Best use of a small SIPP alongside an S&S ISA?

Audaxer

I am retired and over 55 and recently opened SIPP with HL with the maximum amount of £2,880 which will go up to £3,600 gross when the tax credit is received. I’ve not yet invested the cash as I’m considering the best way to use it alongside an S&S ISA.

My initial thoughts are that I should invest in the same funds and same percentages as the ISA, and each subsequent year move £2,880 worth of the funds from the ISA to the SIPP to get the £720 tax credit added each year. I know it will be taxed on the way out when I start to drawdown, but still should be an initial net gain of £180 per annum rather than just keeping all the funds in the ISA. Does that sound like a good strategy?

I’d appreciate your views.

bowlhead99

That's fine. If you just leave it in the ISA and don't bother to use the pension contribution allowance you'll miss out on some free tax relief money which won't generally be expected to be taxed at as high a marginal rate as the relief was given on the way in.

The expected gain from doing it relates to the 'tax free lump sum' element when you pull it out, and perhaps you may also get away with some of the income drawn down being within your personal allowance too (if you can draw it without displacing other income that you'd have otherwise got tax free that year).

As the money is still invested (whether ISA or SIPP) it can make sense to just use the same holdings which sounds simple enough. However if you're only actually putting relatively small amounts into to pension from ISA (under £4k a year) and your ISA investments are many and various, it might be a hassle to duplicate the exact proportions of all the investment products in the ISA. If it's only a small pot, keep it simple.

Also, you might like to consider holding relatively lower-growing assets in the SIPP and your more aggressive funds in the ISA, given the pension capital and growth will (probably) eventually be taxable at some marginal rate while money taken out of the ISA will never be.

pip895

Obviously it would be better still if you didn't need to take money out of the isa but its not a bad idea particularly if the inheritance advantages of a SIPP are of interest.

I believe you can actually take money out of the SIPP and replace it in the isa whilst still adding the £2880/annum provided you keep at least £1k in it. This might be an advantage depending on your tax situation.

ColdIron

This is what I do. Have you considered moving the cash from the SIPP into an Income Drawdown SIPP annually? You can take £900 as a tax free lump sum straight away and you could stick this in your ISA. Then you could either invest it in the same things you could have used in the SIPP and leave it or take an income if you want. With HL there are no fees for this

Audaxer

Thanks guys for your responses.

For this tax year I'm actually well under the Personal Tax Allowance limit, but I won't be next tax year as I will start taking a DB pension. Would I be therefore allowed to draw a lump sum of £2,600 tax free this tax year as still well within my Personal Allowance, leaving £1k in to keep the SIPP open, and still be able to pay in next year's £2,880 after April? Or would I be better off doing as ColdIron suggests and draw out a tax free lump sum of £900 every year moving it back to the ISA?

ColdIron

If you have the headroom in your Personal Allowance you could do much as you say. Take £3,500 out, £875 as a tax free lump sum and £2,625 taxable but covered by your allowance. Next year when you have a higher income from your DB pension take the tax free lump sum or just leave it in the SIPP. My suggestion of moving it into drawdown really just lets you access some of it early

As an aside, and I'm not sure about the fine detail, but you might be able to withdraw the whole sum rather than leave £1,000 to keep the SIPP open, if they close it just open another next year. The £295 + VAT early closure fee only applies if you move it into drawdown, take income and close it within 12 months. Might be worth a phone call to see if they apply the standard £25 + VAT fee if they close it. I expect they get asked this a lot

Audaxer

ColdIron wrote: »

If you have the headroom in your Personal Allowance you could do much as you say. Take £3,500 out, £875 as a tax free lump sum and £2,625 taxable but covered by your allowance.

Thanks again ColdIron, is it definitely okay to do that and pay in £2,880 next year? I think I read it only counts as recycling if £7,500 per year but I just want to check its definitely allowed? If it is would £2,625 part initially be taxed and have to be claimed back?

The £295 + VAT early closure fee only applies if you move it into drawdown, take income and close it within 12 months.

Their website says about the Early Closure Fee:
"This fee applies instead of the standard account closure fee when funds are paid to you as income and the SIPP account has been open for less than 12 months."
If you take out a lump sum would that not also be classed as taking income?

ColdIron

Audaxer wrote: »

Thanks again ColdIron, is it definitely okay to do that and pay in £2,880 next year? I think I read it only counts as recycling if £7,500 per year but I just want to check its definitely allowed?

It's fine, this is what I do, it's pretty standard practise. Maybe have a read of this

https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions

If it is would £2,625 part initially be taxed and have to be claimed back?

I believe it would be taxed

Their website says about the Early Closure Fee:
"This fee applies instead of the standard account closure fee when funds are paid to you as income and the SIPP account has been open for less than 12 months."
If you take out a lump sum would that not also be classed as taking income?

No. Once you go into drawdown and start to take a regular income from dividends, straight cash etc the platform incurs additional costs as they are essentially providing a PAYE service to you, HMRC reporting, production of P60s etc and it is this that the fee is designed to discourage