ISAs should be more aggressive than sipps

Legacy_user

I think we're less likely to breach tax brackets if sipps have all the bonds and ISAs have all the equities, although before the sipp can be accessed the isa needs some bondage

Bear in mind lifetime allowance too

The overall picture can be balanced even if individual accounts arent

redux

These are wrapper categories, not the actual content.

It isn't entirely clear whether you are proposing this as new system rules by the government, or as decision making by the user.

Either way, people are entitled to make their own investment decisions, without having them forced, and they may have different opinions and goals to yours.

I would tend to disagree with you. A sipp might be more likely to be held for a longer term, and equities might also be more likely as longer term. Then as someone approaches and into retirement they might want to gradually want to shift from equities towards interest returns, and they shouldn't be constrained by what holder their funds are in.

System

Individual decision, not forced at all but just using the wrappers in the most efficient way - ISAs better for withdrawal so to me it makes sense for them to house the aggression, as long as people have the discipline

PeacefulWaters

It's a bit of a misleading thread title then.

For you it might be right. For most I'd suggest it's a poor strategy.

The idea of putting your most volatile assets in a fund you'd want to withdraw from sooner? Don't really get it.

bowlhead99

Pension comes with tax relief and will not be fully taxable in retirement due to tax free lump sum, so is more efficient.

Lets say you are investing £200k over the next decade in an ISA vs £200k in a SIPP. The eventual pot you build and withdraw will have been cheaper to acquire, pound for pound, in the SIPP. The fact that it costs some tax to extract money from the SIPP is a red herring, as they gave you a nice big chunk of tax relief in the first place when contributing to the SIPP which will have made up a greater proportion of the eventual assets than what will be lost when drawing it.

Then let's say you are going to invest one of the pots in a conservative low growth set of bonds and the other in an aggressive high growth set of equities over the subsequent three or four decades. So, one of the £200k pots will turn into £250k and one of the pots will turn into £1 million.

As you know SIPP is more tax efficient, and the assets in the SIPP pot will have been cheaper to acquire pound for pound than the assets in the ISA pot (for reason of taxation regardless of investment performance), you have a stark choice:

You can have a million pounds of assets that were acquired relatively cheaply and 250 thousand pounds that were acquired relatively expensively ; or you can have 250 thousand pounds of assets that were acquired relatively cheaply and a million pounds of assets that were acquired relatively more expensively.

Most people would prefer to buy their million pounds cheaply and their quarter million expensively, than the other way around. Hence, they would be better earning the million in the SIPP rather than in the ISA. In later life they can withdraw a portion of it from the SIPP each year and use that money (acquired more tax-efficiently) to fund their ISA contribution allowances each year once they no longer have employment income to allow them to do that.

System

I'm not suggesting changing the amount that gets put into which wrapper, just the concentration of equities, where growth is better done. I'm assuming pension relief wouldn't change your total allocation anyway, just imagining pots of unmarked cash that then gets allocated

Fast growth could put one into the 40% income tax band or over the lifetime allowance...

Peaceful- you don't have to withdraw the isa sooner if you're over 55/57, that's just a mentality associated with the wrappers

redux

MatthewAinsworth wrote: »

Fast growth could put one into the 40% income tax band or over the lifetime allowance...

That is not a reason to seek worse investmemts or try to hobble those you do have.
.
The 40% tax rate is only on the higher band of income, not all of it, there may be other tax advantaged schemes to explore, and after that 60% of something is still a lot better than not having it at all.

Linton

It depends very much on one's circumstances, but I agree that for some people the concept of putting bonds and lower growth assets in a SIPP and both higher growth and income generating assets in ISAs makes a lot of sense......

1) If one is in danger of breeching the LTA
2) If one is near to a higher rate tax band

In my case I am deferring my SP to improve long term inflation protection and to use the resultant tax allowance window to deplete my SIPP as quickly as possible putting the money into S&S ISAs. Otherwise when I take my SP there is likely to be insufficient tax headroom to access all of the SIPP before death without paying higher rate tax. Clearly this strategy will be compromised if the SIPP increases in value by too much.

This is only valid once one is in or near to drawdown. Prior to then the 25% tax free lump sum is a good reason to maximise growth in a SIPP. One can easily change the distribution of assets on starting drawdown.

System

Good idea to drain sipp first due to tax thresholds and no tax hurry to draw isa. Thank you Linton for the idea of delaying sp, I'll consider the same for the same reason

Redux - not shifting to a lesser overall allocation, but just changing where you hold the equities Vs where you hold the bonds

bowlhead99

MatthewAinsworth wrote: »

redux wrote: »

That is not a reason to seek worse investmemts or try to hobble those you do have.

Redux - not shifting to a lesser overall allocation, but just changing where you hold the equities Vs where you hold the bonds

Yes you are hobbling your investments if you put the ones that would grow the most into the least tax efficient wrappers. With 30+ years to retirement you want the free government money (the tax relief) to grow into as large a sum as possible not to grow into the least amount possible. By doing the equities in the ISA instead of in the SIPP, the growth of the SIPP will be relatively poorer; so the end result is that your lowest-growth pot is the one which has been cheapest to acquire per pound of eventual value.

The wealth-maximising option is the one that has your highest growth pot be the cheapest to acquire, or put another way, maximising the growth of the free money.

You are not in any danger of hitting your lifetime allowance or being high rate taxpayer in retirement given your current level of salary and assets, and those were the two sensible reasons offered by Linton that you might want to do your low growth assets in your SIPP. The idea of putting the low growth assets in the SIPP does not make sense for the vast majority; instead they want to get the large growth on the pot of money that has been most tax efficient to acquire (thus spending little to aquire a lot, and growing the value of the tax relief).

redux

MatthewAinsworth wrote: »

Redux - not shifting to a lesser overall allocation, but just changing where you hold the equities Vs where you hold the bonds

I know you mean that, but if some people have theories they want more equity exposure when younger, then gradually less, then there would be increasing quantities in what you would deem the wrong wrapper category, causing dilemmas of whether to transfer or not.

If anything, having it the other way around makes intuitively more sense to me, that equities are mainly in the pension, for a spread of reasons including what bowlhead said, annual amounts drawn out, and any excess over living costs then put in ISAs (though some here would also suggest for some sets of circumstances still making a modest new pension contribution).

For one example, some people are interested in p2p for income (I'm not recommending this, just saying some do). At the moment they will find they can do this in ISAs (as providers get schemes up and running, either already or imminent) but maybe not as easily in SIPPs yet or perhaps ever.