SIPP Contributions with higher rate tax?

Sobraon

An earlier thread looked at the pros and cons of joining a company pension scheme when someone was in their mid 50s.

A sort of equivalent (at least to my mind !) situation can occur when someone in their 50s earns enough to pay higher rate tax whilst in employment but will pay standard rate in retirement.

In this situation is it worth contributing to a SIPP to 'soak up' the higher rate PAYE?

Couldn't find this discussed previously so any thoughts please? (Assuming company pension scheme and ISAs are fully utilised).

jamesd

Yes, a SIPP or a personal pension is worth considering. Which is best depends on the investment risk level you're using. The personal pension can be cheaper for low or medium risk, the flexibility of the SIPP might be worth the cost for high risk. But it's still worth comparing the SIPP to a really good pension with lots of investment choices.

EdInvestor

I'd have thought it's only really worth it if you are planning to put the SIPP into drawdown later, so that you will look at it as a 20 year project and use investments with the expectation of both growth and income to provide a bit of a topup when you are really old.

Otherwise you will be advised to invest in cash or gilts and will end up with a very small taxable annuity (if indeed you can even get anyone to sell you one with a miniscule fund) and no access to the capital. You'd be better of with 60% of the money in cash.

Sobraon

Thanks both (again), I ran a couple of spread sheets to model the scenario and the results from investing in a SIPP seem marginal for reasonable growth rates when buying an annuity.
I just wanted to check I wasn't missing anything

jamesd

Sobraon, simply don't use mostly cash investments unless you're planning to retire within the next four or five years. If you were planning to do that and were planning to buy an annuity you might put 30% into corporate bonds for stability and gradually move closer to cash. Over that short time frame the return from higher rate tax relief now then paying basic rate tax in retirement plus the near-cash returns beats the returns outside the pension.

You do want to try to invest enough in investments with high enough return to end up with a total pension pot of more than 10,000, since below that it can be more difficult to buy an annuity if you wanted to do that.