Put money in ISA or SIPP?

C_Mababejive

I'm just thinking about the best thing to do with dividend income from on ISA holdings.

I feel it isnt a binary choice,

Obviously recycling into a SIPP would get a minimum 20% tax relief and go some way to limiting exposure to higher rate tax. Over the long term the tax relief "boost" would also hopefully boost returns??

Any thoughts?

Thanks

Alexland

If you are paying higher rate tax and don't need access until retirement age (accepting it might slip back a bit) then it almost always makes sense to pay more into a pension. Ideally via your employer if they offer salary sacrifice to save the NI.

Alex

Primrose

Partly depends on your age but obviously the extra tax relief on pensions could make it more profitable in he longer run, especially if you might want to retire early or even get made redundant in your later years and find it difficult to find new employment.

I'd opt for some flexibility and perhaps go the belt and braces option. If the 25% tax free option is still available from your pension when you come to retire you'll get more of your transferred investment tax free but remember there is a lower age limit before you can get your hands on it. You can, of course draw an income or tax free money from your ISA at any time so it's partly about figuring the level of income want in later years.

Herbalus

Bit late to the party on this one, but the other consideration is your tax position in retirement.

Pensions are taxable as income, so in one sense are deferred tax if you gain the tax relief on investments but then pay tax on them on withdrawal, so potentially nets out at zero.

ISAs are tax-free to withdraw so investments here do not benefit from an uplift but neither will you pay tax on withdrawal.

Alexland

Herbalus wrote: »

Pensions are taxable as income, so in one sense are deferred tax if you gain the tax relief on investments but then pay tax on them on withdrawal, so potentially nets out at zero.

Hopefully it will be a bit better than zero by using the 25% tax free and any income tax personal allowance not used by state pension. The OP suggests they are currently paying higher rate tax but the taxed proportion of their pension in retirement may only be at basic rate.

Alex

Corto

I have the same problem:

I'll probably get a pension above tax threshold through my employer's scheme + state pension. So I would pay 20% tax now and later as well (on what I take out of the SIPP pension pot above the tax free lump sum).

If I get a 20% tax advantage now on SIPP contributions and take 25% percent out of the pot tax-free at retirement age, that would make it just about 6.25% over some 20 or more years. That's 3125 per 50k. However, SIPPs charge fees and more so than ISAs; most charge even more during drawdown (where ISAs charge nothing for withdrawals), A rough.0.25% charge over 20 years sums up to 5% and mops up the tax advantage already. A constant charge of 150£ per year results in 3000£, again eaten by the provider. These numbers seem to be at the cheaper end for SIPPs..

It therefore looks like there is little advantage in SIPPs for me and many average income earners given that in addition the money is locked away until 55 as compared to an ISA. Maybe I am missing something?

Amoux

Corto wrote: »

I have the same problem:

I'll probably get a pension above tax threshold through my employer's scheme + state pension. So I would pay 20% tax now and later as well (on what I take out of the SIPP pension pot above the tax free lump sum).

If I get a 20% tax advantage now on SIPP contributions and take 25% percent out of the pot tax-free at retirement age, that would make it just about 6.25% over some 20 or more years. That's 3125 per 50k. However, SIPPs charge fees and more so than ISAs; most charge even more during drawdown (where ISAs charge nothing for withdrawals), A rough.0.25% charge over 20 years sums up to 5% and mops up the tax advantage already. A constant charge of 150£ per year results in 3000£, again eaten by the provider. These numbers seem to be at the cheaper end for SIPPs..

It therefore looks like there is little advantage in SIPPs for me and many average income earners given that in addition the money is locked away until 55 as compared to an ISA. Maybe I am missing something?

I don't think you are missing anything, other than you may be overstating the fees. Not all SIPPs charge drawdown fees, and if you have ETFs you can usually cap fees, which is what I do. But I do generally agree with you. More needs to be done to make SIPPs more attractive for basic rate taxpayers, either by increasing the tax relief and/or lowering the fees.

Personally I have a bit of everything - SIPP, ISAs and LISA. For basic rate taxpayers, the LISA is actually the most tax efficient of the three. And whilst not everyone will agree, but I think having the money locked away until 55-60 is not necessarily a bad thing!

Corto

Thanks for the reconfirmation!

I have already learned quite a bit on this forum. My thanks goes to the Operators and all the most knowledgeable commentators and supporters!

When I read about SIPPs for the first time I thought they'd be a no-brainer. As it seems they are pretty much one of the more complex instruments on the market.

I am currently following up the suggestion from elsewhere on this site that Salary Sacrifice on a company scheme can mean a National Insurance reduction of 12% or so as well. That would clearly be an incentive.

The protection level of SIPPs may well be another plus in bad times to come.

There are other suggestions around on this site and I am not the person to summarise them.

With respect to my exaggeration of fees. I was sort of aware of that there are cheap providers, although I think I matched the price of "good choices" for something around 50k.

Seriously, do the fee structures have to be as complicated as they are? There are many people that would easily pay 0.45% because they just believe tax-man gives them 20. However, that discussion should go on a different thread.

short_butt_sweet

if you're in a situation where your tax advantage from a pension is only that 6.25%, then i think you're correct that it will be lost in higher fees over a period of decades. there are some fixed-price SIPPs, if you have a larger SIPP, but at a higher price than you'd pay for a fixed-price ISA.

however, a couple of situations where a pension might make sense despite only having 6.25% tax advantage:

1) you're already old enough to draw from a pension (or very nearly old enough). so the fees won't be over decades, but just a small number of years.

2) you already have a SIPP, which you started because it gave you a bigger tax advantage at the time (e.g. 40% relief on contributions). the extra charges for putting more in a SIPP may be no greater than the extra charges for putting more in an ISA - especially, if you are already using a fixed-price SIPP.

also, some people may find it useful to put money away where they won't be tempted to spend it, or where their creditors can't get at it, or where it won't affect their entitlement to means-tested benefits.