SIPP Questions?

dunstonh

with a sipp you get 20% tax rebate but then pay this tax when you draw down the pension, so why not just put the funds in an ISA?

What about the personal allowance? £10k p.a. after 65. A couple can earn £20k tax free. Plus you get the 25% out tax free.

Also, for all the issues pensions have, they beat ISAs on income provision. That is, after all, the point of a pension.

thenudeone

cashbackproblems wrote: »

with a sipp you get 20% tax rebate but then pay this tax when you draw down the pension, so why not just put the funds in an ISA?

Answer : if you are a higher rate taxpayer now but you expect to be a basic rate (or non-) taxpayer once you retire;
OR if you are a basic rate taxpayer now but your existing pension provision is likely to leave some of your tax-free allowance unused after you retire (i.e. your pension would be free of income tax)
OR you want to protect your assets against potential creditors in case of bankruptcy.
You get many tax benefits from ISAs and if you used your full ISA allowance every year from age 21 to retirement then you would be very unlikely to retire in poverty, even without the extra tax advantages of pensions!
There is already an extensive thread on Pension vs ISA debate which covers the pros and cons very nicely. I suggest you have a look there.

Loughton_Monkey

cashbackproblems wrote: »

with a sipp you get 20% tax rebate but then pay this tax when you draw down the pension, so why not just put the funds in an ISA?

The short answer is the 25% tax free lump sum. If you don't take this, then any pension (not just SIPP) works like this:

1. Whenever you contribute, HMRC gets 'on your back' and 'shadows' your investment to the tune of 25%.

2. When you take the pension from the pot (which has grown), HMRC claws back it's investment (and growth) at the same rate you do.

3. Hence under those circumstances, you might just as well have invested in the same funds, but in an ISA.

Bottom line: Always take the 25% tax free lump sum - equivalent to a 6.25% free contribution overall from the Government.

Of course if you can get 40% relief on contributions, but avoid 40% tax when you draw the pension, then you have certainly made money!