SIPP vs. ISA in pension planning

aroominyork

Can I please check the comparative dis/advantages of SIPPs and ISAs in pension planning. If we assume that:

i) I am not currently a higher rate taxpayer, or I have paid enough into my SIPP this FY to reclaim all my 40% tax
ii) After I retire I will always fully use my personal tax allowance
iii) Tax rates will be the same when I retire as they are now
iv) I will not need to access my ISAs other than in retirement
v) I remain a basic rate taxpayer after retirement.

Then, is the only difference between SIPP and ISA that I will get 25% of my SIPP income tax-free? Or is there an additional benefit (which I cannot quite get my head around) that because my SIPP investments are grossed up when they are invested, I also get capital growth on the reclaimed tax which I do not get under ISA?

TheTracker

With employer contributed money to a SIPP you also avoid other taxes like NI or dividend tax that you may have paid before putting in a ISA.

Being taxed before or after is the same in terms of capital growth. 100*110%*80% is the same as 100*80%*110% for example, using growth of 10% and tax of 20% for demonstration.

Alexland

Yes in your scenario the benefit of a pension is the 25% tax free which is ok but could be erroded if the rules change such as an increase in the rate of income tax on the other 75%, etc.

If your employer supports salary sacrifice on employee contributions then the benefit would be greater.

The benefit of a S&S ISA is the money is accessable earlier if your wealth puts you into a position to retire earlier than the government will allow you to access your pension.

Also I assume you are too old to qualify for a LISA?

We are using a mix of pensions, LISAs and leftovers in S&S ISAs to save for costs occuring in retirement. At this stage I don't anticipate retiring before the government will allow me to draw my private pensions.

Alex

aroominyork

TheTracker wrote: »

Being taxed before or after is the same in terms of capital growth. 100*110%*80% is the same as 100*80%*110% for example, using growth of 10% and tax of 20% for demonstration.

But with 25% tax-free on pension withdrawals isn't the former effectively 100*110%*85%?

Alexland wrote: »

Yes in your scenario the benefit of a pension is the 25% tax free which is ok but could be erroded if the rules change such as an increase in the rate of income tax on the other 75%, etc.

But if the rules and tax rates do not change, if I move funds from my ISA to my SIPP now I make them worth 6.25% more, isn't that correct? (My £100 ISA becomes £125 in my SIPP and is worth £106.25 after 75% of it is taxed at 20%.)

ColdIron

It's not an either or, you could use both particularly if you are or expect to be a higher rate taxpayer. You might look at prioritising your ISA in the earlier years, it gives you flexibility etc. When you are close to retirement, switch to filling your pension and claim the full 40% rebate. When you retire refocus on your ISA. However I don't think I'd be putting too much store in your item iii) and there could be merit in making hay while the sun shines especially with regard to pension contributions

Alexland

aroominyork wrote: »

But if the rules and tax rates do not change, if I move funds from my ISA to my SIPP now I make them worth 6.25% more, isn't that correct? (My £100 ISA becomes £125 in my SIPP and is worth £106.25 after 75% of it is taxed at 20%.)

There is a much higher chance of the rules changing than them not changing but yes as I said there is a small benefit from the 25% tax free however I wouldn't bother calculating it to 2 decimal places as it will have changed by then.

NoMore

http://monevator.com/sipps-vs-isas-best-pension-vehicle/

Fatbritabroad

ColdIron wrote: »

It's not an either or, you could use both particularly if you are or expect to be a higher rate taxpayer. You might look at prioritising your ISA in the earlier years, it gives you flexibility etc. When you are close to retirement, switch to filling your pension and claim the full 40% rebate. When you retire refocus on your ISA. However I don't think I'd be putting too much store in your item iii) and there could be merit in making hay while the sun shines especially with regard to pension contributions

I'm in this camp. My liquid net worth outside of pension is fairly small though I'm trying to increase it. Currently 50k. Im 37. My pension has 140k in it and contribute 14% with my employer putting gin 4% But on a salary of nearly 90k I want to save the tax if I can and can't assume I'll always be on this kind of pay and kind of want to get my retirement fairly sorted before kids come along when I will probably reduce the amount I put in

AnotherJoe

Alexland wrote: »

There is a much higher chance of the rules changing than them not changing but yes as I said there is a small benefit from the 25% tax free however I wouldn't bother calculating it to 2 decimal places as it will have changed by then.

Thats true if the 75% is taxed at 20% rate. However if you retire before state pension age and before any other pension comes into play, so you have no taxable income, you can likely avoid tax on some of that 75% as well. So maybe you are getting up to 10% or better, not 6.5%

For example, I've already taken out my 25%. So the 75% thats left is taxable. However if i take out less than the tax allowance, eg £988 a month there's no tax on that either, since i have no taxable income, even though in your calculation I'd be paying 20% on it.

aroominyork

I am 56, OH is 60. Before I retire I will most likely inherit a sizeable amount. Both of us contribute enough to SIPPs each year to reclaim all 40% tax.

I am tempted to move some funds from ISA to SIPP. I guess one risk is of higher rate tax relief on SIPP contributions disappearing and a single band of 25%-30% being introduced; then I would have moved too early. But crystal balls and all that...

ColdIron: why refocus on ISA in retirement? Do you mean draw from it first and if so why so long as I am a basic rate taxpayer after retirement? Because of beneficial IHT rules on SIPPs?

Last question for now. Can I make in specie transfers from ISA to SIPP (I am with HL, in the process of switching to ii) or must I sell, withdraw and rebuy?

lisyloo

I think there a fairly major one been missed which is the income tax relief.

Assuming iii) you!!!8217;ll be able to draw 11.5k (or whatever the personal allowance is) per year tax free.

You!!!8217;ll be able to take all of your ISA tax free but you paid 20% income tax on the way in.

So in addition to the tax free lump sum, there!!!8217;s tax relief on £11.5k per year (or equivalent at the time).