larry_M
    • By Larry_M 8th Oct 17, 12:00 PM
    • 27 Posts
    • 1 Thanks
    Larry_M
    No - one personal allowance amount per year. If you have retired you aren't earning from work. Part-time working doesn't play well to getting as much out from a SIPP quickly, unless you have longer to do it. e.g earn 6k and you can draw 6k form your SIPP before hitting the personal allowance if it were 12k, if you do it UFPLS you can draw another 1.5k form the SIPP tax-free per year (but you get no pension commencement lump sum).
    Originally posted by ermine
    Thanks for your time in explaining all this. One last question: are the amounts received from a pension still included in the assessment re the personal allowance? I understand what you're saying about part-time working, but let's say I was retired, not working, and drawing my LGPS pension which was 12k per year and the personal allowance was also 12k, would that mean that I effectively had no allowance left in terms of the SIPP lump sums?
    • bigadaj
    • By bigadaj 8th Oct 17, 1:16 PM
    • 10,803 Posts
    • 7,100 Thanks
    bigadaj
    Thanks for your time in explaining all this. One last question: are the amounts received from a pension still included in the assessment re the personal allowance? I understand what you're saying about part-time working, but let's say I was retired, not working, and drawing my LGPS pension which was 12k per year and the personal allowance was also 12k, would that mean that I effectively had no allowance left in terms of the SIPP lump sums?
    Originally posted by Larry_M
    Apart form the 25% tax free allowance from a DC pension then everything else is potentially taxable.

    What ermine is suggesting is that rather than retire at 60 you could retire at 58, take the pension over two years to bridge the gap and potentially topped up from savings, isa etc

    Then claim your unreduced db pension at 60.
    • ermine
    • By ermine 8th Oct 17, 4:31 PM
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    • 924 Thanks
    ermine
    ^ what bigadaj says

    It's a missed opportunity to not run down your DC pension to 0 ahead of a DB pension unless your DB pension is less than the personal allowance. Historically you couldn't do that, but Osborne's pension freedoms mean you may be able to extract most of your DC pension savings free of tax, particularly if you have savings as well to bridge the gap between the personal allowance and your annual expenditure.

    All pensions (other than the 25% pension commencement lump sum or the UFPLS alternative) are added together with any money you earn in that tax year. The personal allowance is taken off, £11,500 this year and you are taxed at 20% on what is left between £11500 and the total amount,, unless you earn above the higher rate tax threshold of £45k.

    Income from employment (but not pension income) is subject to national insurance unless you are over State pension age, the result is that employment income tends to see tax rates of ~ 30% over the personal allowance if you count NI as well.

    You should seek advice or read your pension Scheme booklet to see how your Prudential AVC works with your main scheme. Often the point of an AVC (which is a DC pension) running together with a public sector DB pension is that the total combined sum of DB and DC fund is used to qualify the 25% tax-free lump sum. That way you get to take all of it from the DC AVCs leaving your DB pension alone, which massively maximises your tax free lump sum. A very rough guide to the notional capital behind your DB pension is 20x the gross pension payable at Scheme normal retirement age. Your aim therefore is to target your Pru AVC at 1/3 of 20x(scheme pension at NRA) such that your Pru AVC is the entire tax free lump sum. But that all depends on your AVC being linked to the main DB pension, seek workplace advice on that.

    If it isn't linked, you can transfer the AVC to a SIPP and use the total as your DC pot to run down, deferring your main pension to NRA. That is what I did - I gave up the ability to take my AVC as my tax-free PCLS at retirement age and shifted it to a SIPP, running it out at the personal allowance over several years and topping it up with the dividend income from my ISA. That way I eat no actuarial reduction on drawing my DB pension, but I get no PCLS either.
    Last edited by ermine; 08-10-2017 at 4:44 PM.
    • ermine
    • By ermine 8th Oct 17, 4:54 PM
    • 623 Posts
    • 924 Thanks
    ermine
    would that mean that I effectively had no allowance left in terms of the SIPP lump sums?
    Originally posted by Larry_M
    That is correct, you have no personal allowance left. But the 25% pension commencement lump sum is tax-free read more from the pensions advisory service so it's your lucky day - it doesn't matter that you have rammed your personal allowance. That's what it's there for, to extract as much cash as possible tax-free

    Incidentally, you can talk to pension wise for free if you are over 50

    Pension Wise is a free and impartial government service about the different ways you can take money from your pension
    although having a DB pension makes things more complex (in a good way for you) and they may bat you back to your workplace pension trustees, but you should be able to substantiate the specifics about your DC pensions. See if your workplace has a finacial advice scheme for people close to retirement, too.
    • Larry_M
    • By Larry_M 8th Oct 17, 6:45 PM
    • 27 Posts
    • 1 Thanks
    Larry_M
    Thanks all for your contributions, it is much appreciated.
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