Saving into a SIPP when pot exceeds £1M equals ISA?

PaddyLondon

Hi, I did some sums that show, investment returns being equal, post tax returns are equal between an ISA and a SIPP, after the LTA charge. This implies the effective limit is for tax efficient ISA-like savings is 'pension contribution' limit plus 'ISA limit'.

Is this the correct conclusion? ie it makes sense to save funds in excess of the ISA LIMIT into a SIPP in order to get tax efficient growth, despite the LTA charge?

EdSwippet

PaddyLondon wrote: »

Hi, I did some sums that show, investment returns being equal, post tax returns are equal between an ISA and a SIPP, after the LTA charge.

This is only true if you are a higher rate taxpayer on contributing to the SIPP and a basic rate taxpayer when withdrawing. Mathematically, 40% higher rate tax is equivalent to 25% LTA charge + 20% basic rate tax on the remaining 75% of the pension.

Otherwise, mileage varies. If you are a higher rate taxpayer on both contributions and withdrawals -- relatively likely with a sizeable pension pot -- the SIPP comes out worse than the ISA by a fair margin, 15%. Other factors: a SIPP can offer a good IHT shelter, but is encumbered with age-related access and tax issues that an ISA does not have.

Triumph13

That may be true, but only if you are getting 40% tax relief on your contributions and will NOT be a higher rate tax payer in retirement. If you end up paying HRT in retirement then the SIPP is a very bad idea indeed. Conversely, if you will only pay basic rate tax in retirement, but get better than 40% relief now due to salary sacrifice or not losing child benefit then the SIPP may beat the ISA - as long as they don't put up basic rate tax too much or apply NI to pensions...


(Sorry Ed clearly types faster than me!)

jamesd

Depends on your overall situation and risk tolerance. VCT or EIS could easily make sense.

PaddyLondon

Ed, Triumph, James - many thanks, very helpful.

I'll have a crack at understanding the other options (VCT etc) for future options. I've had a decent redundancy payment age 56 that means pension pot plus cash in bank is higher than LTA and taxable income abnormally high, so I'm trying to think of ways of getting this year's taxable income below £100k and keep below the threshold where the effective marginal rate is 60/65%.

God knows what's going to happen to what has become a hideously complex tax and saving landscape.

bigadaj

PaddyLondon wrote: »

Ed, Triumph, James - many thanks, very helpful.

I'll have a crack at understanding the other options (VCT etc) for future options. I've had a decent redundancy payment age 56 that means pension pot plus cash in bank is higher than LTA and taxable income abnormally high, so I'm trying to think of ways of getting this year's taxable income below £100k and keep below the threshold where the effective marginal rate is 60/65%.

God knows what's going to happen to what has become a hideously complex tax and saving landscape.

Why is cash in bank relevant in this situation?

Obviously depends on your income for the year and maybe you are maximising pension contributions and carry forward, and have lifetime allowance issues ignoring the cash in bank.

Vcts guve you a flat rate 30% relief, so not perfect for higher tax rates but worth looking into, higher risk investments generally so do your research and ensure you understand what is available and the implications.

Triumph13

bigadaj wrote: »

Why is cash in bank relevant in this situation?.

I think he mentioned the cash because that's what he's thinking about putting into the pension.