SIPP vs ISA/LISA in addition to 2015 NHS Pension

redlfc

Hi all! I know this thread has been discussed before but none that ive seen that would apply to my age/career

Ive done quite a bit of reading , both on these forums as well as Monevator. I am a 25 yr old junior doctor living with parents, with around 35k in savings - only debt is a fairly significant 70k plus student loan accruing 6.1% interest

As advised by others on these forums - I plan to stay in the NHS Pension for the entirety of my career but would like to bridge the retirement age of 67 so that I can retire between 55-60 without withdrawing my pension early. I do not plan on ERRBO either.

I have been reading the benefits and drawbacks of both SIPPs and LISA/ISAs and would like some clarification if ive understood correctly, and what would be best for me

SIPPs
Pros
-- As a higher earner I would get tax relief on 40% (which would be topped up by HMRC) effectively meaning 100 investment only costs me 60
-- Can invest up to 40k per tax year
-- Can be accessed from ages 55-57
-- Marginal tax if die after 75, no tax if before 75

Cons
-- Only 25% can be accessed tax free - rest taxed as normal income


LISA
Pros
-- Receive 1k bonus on investments of 4k every year from 18 (25 for me) till 50
-- All withdrawals are tax free

Cons
-- Cannot access money until 60 without effective 6% loss
-- Savings into LISA are post tax
-- 40% inheritance tax if not passed on to spouse

ISA
Main pro is that I have access to the money at any time (which could also be a negative depending on how you handle losses) ,20k per year deposit, and being tax free to withdraw - but no tax relief/bonus


Essentially with SIPPs you are taxed on the way out whereas with LISA you are taxed on the way in

Initially I had ruled out SIPPs as I thought my career as a doctor could likely put me close/surpass the LTA - which the SIPP would also add to. However my plan is to specialise as a GP (could potentially be fully qualified in around 3.5 years) These days most GPs jobs are varied, with some time spent in out of hours locums, some as partners, and even those who are salaried GPs rarely work more than 3 days a week as NHS salaried GPs. I also am considering taking a gap year post foundation training to locum/travel as I have not yet had a break from education since I joined nursery! All this would mean time away from the NHS pension scheme/less pensionable pay if only doing 3 days NHS a week - which would lower my NHS pension in the long term.

Based on the above - does that make SIPP a viable option to fund my early retirement over LISA/ISA?

If so, im a bit confused to how SIPPs actually work - I understand you can invest in both cash SIPP and S&S just like with ISA - but in regard to the 40% tax relief - does that mean I should only be investing in SIPP when I reach this tax bracket? And if so - the SIPP would automatically realise that I am a higher earner and contribute 40% tax relief via cash into the S&S (if thats the SIPP I had)

Also once you take the 25% tax free lump sum from SIPP- do you still get the next 11,850 tax free PSA or is everything taxed at 20% until you reach next tax bracket?

Would a good strategy be to invest in LISA/S&S ISA until later on in career and then open SIPP (maybe at 50 when LISA bonus stops) to ensure i get 40% tax relief and to monitor to make sure i dont surpass LTA

Paul_Herring

I am a 25 yr old

would like to bridge the retirement age of 67 so that I can retire between 55-60 without withdrawing my pension early.

Based on the above - does that make SIPP a viable option to fund my early retirement over LISA/ISA?

I wouldn't plan on being able to access any pension product at age 55, at your age. (And I'd not assume 67 was set in stone either.)

Dazed_and_confused

If so, im a bit confused to how SIPPs actually work - I understand you can invest in both cash SIPP and S&S just like with ISA - but in regard to the 40% tax relief - does that mean I should only be investing in SIPP when I reach this tax bracket? And if so - the SIPP would automatically realise that I am a higher earner and contribute 40% tax relief via cash into the S&S (if thats the SIPP I had)

The choice is yours. Plenty pay into a SIPP or personal pension for basic rate relief only. Others ensure they pay in when they can get higher rate tax relief.

Either way the pension company (courtesy of HMRC) only ever add basic rate relief. You have to claim any additional relief due from HMRC. Depending on timing of you notifying them of the contributions this would be either by an adjustment to your tax code or a repayment direct from HMRC.

Note: Any additional tax relief due is never added to your personal pension/SIPP.

Also once you take the 25% tax free lump sum from SIPP- do you still get the next 11,850 tax free PSA or is everything taxed at 20% until you reach next tax bracket?

It all depends on what other income you have. Pension income (the taxable bit) is just like a wage for tax purposes. So if your only taxable income was £11,850 taxable pension from the SIPP then no tax would normally be due.

FIRSTTIMER

I am similar to you and have been in LGPS and USS and TPS.

I would say max out the NHS contributions first - buy outs/apb etc. Then knowing you will get the absolute maximum you can buy, paying in the maximum between now and when you go. Potentially topping up with a cash lump sum before officially retiring - if you have any wriggle room in buying anymore pension (you then know at age 67/68 or 65 if buy out included that you have the maximum you can get from NHS Scheme).

I would then do a SIPP personally, as I think you can access it earlier than a LISA (age 55, probably age 58 when you get to it - government plan in the pipeline is the earliest you can access pension will be state pension age MINUS 10 years). I would then draw down the SIPP with flexibilities (probably 25% tax free lump sum and then income set at the tax free allowance per year until the NHS pension kicks in).

crv1963

It depends on how much you choose to save. A bit everything might help- save in LISA you can access that money for house purchase or fund age 60 onwards; H2BISA for house purchase; SIPP locked away for retirement 10 years before SPA and NHS pension can be accessed.

You could also look to an AVC to get a TFLS rather than the poor rate you get exchanging NHS Pension for lump sum. Money taken out of salary doesn't feel as hard as you are not used to seeing it go into the bank so if you have a rough patch later in life you don't easily cancel the direct debit payment "for a few months".

redlfc

crv1963 wrote: »

It depends on how much you choose to save. A bit everything might help- save in LISA you can access that money for house purchase or fund age 60 onwards; H2BISA for house purchase; SIPP locked away for retirement 10 years before SPA and NHS pension can be accessed.

You could also look to an AVC to get a TFLS rather than the poor rate you get exchanging NHS Pension for lump sum. Money taken out of salary doesn't feel as hard as you are not used to seeing it go into the bank so if you have a rough patch later in life you don't easily cancel the direct debit payment "for a few months".

thanks for the reply CRV! Didnt get the last paragraph - not familiar with the terms AVC/TFLS
I thought theres no lump sum on NHS DB scheme?

redlfc

FIRSTTIMER wrote: »

I am similar to you and have been in LGPS and USS and TPS.

I would say max out the NHS contributions first - buy outs/apb etc. Then knowing you will get the absolute maximum you can buy, paying in the maximum between now and when you go. Potentially topping up with a cash lump sum before officially retiring - if you have any wriggle room in buying anymore pension (you then know at age 67/68 or 65 if buy out included that you have the maximum you can get from NHS Scheme).

I would then do a SIPP personally, as I think you can access it earlier than a LISA (age 55, probably age 58 when you get to it - government plan in the pipeline is the earliest you can access pension will be state pension age MINUS 10 years). I would then draw down the SIPP with flexibilities (probably 25% tax free lump sum and then income set at the tax free allowance per year until the NHS pension kicks in).

thanks! how does one go about increasing NHS pension contributions - but surely thats just more money that I wouldnt be able to access till SPA - I think the amount ill have by then will be enough and id rather have access to the money earlier on. Also not familair with the term APB

I agree I think SIPP would be a good investment to tide me till SPA - only worry would be hitting LTA but who knows

redlfc

Dazed_and_confused wrote: »

The choice is yours. Plenty pay into a SIPP or personal pension for basic rate relief only. Others ensure they pay in when they can get higher rate tax relief.

Either way the pension company (courtesy of HMRC) only ever add basic rate relief. You have to claim any additional relief due from HMRC. Depending on timing of you notifying them of the contributions this would be either by an adjustment to your tax code or a repayment direct from HMRC.

Note: Any additional tax relief due is never added to your personal pension/SIPP.



It all depends on what other income you have. Pension income (the taxable bit) is just like a wage for tax purposes. So if your only taxable income was £11,850 taxable pension from the SIPP then no tax would normally be due.

I thought SIPP was the same as personal pension or are they two different entities? thank you thats very helpful to explain how the tax relief actually works

crv1963

redlfc wrote: »

thanks for the reply CRV! Didnt get the last paragraph - not familiar with the terms AVC/TFLS
I thought theres no lump sum on NHS DB scheme?

AVC= Additional Voluntary Contributions, basically choice of two providers with NHS Pension under the rules I believe that instead of taking it as extra pension you can take it as a TFLS= Tax Free Lump Sum, check with your Trust Pensions Officer. If you can't find the number ring payroll and they'll redirect your call.

It might be worth googling "increasing my NHS Pension". The payment can be taken as a percentage - easier to keep pace with promotion and payrises or as a fixed monthly sum I think from memory £25 pm upwards. Taken before deductions just like your pension by payroll and can be stopped or increased easily.

hugheskevi

A few thoughts/observations:

• As well as higher rate and additional rate tax relief, you can also get higher effective relief if you use pension contributions to reduce your income to benefit from avoiding/mitigating the Child Benefit taper, and also to avoid/mitigate the withdrawal of the personal income tax allowance.

• ERRBO is a way to increase the value of your pension without generating any pension input.

• Once you start to earn around the £100,000 mark you will face Annual Allowance charges each year, and as salary escalates the tapered Annual Allowance will affect you. This significantly reduces the value of voluntary additional pension contributions. This is a particular concern for you as the Annual Allowance thresholds are frozen in cash terms and the NHS pension scheme is set to be improved from 1st April 2019, so you may face these issues relatively early in your career.

• Given the above, if you are planning to make additional voluntary pension saving, there is likely to be an ideal time when you are benefiting from higher rate relief but not yet affected by the Annual Allowance, although remember that with the ability to carry-forward up to 3 years of unused Annual Allowance you may want to review/reduce voluntary pension saving a few years before you think you will be affected by the Annual Allowance.

• Your State Pension age and normal pension age in your NHS pension scheme is already 68, not 67. This is intended to move in line with life expectancy, so would be expected to increase over time.

• The minimum pension age is intended to be state pension age minus 10 years (but not yet legislated).

• Taking Defined Benefit pension early with actuarial reduction can be a way to avoid/mitigate the effect of a Lifetime Allowance breach, as HMRC value a pension paid at age 55 as being worth the same as a pension paid at 70.

• LISAs are fine and I would think using one a good idea, but you can only put peanuts into them, at least at the moment. In a lot of cases the tax position is neutral, as you get a 25% boost from Exchequer contribution in the LISA, which is similar to the benefit from higher rate tax relief (40%) less tax paid on the pension in retirement (20%, or 15% if taking into account tax-free lump sum).

I think LISAs appear to be very suitable for your circumstances.

I think you may want to consider ERRBO more, as not generating a pension input is a very useful feature - I think you will find the scope for making voluntary pension contributions becomes quite limited quite early in your career due to the Annual Allowance.

I would be focusing on LISAs and other ISAs or other investments until you reach higher rate tax, then using Added Pension or personal pensions if you want to make voluntary pension saving to benefit from higher rate relief as salary increases. A key question for you is whether to use pensions without benefiting from higher rate relief. Personally I think with LTA issues and limited tax relief on offer there is no compelling reason to do so - it could easily end up being something you regret. But if policy change goes in other directions it could end up being a sensible decision. For me, there isn't enough on the table in the form of 20% relief to justify the risk.

As salary gets up to about £60,000 or £70,000 you will be hitting the Annual Allowance if you are pensioning all your higher rate salary income, so you will be increasingly limited in your voluntary pension saving. By the time you earn about £100,000 your Annual Allowance will be taken up by your main scheme pension so it is unlikely you will want to be making any voluntary pension saving.

I wouldn't discount taking a large actuarial reduction for early pension payment, as if it avoids/mitigates LTA issues it may be a sensible move. Also, if affected by Lifetime Allowance and also going to be a higher rate taxpayer once the pension is taken, the lump sum becomes a consideration, even at the dire rate of 12:1.

redlfc

crv1963 wrote: »

AVC= Additional Voluntary Contributions, basically choice of two providers with NHS Pension under the rules I believe that instead of taking it as extra pension you can take it as a TFLS= Tax Free Lump Sum, check with your Trust Pensions Officer. If you can't find the number ring payroll and they'll redirect your call.

It might be worth googling "increasing my NHS Pension". The payment can be taken as a percentage - easier to keep pace with promotion and payrises or as a fixed monthly sum I think from memory £25 pm upwards. Taken before deductions just like your pension by payroll and can be stopped or increased easily.

so does this additional amount effectively increase what basic pensionable pay figure is used - hence the 1/54 multiplied by salary amount will be higher each year? tbh i dont see the benefit of that as I have no aim to earn more when i reach 67, id rather invest elsewhere for money i can access before this age