Mixing ISAs and SIPPS for early retirement

Bounderby

Hi all,

I am not a regular poster but have posted before about my intention to retire early. My circumstances (and the pension rules) have changed and I think I need to get my head around SIPPS. Not sure if this should be on the pensions/retirement board?

I'm 35, single no kids, homeowner with 50% LTV mortgage fixed at 1.49% until June 17. I was overpaying mortgage but have stopped this since I got this rate.

I've recently had a promotion and current salary is £50k. First time as a higher rate tax payer. I'm in the LGPS with 12 years' service to date; contributions are now 8.5%.

I live very simply, and I'd like to semi-retire at around 45, i.e. at least quit the 'career' job. The LGPS will comfortably meet my needs from normal retirement age (22yrs will give around £18k p.a., with any state pension a bonus). So I need to fund 45-68. The original plan was to fill up the ISA allowance each year but with my higher pay I'm going over the limit and don't know what to do with the surplus.

I can save around £1,750 per month. £1,250 into S&S ISA to fill it (I know it's slightly higher, but let's keep it simple). I'm currently fully invested in VLS100 with circa £40k. I have no other assets of note other than the house.
Should I be looking to put the other £500 into a SIPP? My understanding is that I can get tax relief? Then my plan would be 45-55 draw from ISAs, then 55-68 also draw from SIPP, then 68 onwards pension. Or should I put more in the SIPP and less in the ISA?

Also, can I still invest in the VLS in the SIPP? Are there any other options I should be considering? I had always thought I'd get a BTL at some point but the hassle and tax position really doesn't appeal any more.
I know circumstances can change, but let's assume I have this 10yr window and things stay relatively stable in terms of personal income and expenditure.
I'd appreciate any comments/opinions on the above or any alternatives on what routes you would take.

Many thanks

super_reds

Bounderby wrote: »

Hi all,

I am not a regular poster but have posted before about my intention to retire early. My circumstances (and the pension rules) have changed and I think I need to get my head around SIPPS. Not sure if this should be on the pensions/retirement board?

I'm 35, single no kids, homeowner with 50% LTV mortgage fixed at 1.49% until June 17. I was overpaying mortgage but have stopped this since I got this rate.

I've recently had a promotion and current salary is £50k. First time as a higher rate tax payer. I'm in the LGPS with 12 years' service to date; contributions are now 8.5%.

I live very simply, and I'd like to semi-retire at around 45, i.e. at least quit the 'career' job. The LGPS will comfortably meet my needs from normal retirement age (22yrs will give around £18k p.a., with any state pension a bonus). So I need to fund 45-68. The original plan was to fill up the ISA allowance each year but with my higher pay I'm going over the limit and don't know what to do with the surplus.

I can save around £1,750 per month. £1,250 into S&S ISA to fill it (I know it's slightly higher, but let's keep it simple). I'm currently fully invested in VLS100 with circa £40k. I have no other assets of note other than the house.
Should I be looking to put the other £500 into a SIPP? My understanding is that I can get tax relief? Then my plan would be 45-55 draw from ISAs, then 55-68 also draw from SIPP, then 68 onwards pension. Or should I put more in the SIPP and less in the ISA?

Also, can I still invest in the VLS in the SIPP? Are there any other options I should be considering? I had always thought I'd get a BTL at some point but the hassle and tax position really doesn't appeal any more.
I know circumstances can change, but let's assume I have this 10yr window and things stay relatively stable in terms of personal income and expenditure.
I'd appreciate any comments/opinions on the above or any alternatives on what routes you would take.

Many thanks

I can try and answer a few points, there are far better qualified, helpful people on here who will help more fully.

Yes you can invest in VLS via a SIPP, most SIPPS I have seen you can see what funds they can access relatively easily.

I personally would pull together a spreadsheet to try and formulate your plan. You can make it as simple or complicated as you like showing Income and Expenses over the next however many years. You will probably need to make some assumptions on investment growth and inflation.

You can then play with how much you want to invest into your SIPP and ISA's. The benefit of investing into your SIPP as a higher rate tax payer would be that you get relief at 40% rather than 20%, the downside is that the money is locked away until you are 55. You would get relief at 40% from 50k down to 42k ish. You would need to claim this either via a SA return or via your tax code after contacting HMRC.

Hope that helps slightly.

kidmugsy

The attraction of a SIPP would be greatest if you used it to eliminate all your 40% tax. So about £3k p.a. gross i.e. about £2400 net. After that I'd look at ISAs, and I'd build up an emergency fund in interest-bearing current accounts. (Santander, Nationwide, Lloyds, TSB, ....)

If you still have a monthly surplus, you could just accumulate it with a view to deploying it when next you switch mortgages, or you could hang on to see what reforms are going to come in for personal pensions.

You could also simply hold some shares outside tax shelters: you'll be allowed £5k p.a. of dividends outside tax shelters tax-free from 2016/17.

The regular commenter jamesd is a great fan of VCTs and P2P; you could look up his comments on recent threads.

kidmugsy

One other thing: if you expect to draw out of your SIPPs from age 55/57 up to the onset of your LGPS pension, then you could target a taxable income from the SIPPs of an amount equal to the Personal Allowance vs income tax. That could motivate you to pile more money into SIPPs now rather than wait for reform. One way to play that is to go for the £3k p.a. target now, and wait to see what the Chancellor says in his Autumn Statement and March Budget before you add any more.

masonic

There are already proposals to increase the age at which it is possible to access funds in personal pensions as the state pension age increases. I'm using 60 as the earliest age I'll be able to access my personal pension in my forward projections.

In terms of investment choice, there doesn't seem to be a compelling reason to do anything different in the SIPP. VLS100 is obviously towards the top end of the risk scale and you will be presumably lifestyling the S&S ISA as you approach the point at which you start to draw down the capital, whereas you can leave the SIPP alone for longer. If you want some easier exposure to property, then you can always stick a bricks and mortar fund on the side, or pick a multi-asset fund like L&G multi index, which has exposure.