ISAs should be more aggressive than sipps

System

I think growth of the tax relief is a red herring, when you get taxed you lose the growth apart from what is beneath the 20% income tax threshold - the tax you pay grows in line with the investment.

But the pre 20% income tax threshold should be fully used

cloud_dog

Re the OP... I don't really understand the concept of making investment decisions for 30 yeas in the future today; by that I mean deciding on equity / bond splits today.

Surely in the early / mid years the focus should naturally be on achieving as much growth as possible (irrespective of wrapper), with the consideration of migrating (or balancing) your overall finances towards a different split (balance) as you near retirement, and then how you manage this 'balance' once retired.

cloud_dog

MatthewAinsworth wrote: »

I think growth of the tax relief is a red herring, when you get taxed you lose the growth apart from what is beneath the 20% income tax threshold - the tax you pay grows in line with the investment.

In percentage terms, yes but, not in absolute monetary terms. So you will be 'money in the hand' financially better off utilising the tax relief early on and then managing your tax obligations later.

ffacoffipawb

MatthewAinsworth wrote: »

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

Bondage fnaar fnaar.

talexuser

If an IFA advised me to invest 30 or 40 years of pension contributions in bonds alone I would be out the door before he finished the sentence. For the rest it sounds like the tax tail wagging the dog.

TheTracker

bowlhead99 wrote: »

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).

Funny world where I'm siding with MA vs b99 logic!

SIPP tax efficiency is mostly on contribution. MAs argument is what to do about allocation post-contribution.

If you are in your 30s and have say 100k in each of a SIPP and an ISA and need to decide where to allocate your equity and bond funding, I'd be putting the equities in the ISA side. It's most tax efficient to do so (since it's likely you'd eventually be paying income tax on SIPP withdrawal). Rather than say 60k/40k in each of ISA and SIPP I'd be putting 100k of ISA in equities and with the SIPP 20k equity and 80k Bonds. I do similar at the next level - I put Small and Value trackers in my ISA. And I use Bonds in my unwrapped savings to stay below dividend allowances.

Of course, once needs to accept that you accessible money (ISA) is much more susceptible to big drops, and that's a factor that must be taken into account wrt whether to do this.

Re "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." is not true post contribution. The wealth maximising option is to maximise growth in the pot with least post-contribution tax. I'm sure you are aware of the mistaken assumption people make about compounding of relief inside a wrapper, it doesn't happen.

And all this w/o having to mention the LTA.

Imagine a person with a 50:50 asset allocation, 100k in each of ISA and SIPP. And say 10% growth in equity and 2% in bonds. With the equities in the SIPP they'd get 25% free of tax, then pay 20% (eg) tax on 750, so 150 tax. But if the put the bonds in the SIPP they'd pay only £20 tax. This example assumes you've already used your lower tax free income threshold, which happens around 300k in normal drawdown circumstances.

cloud_dog

TheTracker wrote: »

MAs argument is what to do about allocation post-contribution.

I don't think MAs post makes that clear, otherwise why would MA comment...

TheTracker wrote:

Bear in mind lifetime allowance too

If it is post contribution and assuming you contribute up to the point of retirement/decsion making then the LA would be a known position and not something that needs to be born in mind.

Whilst the points you make are perfectly valid they are predicated on this one position being the truth.

Linton

I am nervous saying this but I think Bowlhead's post greatly overstates the case....

Assuming basic rate tax throughout....

If you had £200K net to invest, £100K in an ISA and £100K in a SIPP then you would end up with £100K in the ISA and £125K in the SIPP.

Suppose the choice was either equity with a total of 100% return or bonds with a 0% return at retirement after a number of years.

1) Bonds in ISA, Equity in SIPP

ISA income =£100K
SIPP income=0.25*£250K+0.75*0.8*£250K=£212.5K

Total=£312.5K

2) Equity in ISA, Bonds in SIPP

ISA income=£200K
SIPP Income=0.25*£125K+0.75*0.8*£125K=£106.25K

Total=£306.25K

So even with a very much higher equity return than bond return the difference is very small. Obviously with an equity return the same as the bond return the difference in scenarios would be zero. So in reality with long term bond returns only somewhat lower than equity returns the difference is very very small.

cloud_dog

I suppose another aspect to consider would be that any ongoing capital withdrawal from the ISA would not count towards income tax liability, whereas any monies (ignoring the 25%) taken from a pension would be included in income tax calculations.

EDIT: The reason I posted is that in my simply head I've always thought of moving my investments across to a more income (divi) type solution but it may be financially beneficial to actually sell down investments in an ISA (rather than a SIPP) and take the money as capital rather than income.

System

I had meant post contribution, as for me this thinking came from talking to someone who had vls60 in their sipp and was pushing the 40% bracket when they draw. I take it as a snapshot of total value assuming the whole lot could be sold and reallocated if necessary

Cloud -Im sorry for not making clear, it's because for lack of knowing the angle people think from I assume they'll make the same assumptions

Linton - if we don't adjust proportions put in the wrappers?