SIPP, Hargreaves Lansdown and Funds

sabelu

sabelu wrote: »

Can someone check my understanding?

Can I assume that if I sell 15k worth of shares and transfer the money into the SIPP the HM Revenue will make this up to 25k as I pay 40% tax on part of my income or do I sell 25k shares and they rebate me 10k, how does this work?

Just found out that the 35k threshold for 40% tax is after your personal allowance, is that correct?

I suppose at 22% rebate this is still a good deal?

EdInvestor

If you only get basic rate tax relief, I wouldn't bother as you get taxed on the pension income when you take it.Better to leave it in the ISA where it's accessible and tax free.

dunstonh

EdInvestor wrote: »

If you only get basic rate tax relief, I wouldn't bother as you get taxed on the pension income when you take it.Better to leave it in the ISA where it's accessible and tax free.

unless of course you will get childrens/working tax credits because of the contribution or you want to increase your income in retirement (pensions beat ISAs on that front).

jamesd

sabelu, you can take 25% and don't have to buy an annuity or go into income drawdown. Can just take no income. Or could take the maximum income and use it to fund maximum ISA contributions, to gradually translate the pension regular income into an ISA lump sum that you can get 100% of at any time. Though the pension income that you take to do this move into the ISA is taxable when you take it.

The higher rate tax threshold is after deducting the personal allowance. You also deduct such things as unreimbursed work expenses before calculating it. You add on other income like gross interest from non-ISA savings accounts.

The 22% add-on for this year is dropping to 20% next year so there is some benefit in getting it this year. However, if you think that you're going to be a higher rate payer in future years you may be better off deferring it until you are, using the ISA or normal outside ISA fund purchases until then. Then you'll be able to get the higher rate rebate for the part that's higher rate, hopefully gradually increasing that over the years.

This government has been increasing the higher rate threshold below the rate of salary increases so more people are becoming higher rate tax payers, so if you're close now, your chance of being higher rate is increasing.

Also worth remembering that the 25% tax-free lump sum does get you 25% of the tax relief that the ISA never gets, so even if tax rates are the same when you contribute as when you take out the income, you're still ahead by that much - so 25% of 22% this year is a gain that the ISA can't match. For this reason among others, the pension is the best route to an income up to around 20,000 a year (after including the state pensions). Even above that it's still more efficient for income than the ISA. Where the ISA wins is the flexibility to take the whole lump sum in one go.

Funds that pay mostly in growth are good candidates for use outside an ISA or pension. Something like BlackRock UK Absolute Alpha works well: hedging to be more safe than the general stock market, so a nice steady growth (so far) and no dividends/distributions or income that would be taxable. So pure capital gains growth to use you annual CGT allowance, effectively making it as tax free outside an ISA as inside one.

There are also various structured products around that pay out in capital growth a few years in the future but lock you in for those few years. GEBs are not one of them - they are a poor option.

But whatever you do with any money that doesn't go into the pension, do be sure that you use investments, not savings accounts. The delay in using the pension is counter-productive if you get the lower long term average returns from savings accounts while you're waiting.

EdInvestor

jamesd wrote: »

Funds that pay mostly in growth are good candidates for use outside an ISA or pension. Something like BlackRock UK Absolute Alpha works well: hedging to be more safe than the general stock market, so a nice steady growth (so far) and no dividends/distributions or income that would be taxable. So pure capital gains growth to use you annual CGT allowance, effectively making it as tax free outside an ISA as inside one.

Of course you do need to remember that over the long temr the vast majority of the growth in stockmarket investing is from reinvested dividends: so you may not do too well if you go for "growth" type companies/funds which don't pay out divis.Dividend income is effectively tax free to basic rate taxpayers, so no problem there.

meester

dunstonh wrote: »

unless of course you will get childrens/working tax credits because of the contribution or you want to increase your income in retirement (pensions beat ISAs on that front).

Tax credits do not take into account savings.

Not at all. You can have £100m of capital but low income, and still get tax credits

It really is unwise to lock up money in an inflexible pension without getting a decent incentive.

Taking money out of an ISA is nearly always going to be wrong. Even if you do want income in retirement, then the ISA is far more flexible and can provide for capital needs where the pension cannot.

dunstonh

meester wrote: »

Tax credits do not take into account savings.

Not at all. You can have £100m of capital but low income, and still get tax credits

It really is unwise to lock up money in an inflexible pension without getting a decent incentive.

Taking money out of an ISA is nearly always going to be wrong. Even if you do want income in retirement, then the ISA is far more flexible and can provide for capital needs where the pension cannot.

You can get upto 72% tax relief effectively with pensions. If you ignore growth and get 25% back, then your retirement income has only cost you 3%. Thats a pretty good incentive.

Most people are not going to be able to get the ideal scenario that gets 72% but anyone getting tax credits or just over the limit is going to benefit by making pension contributions by the tax relief and an increase in tax credits.

Taking money out of an ISA is not nearly always wrong. Its certainly something you dont do without considering pros and cons. However, I think one of my best early transactions involved cashing in a PEP 3 months after starting it to then put into a pension.

Whilst a pension is no good for capital needs, it will beat an ISA for income.

meester

dunstonh wrote: »

You can get upto 72% tax relief effectively with pensions. If you ignore growth and get 25% back, then your retirement income has only cost you 3%. Thats a pretty good incentive.

Most people are not going to be able to get the ideal scenario that gets 72% but anyone getting tax credits or just over the limit is going to benefit by making pension contributions by the tax relief and an increase in tax credits.

Taking money out of an ISA is not nearly always wrong. Its certainly something you dont do without considering pros and cons. However, I think one of my best early transactions involved cashing in a PEP 3 months after starting it to then put into a pension.

Whilst a pension is no good for capital needs, it will beat an ISA for income.

How are they increasing their tax credits?

Have I missed something?

jamesd

Pension contributions reduce the effective income, which can increase the amount of tax credits available.

meester

jamesd wrote: »

Pension contributions reduce the effective income, which can increase the amount of tax credits available.

Ah I see what you mean. It's 39% withdrawal rate now, too.