OK Sell me on SIPP please...

C_Mababejive

I did think about tagging this on another SIPP thread but thought better of it.

So Sipps...you pay money in,you get tax relief,your pot gets bigger.

From a certain age you can take a lump sum and the rest as taxable pension....

So whats good about that?

They give you tax relief up front but you then have a taxable pension when you claim it.

What if you take your lump sum then snuff it a month later...how is your pot valued and who gets it?

Are there other vehicles which are better?

Thanks

JoeCrystal

You might as well ask for "Sell me on Pension please..." instead. SIPP is just another pension scheme where you can hold almost any type of investments from shares to commercial premises.

Cheers

Joe

jem16

C_Mababejive wrote: »

I did think about tagging this on another SIPP thread but thought better of it.

So Sipps...you pay money in,you get tax relief,your pot gets bigger.

From a certain age you can take a lump sum and the rest as taxable pension....

So whats good about that?

You get a tax free lump sum. Anything up to your personal allowance (including state pension) is paid tax free. Main advantage is for higher rate taxpayers that get 40% tax relief but will only be basic rate taxpayers in retirement.

What if you take your lump sum then snuff it a month later...how is your pot valued and who gets it?

Depends on how you arranged to take the pension.

Are there other vehicles which are better?

Thanks

All depends on personal circumstances. The likelihood is that no one wrapper is best, but a mixture.

jamesd

Pension first: "you pay money in,you get tax relief,your pot gets bigger". That applies when using funds. If you want to use more than funds you need to use the SIPP form of personal pension. So SIPP or not is a choice based on investment types used.

If you die after taking any benefits from a pension your expression of wishes form is used to determine who gets the money, paid outside your estate. A spouse gets it into a pension pot of their own tax free. So do a few limited types of financial dependent. Others get it outside a pension and a spouse can also do that, with a 55% tax charge first. The value is whatever the value of the investments is.

Whether other vehicles are better depends on the objectives. Pensions are good for higher income in retirement, where they beat ISAs. They beat them by even more if you use salary sacrifice pension contributions or are a higher rate tax payer while working and basic rate in retirement. Any employer matching is a great extra bonus that is mostly available only in pensions.

The S&S ISA can be better for basic rate tax payers who want to retire before pension income is available and wil need to spend capital for living expenses at a higher rate than the GAD limit for pension drawdown allows. Same can apply between age 55 and state pension age. If there's good tax relief on the pension contributions on the way in they may still beat an ISA for this, with more chance of beating if the income is needed for many years than if it's very rapid spending of capital over only a few years.

If ISA allowances are used and pensions are less desired for some reason then VCTs can be useful for their 30% tax relief (capped at the tax you actually pay in a year), tax free income and no capital gains tax. For some this can beat basic rate pension contributions due to the higher tax relief, if the available investments are appropriate.

C_Mababejive

OK so take for example a basic rate taxpayer with a FS scheme which e has paid into for perhaps 30 years and still has at least another 10 years to pay in.

That person could theoretically obtain his pension pot valuation,transfer it to another plan manager,by high yield shares and live off the divis and preserve the pension pot whereas if he left it with his employers FS scheme,they would pay him out until he snuffed it...err...and keep all the money paid in over the years in house.. They might even manage to pay his annual pension out of investment income so keeping the pot to themselves.

If one had a good well funded FS..im not sure there would be much benefit to firing up a SIPP to run alongside ?

jem16

C_Mababejive wrote: »

That person could theoretically obtain his pension pot valuation,transfer it to another plan manager,by high yield shares and live off the divis and preserve the pension pot

Theorectically!

However first of all he would have to find an IFA willing to sign off such a transfer which he would find exceedingly difficult as 99 times out of 100, it would be extremely foolish to do so.

whereas if he left it with his employers FS scheme,they would pay him out until he snuffed it.

Most final salary schemes also include a spouse pension so it would carry on if there was a spouse.

If one had a good well funded FS..im not sure there would be much benefit to firing up a SIPP to run alongside ?

If basic rate taxpayer, probably not. If higher rate taxpayer then yes.

Linton

C_Mababejive wrote: »

OK so take for example a basic rate taxpayer with a FS scheme which e has paid into for perhaps 30 years and still has at least another 10 years to pay in.

That person could theoretically obtain his pension pot valuation,transfer it to another plan manager,by high yield shares and live off the divis and preserve the pension pot whereas if he left it with his employers FS scheme,they would pay him out until he snuffed it...err...and keep all the money paid in over the years in house.. They might even manage to pay his annual pension out of investment income so keeping the pot to themselves.

If one had a good well funded FS..im not sure there would be much benefit to firing up a SIPP to run alongside ?

Disadvantages of switching from FS pension to dividend income:

1) The amount of money from dividends could be significantly less than the final salary pension.
2) The income from dividends is not guaranteed to keep up with inflation
3) It would be very risky not to re-invest some of the dividends as companies fall by the wayside. For example a few years ago Premier Foods and Dixons were good for dividends.
4) The major risk to be managed with retirement planning is that you live too long and exhaust your savings. A FS pension removes this risk completely.

So it seems clear to me that switching it is not a good idea. Of course if your objective was to provide for your children rather than your old age you shouldnt have been paying into a pension anyway.


On your final point - I would agree completely. If you have a good FS pension that, together with the State Pension gives you sufficient income to meet your needs then taking an additional SIPP may not be a good idea. Ensuring maximum use of your S&S ISA allowance could better meet your requirements.

jamesd

With a well funded final salary pension there are still good to excellent reasons for using a personal pension as well:

1. You can take the personal pension from age 55 if you want to, without actuarial reduction and that can help to make it possible to retire earlier than the employer scheme.
2. If your total income from work final salary and state pensions ends up over £20,000 you can use flexible drawdown to take out all of the money in the personal pension. The first 25% with no tax, the remainder added to your income in the year in which you take it out. If you contribute via salary sacrifice or at a higher tax rate than your retirement rate (say 40% then retire at 20%) then you get more in tax relief than you paid in even ignoring the 25% that's tax free.

Pedent

jem16 wrote: »

Main advantage is for higher rate taxpayers that get 40% tax relief but will only be basic rate taxpayers in retirement.

Presumably there's a similar advantage for basic rate taxpayers who won't be taxpayers in retirement (perhaps because they're on a low income, or perhaps because most of their retirement income comes from ISA investment returns).

gadgetmind

Pedent wrote: »

Presumably there's a similar advantage for basic rate taxpayers who won't be taxpayers in retirement.

Yes, but again it depends on exact circumstances.

My wife doesn't work, so we put the basic £2880pa into her pension, which HMG gross up to £3600. At age 55, she will take 25% tax free, and start drawing down the rest, which will again be tax free. Even when state pension kicks in, she should be able to just about avoid tax as she has no state second pension to speak of.