SIPP vs. ISA in pension planning

BananaRepublic

aroominyork wrote: »

This is interesting on the danger of filling your SIPP too much during the early accumulation years and as a result paying avoidable higher rate tax after retirement. So it seems the best strategy is i) always pay into a SIPP first to reclaim any higher rate tax and/or to get any free money from an employer, then ii) during the early accumulation years pay into an ISA ahead of a SIPP and iii) the nearer you get to retirement bring the SIPP into play and also transfer funds from ISA into SIPP to get the maximum benefit from the 25% tax free lump sum while not taking yourself into a higher rate tax bracket when you draw on your SIPP. That maximises tax efficiency and also keeps your savings accessible (in ISA) during your younger/mid-age years. Does that sounds right?

You’ve hit the nail on the head. At present you can take about £15,000 per year from a pension before it attracts tax. And of course if you have a large pension, you will attract higher rate tax. The 25% tax free lump sum helps. To make matters worse, there is a limit on the total pension fund size. But all of this is based on current taxation rules, and they have changed dramatically over the last ten years, who knows how they might change in the next ten years. I don’t trust governments, especially as current pension tax rules are very beneficial for higher rate tax payers, and I can’t see that continuing.

An ISA has the advantage of course that it escapes all taxation.

ArmyDilllo

I retired early (56, eighteen months ago) and use a SIPP and other investments, including a SIPP.
My income to cost ratio is currently 4:1, but my investment strategy is to see that gap average continue growing each year, as I age.

From my point of view, what mattered was; how much I have in total and each investment vehicle.
Either; how much I intend to draw from them; how much tax I can save; the comparative growth rates; what you intend for your estate after your gone.

I am fortunate enough to have a sizeable estate already and intend for my Nephew & Niece (or their families) to inherit.
Current legislation makes it far easier for them to inherit my pension.
It is removed from my estate and therefore Inheritance Tax.
But it will be subject to their nominal rate of Income tax when they do withdraw it, either as a lump sum or incrementally.

Currently I am using my SIPP to withdraw up to the limit of my annual Personal Tax allowance via UFPLS (a form of Drawdown which allows me to remain invested and take 25% tax free sums on top of my £11,500 lump sum, giving me £15,500 p.a.) and then using other investments to top up whatever else I need.

As I'm retired, and drawing my pension, I don't qualify for higher rate tax relief on my contributions so that's of no benefit to me.

Although I get 25% on top of my pension contributions, this is now restricted (see above) and is of almost no benefit. Plus the growth rates of my other investments far outpace that of my pension, so the 25% govt. contribution is only relevant for about four years. I worked out that I'm better off retargeting it to other investments (Shares ISAs and shares). The 25% is taxed upon withdrawal as well so depending on how much you have; can contribute; and need to withdraw; it may not work for you (it really doesn't for me).

My state pension becomes available to me in 2026, at which point I will stop drawing from my SIPP and forget about it.
Hopefully my heirs will be able to put my SIPP (still invested) towards paying the govt.'s tax on me for being so selfish as to die. Sorry.., I meant "Inheritance Tax".

Time to get that calculator out.