SIPP or ISA ?

jamesmorgan

The big differences between SIPPs and ISAs come wrt benefits. If you are eligible for tax credits then you receive an additional 41% benefit for any money invested in a SIPP (the impact of the tax credit withdrawal rate). Bear in mind that a family with four children could earn a salary of more than £45K and still be eligible for tax credits, so any money invested would qualify for 81% premium in combined tax relief and tax credits.

If you were to become unemployed, you would be expected to use up most of your money in your ISA before you qualify for the bulk of benefits (those wrapped up in the universal credit) whereas money in a SIPP is protected. Again a family of 4 children could easily receive over £30k/annum in CTC, housing benefit, council tax benefit. This could quickly make quite a dent in an ISA if you were in a prolonged period of unemployment.

tali

jamesmorgan wrote: »

The big differences between SIPPs and ISAs come wrt benefits. If you are eligible for tax credits then you receive an additional 41% benefit for any money invested in a SIPP (the impact of the tax credit withdrawal rate). Bear in mind that a family with four children could earn a salary of more than £45K and still be eligible for tax credits, so any money invested would qualify for 81% premium in combined tax relief and tax credits.

If you were to become unemployed, you would be expected to use up most of your money in your ISA before you qualify for the bulk of benefits (those wrapped up in the universal credit) whereas money in a SIPP is protected. Again a family of 4 children could easily receive over £30k/annum in CTC, housing benefit, council tax benefit. This could quickly make quite a dent in an ISA if you were in a prolonged period of unemployment.

I have 4 kids and get WTC -not seen any SIPP info mentioning WTC - brings a new angle to the decision.

jamesmorgan

tali wrote: »

I have 4 kids and get WTC -not seen any SIPP info mentioning WTC - brings a new angle to the decision.

Bear in mind that your income for tax credit purposes is net income after pension contributions. This is not specific to SIPP's but any money invested in a pension. If you are a marginal high rate tax payer and receiving tax credits, it is really a no-brainer to invest any high tax money into a pension.

You currently pay high rate of tax on any money over £41,450. If you have 4 children and working full time you would still get tax credits on income up to £45,700, however, each extra pound over £6420 sees a reduction of 41p in your tax credits. Without pension contributions, the money between £45,700 and £41,450 (ie £4250) is taxed at 40% and sees 41% tax credit withdrawal. So out of that £4250 you only actually see £808 (actually a bit less due to NI). If you pay £3400 net into a pension this is grossed up to £4250 by additional of basic rate tax. You can then claim the high rate tax back of £850 and also receive £1742 more tax credits. Bottom line is that your £3400 pension contribution only results in £808 less net income, but puts £4250 into your pension.

For money under the high rate tax you lose the high rate tax rebate so each £1000 pension contribution costs you £590 in less income but puts £1250 into your pension.

To take it to its extreme you could put all your money over the tax credit threshold of £6420 into a pension. If you earned a salary of £45,700 you currently receive a net income of £37,598 after tax. You could pay £24,942 net into a pension (gross £31,178). Your new net income (after tax rebates and tax credit adjustments) would be £23,375. So roughly your loss of £14K income puts £31K into a pension.

Note all the above calculations will change with the implementation of universal credits, but the principles are likely to be the same. Also note that all the above figures exclude NI. If you belong to a salary sacrifice scheme where you get the benefits of NI relief then the savings are even greater.

Andy_L

There's a sticky thread on the whole ISA vs Pension option at the top of this board (edited highlights: a mix of both is best, but the balance is very dependent on your personal circumstances)

Also why do you want a SIPP as opposed to an "ordinary" personal pension? Unless you want to hold investments other than funds or cash, SIPPs tend to be more expensive

jamesmorgan

Just to show how attractive pension payments can be, assume someone with 6 children on a salary of £60K (unlikely I know, but not impossible). As they have a salary of £60K they will be losing £4500 in child benefit payments. If they chose to pay £14,800 net (£18,500 gross) into their pension then would receive £3,700 high-rate tax rebate, £7,600 additional tax credits and £4,500 child benefit - a total of £15,800. So by making a £18,500 contribution into their pension, their net salary would actually go up by £1000!!

JohnnyJet

Are there still benefits for a basic tax payer that is in receipt of Child tax credits?

mania112

JohnnyJet wrote: »

Are there still benefits for a basic tax payer that is in receipt of Child tax credits?

Yeah, that makes no difference.

JohnnyJet

So a basic tax payer gets a 20% rebate on all contributions plus an additional rebate for CTC? If so do you have to inform anyone that you are getting CTC before you get this rebate?