ISA vs SIPP for savings

IvorBiggun

Hi

I'm 43, higher rate tax payer in the teachers pension scheme, mortgage paid off, son gone through university and living elsewhere, wife now works part time also as a teacher.

We would love to retire at 55 but obviously our pensions are going to be actuarially reduced substantially so we will need another source of income.

We have some savings and I am tempted to put some into investment trusts (probably City of London, Perpetual Income and Growth, Troy Income and Growth and Princess Private Equity 25% each). I could hold these in an ISA or a SIPP.

Presumably if I put them in a SIPP I cannot access any of the funds or income until 55 but I would gain tax advantages. As a higher rate tax payer do I put in £60 and get £100 worth of investments. I believe I will have to fill in a tax return if I do this?

Given I have funds I can lock away for the next 12 years is a SIPP wrapper a no brainer or are things more complicated?

Thanks in advance.

jem16

IvorBiggun wrote: »

Presumably if I put them in a SIPP I cannot access any of the funds or income until 55 but I would gain tax advantages. As a higher rate tax payer do I put in £60 and get £100 worth of investments. I believe I will have to fill in a tax return if I do this?

No need to complete a tax return just for that. A simple phone call to HMRC will suffice.

Given I have funds I can lock away for the next 12 years is a SIPP wrapper a no brainer or are things more complicated?

Thanks in advance.

Well it would have been but rumour has it that George Osborne has higher rate tax relief targeted in the next Budget to be replaced by a flat rate, possibly of 30%.

You should still get this year's higher rate tax relief though and gaining 30% tax relief to pay 20% in retirement should still be a good deal, just not quite as good.

AlanP_2

You don't get £100 of investments for your £60 paid in as you put it.

You pay £80 in and HMRC add £20 so £100 invested.

You then reclaim the HR relief and get £20 back through code adjustment.

Same nett cost as you talked about but slightly different mechanism.

hugheskevi

Minimum Normal Pension age was announced as increasing to 10 years lower than State Pension age. It hasn't been legislated for yet, but you should expect not to be able to access the pension until at least age 57.

Paul_Herring

hugheskevi wrote: »

Minimum Normal Pension age was announced as increasing to 10 years lower than State Pension age. It hasn't been legislated for yet, but you should expect not to be able to access the pension until at least age 57.

Seems to have died down for the moment (Feb '15):

http://www.thisismoney.co.uk/money/pensions/article-2967477/Pension-age-increase-axed.html

This change was expected to be included in the Taxation of Pensions Act, which has just received Royal Assent - but it’s not there.

And even if it was to happen it would affect 42yr-olds and younger (OP is 43):

http://www.telegraph.co.uk/finance/personalfinance/special-reports/11537512/Cash-in-your-pension-at-55-You-may-have-to-wait-till-70.html

The Treasury, just a few months ago, opted for a more electorally palatable five years, starting in 2028. From then, the private pension age will rise to 57.

(Current 42 yr olds turn 55 in 2028)

kidmugsy

OP, if you opt for the SIPP, you get a 67% boost to your money (100/60 = 1.67). Then, if you draw the money out after age 55, the first 25% is tax-free lump sum; the next tranche of taxable income will also be tax-free until you reach your annual Personal Allowance against income tax. Unless there's some chance that you will need access to the capital before age 55, the advantages lie massively with the pension.

jamesd

IvorBiggun wrote: »

I'm 43, higher rate tax payer in the teachers pension scheme, mortgage paid off ... wife now works part time also as a teacher. ... We would love to retire at 55 but obviously our pensions are going to be actuarially reduced substantially so we will need another source of income.

Core good strategy for this situation is to take the defined benefit pensions at normal retirement age and use a combination of investments and/or borrowing (remortgage, say) to provide income between retirement and availability of pension income, switching to repaying debts, if desired, once the state pensions are in payment.

IvorBiggun wrote: »

Given I have funds I can lock away for the next 12 years is a SIPP wrapper a no brainer or are things more complicated?

Provided you are willing to accept the age 55 limitation and accept the legislative risk that this age could increase the plan is good and it is good to use the tax relief.

You lose the capability to use the money to support yourself in case of long term inability to work that would be available if non-pension investments were used instead.

VCTs give 30% tax relief that has to be repaid if you sell within five years. You have time to take 30% three times vs once only for the pension, giving VCTs a very substantial tax relief edge, but you do need to determine whether VCTs are suitable. I think that the types that provide for a planned exit at around the five year mark and those that are mostly asset-backed are likely to be broadly suitable, while those investing in new businesses or research-based products are much less likely to be.

Given possible budget moves you should plan to use borrowing if required to use your whole 40% tax band for pension contributions before the Budget. This is because it is possible that higher rate income tax relief maybe substantially reduced.

AnotherJoe

Given possible budget moves you should plan to use borrowing if required to use your whole 40% tax band for pension contributions before the Budget. This is because it is possible that higher rate income tax relief maybe substantially reduced.

^^^^ This. Do this right now.

IvorBiggun

A couple more questions (all numbers rounded to make the example simple). Lets say I earn £55k and already put £5k into my employers scheme, leaving me £50k to pay tax on. I get a £10k allowance and £35k of 20% meaning I pay 40% tax on £5k. Presumably I can only get 40% tax relief on the first £5k I put into a SIPP with the rest at 20%? and presumably this is still worth it?

When the 30% flat rate comes in does that mean even basic rate tax payers will get 30% back? or are they just reducing the 40/45% bands to 30%?

VCTs look quite risky for a pension?

IvorBiggun

Also if I have not invested in previous years is there any ability to "carry over" my 40% from previous years?

jamesd

You can't carry over the 40% band from past years any more, used to be possible many years back. You can carry forward the annual £40k pension contribution allowance and you will have plenty of that available, capping your maximum pension contribution this year at your earned income.

VCTs vary hugely, just as funds do inside a pension. I rather like the 100% asset-backed Albion VCT or the around 50% asset backed Crown Place VCT that they also offer but the planned exit types can also get the job done. Not something to use as 100% of your pension planning but they can be a useful component.

Both last year and this I'm effectively eliminating my income tax obligation using VCTs of the sorts mentioned. This is for my basic rate income band, where pension would currently get 20% relief but I can get 30% from the VCT and the VCT is appropriate for my risk tolerance and asset mix. Definitely not for everyone but useful to be aware of their potential.