Sipp vs S&S ISA (or both!!) - Advice Please!!

pappadruid

Hi All,

Like many others who have posted on here I need some advice about starting a pension! I have trawled the posts on here and yes, I can confirm it is a very confusing subject!! A brief summary of my positon........

38 Yrs old - Married Man
Want a retirement income of circa £35K (Apologies if Im dreaming with this!!)
Currently have no personal pension provision, but am fortunate enough to be in the Forces and will be due full pension (circa 13k p.a.) in 8 yrs (although deferred until 55). Have been working full time since aged 16 so should be entitled to full govt pension (currently getting a forecast)

Basic Rate Taxpayer.

Wife not working.

Considering opening two S & S ISA's (one for me, one for the wife). On reading the threads here, it is suggested that a SIPP may be better as the taxman contributes to my SIPP payments also. Is this not the case in the ISA?? I will initially be able to pay in £200 p.m between the two and hope to increase this to £300 - £400 in time. I have a good attitude to risk and would look to manage the investments myself. I would not wish to touch this money until retirement. Where do I stand on CGT on any profits from share sales within the ISA/SIPP? Is one better than the other?

I have read on here that an ISA is the preferred option and a SIPP should only be considered if you have a considerable sum to invest in it? Is this correct?

I like the idea of the SIPP because it means I can put the money away and not be tempted to take money out of it, but dont know if the ISA is a better option?

I know the important thing is to save for retirement, no matter how little, but I would like to do it in the most tax efficent way possible, so all advise is gratefully recieved!

Sorry if this thread has rambled on a bit!!

bristol_pilot

If you contribute to a pension, yes the taxman gives you tax relief on your contributions but he also taxes the pension except for the 25% lump sum (which sods law says will not be tax-free by the time you come to take your pension). So pensions are best for people who are 40% taxpayers in employment and will be basic rate taxpayers in retirement. Either that, or in a job where there is an employer contribution i.e. free money.

With an ISA there is no tax relief on contributions but the capital is accessible and can be invested in tax-free investments or you can spend the capital gradually i.e. like a mortgage in reverse.

If you are financially self-disciplined and you are confident that you will not be tempted to dip into the ISA savings prior to retirement, that is the way I would go in the OP's circumstances. PS: one also has to be confident that one's wife will not see the ISA savings pot as available for paying for that new kitchen or whatever.

jem16

pappadruid wrote: »

Considering opening two S & S ISA's (one for me, one for the wife).

Good - retirement income should always be considered jointly.

On reading the threads here, it is suggested that a SIPP may be better as the taxman contributes to my SIPP payments also. Is this not the case in the ISA??

Tax relief is only available on pensions not ISAs. However as a basic rate taxpayer getting tax relief now and paying it when you take the pension means that it is only deferring the tax till later. Although the pension does have a slight advantage with its 25% tax free lump sum.

However you need to be careful not to have too much taxable income from pensions as you will lose some of the higher personal allowance should it still exist when you retire.

Where do I stand on CGT on any profits from share sales within the ISA/SIPP? Is one better than the other?

Both are free from tax so neither will incur CGT.

I have read on here that an ISA is the preferred option and a SIPP should only be considered if you have a considerable sum to invest in it? Is this correct?

A SIPP is for an experienced investor who would utilise the extra features that it has over a personal pension. Otherwise it tends to be the dearest option.

bristol_pilot

Not wishing to frighten you btw, but to make up your forces & state pensions up to £35k total you need to start putting away something like £1000 per month.

pappadruid

I know! Scary isnt it?!! lol!!!

Thanks all for your speedy replies!! Its greatly appreciated!

Incidentally, anyone know of a pension calculator to show how much lump sum you require for a given monthly income in retirement??

Thanks again!!

bristol_pilot

Work on 20 times the yearly income required, so a £700k pot is needed for a £35k a year pension. But if this were in an ISA, you could access the £700k and spend or invest it as you wish. Which you prefer is up to individual choice (and is essentially a bet on how long you think you will live).

More sophisticated calculations can be done, but there is so much uncertainty with the inputs (such as predicting inflation rates 20 years ahead) that its pointless.

hugheskevi

Wife not working.

It may be helpful to know that your wife can put up to £3,600 into a pension and get tax relief at basic rate, even if she is not a tax-payer.

When planning your retirement arrangements, you may wish to ensure your wife makes full use of her income tax allowance in retirement (currently £9,490 p/a for people aged 65-74 with income under £22,900 p/a). If your wife has a full basic state pension, that would give about £5,000 per year.

Also remember that you can put money into an ISA now, and later move it into a pension and get tax relief then, subject to contribution limits - you can't do that the other way around of course, at least not until the pension is commenced.

dunstonh

A couple earning £20k a year in the husbands name only will pay £2000 a year tax after age 65. Yet a couple earning £10k each will pay no tax.

A saving of £2000 a year in tax just by splitting the direct debit up. This is why you look at things jointly and not have your planning lop sided in one name.

jamesd

You're 38 years old and not expecting to take the pension until you're 55. Your wife presumably would also have a pension hat's only available when she's 55. Your first task in seeking financial security is to get to the point where you can maintain your lifestyle until you can take an income from your pension. That requires the use of ISA or other non-pension investing because you can't use the pension for that bit of income.

It's OK to reduce the capital value during that period because the pension will eventually arrive to top it up.

There's a compromise to consider, though. That's potentially putting in £3,600 a year gross into a personal pension for your wife. That's an annual limit and it'll start to get her to a pension income that might eventually approach yours. £3600 gross is £240 a month before the basic rate tax relief is added by the pension company. The trouble with this is that it can't help your income before she's 55, so it's compromising your financial security until then.

The tax relief is payable into any personal pension, not just the relatively new SIPP type. SIPPs are good if you want the greater flexibility that they offer to invest in things like shares instead of unit trusts. Since you're planning to look after the investments yourself the SIPP option may well interest you and you're potentially paying in enough for it to be worthwhile.

There's no capital gains tax on gains in personal pensions, whether they are the SIPP type or not. Also none inside a stocks and shares ISA.

Since there's no higher rate tax relief involved and assuming that you don't yet have enough money invested to pay your necessary bills until you're 55, the S&S ISA route looks most suitable until you get reasonably close to being able to do that. Then the pension can be added to the mix.

ISAs and pensions get tax benefits in different ways. With the pension you get tax relief in the form of money added to the pension contributions but the income is taxable when you take it. The personal allowance for income tax means that the first part of pension income is tax free, so it's good to get that. The ISA is paid into with after tax money and no added money but you don't pay tax when you take an income. The whole lump sum is available for the ISA, so you can reduce the capital as rapidly as you need to produce income. For a personal pension you can take a 25% lump sum tax free but then there are limits on how much income you're allowed to take.

Your pension is quite close to taking you into higher rate tax so for you the pension looks like a less good route than the ISA, except enough to get any matching contributions your employer may offer.

For your wife, we don't know enough about her situation but if she currently has no pension pot or other entitlement then ISA first to get you to a financially secure position, then pension after that, looks like a reasonable plan.

If you're able to take your pension before you're 55 but at a lower rate you can use that lower income as part of your contingency planning for pre-55 income.

There's one popular option to watch out for. Paying off your mortgage faster than required. That'll save you less in interest than you're likely to make from investments, so it makes you poorer over the long term compared to investing.

jem16

jamesd wrote: »

Your pension is quite close to taking you into higher rate tax

How is is close to higher rate tax? The OP sais that the only prension provision (forces pension) he has at the moment should give him £13k approximately. Plus the state pension.

It will take him over the age related allowance should it still exist but I can't quite see how it's close to higher rate tax.

jamesd

The "Want a retirement income of circa £35K" part would take him quite close to higher rate. I missed this being target rather than current when I checked the income during writing that reply, though. Leaves much more room for pension contributions in his own name, though wife is probably better first choice for pension money.