Approach to SIPPs

darkidoe

Hi all

I am back to gather some ideas for a SIPP I have just opened to maximise the tax relief available and to learn from some of you who have been running your own SIPPs for years!

Just some background.
I am in my late 20s, have a DB Career Average pension, am running a S&S ISA as well.
S&S ISA holdings are basically index tracking ETFs.

With the SIPP, the idea is to pay in to claim up to the higher tax rate tax relief and no more to maximise and utilise the tax relief. The other savings will go into S&S ISA for the flexibility of freedom of access to funds.

I am interested to hear how others manage their SIPPs and ISA concurrently. Do you have a different strategy with the SIPP and ISA?? Given the more rigid and fixed horizon of the SIPPs, do people tend to take more 'risk' in their SIPP? I am leaning towards a passive approach and will be opting for long term funds rather than changing funds every few years so I am trying to work out my long term strategy right at the start.

Accum vs Income funds
There are no dividend tax implication in SIPPS as with ISA, so there wouldn't be any issues with accumulation funds. Is there any other issues other than having the trouble of reinvesting income funds if this is the preferred option?

Annual Allowance
I gather that the annual allowance allows you to claim tax relief up to the level of your earning in the year, up to a maximum of 40,000 per year. And this can be backdated to last few years. My question would be if I missed out claiming on the higher rate tax relief last year, would I still be able to claim on it? I suppose you have to have paid in to the SIPP in the particular tax year to be able to claim on for that additional tax relief. (I.e. You cannot pay into your SIPP this tax year and claim for additional tax relief from last few years income? That would be a bit cheeky )

Higher Rate/Additional Tax Relief
Am i correct to say the tax relief claimed for higher tax payers into SIPPs is done by adjusting the tax code and not by cash into the SIPP?

Lifetime allowance
I will need to keep a lookout for this when I do have a bigger pot size. I gather I will need to get a figure for my pension from the DB scheme and multiple this by 20 and add this to the value of the SIPP to get an overall figure. Once I reckon I might hit this ceiling, i should consider stopping additional contributions.

Any other SIPPs pitfalls I need to lookout for?
How has everyone used SIPPs in their overall financial independence/investment strategy?

The political/policy risk is perhaps the greatest unknown factor we have to deal with i suppose. Hope all this planning is not for naught.

Linton

Your description of Annual Allowance is incorrect...


There are 2 separate limits. The earnings limit refers to all pension contributions (gross) you personally (not employer or Salary Sacrifice) have made to any of your pensions. This is limited to your gross earnings in any tax year. There is no carry forward.


The Annual Allowance of £40K includes all contributions (gross) anyone including you have made to any of your pensions in any tax year. There is carry forward from the 3 previous tax tears. For DB pensions the employer contribution is calculated from a formula - it isnt the real one since the employer doesnt make a cash contribution to your pension. Never having had a DB pension I will leave the explanation to others.


Basic rate tax ispaid into your pension, the higher rate component is paid to you either via your tax code or by cash payment. So if you are planning a contribution to your SIPP you work out the gross amount and then subtract 20% for the actual payment.

Mr.Saver

Just some background.
I am in my late 20s, have a DB Career Average pension, am running a S&S ISA as well.
S&S ISA holdings are basically index tracking ETFs.

I'm in my late 20s too, but don't have a DB pension
I have a DC pension from my employer, a SIPP and have a few more ISAs than you. I buy OEICs, because I found they are often cheaper to buy and hold. ETFs tend to have higher trading fees than OEICs on most platforms, and the ETFs I looked at in the past also often have higher TER/OCF than their OEIC equivalent. However for large enough portfolio, platforms often have a price cap for ETF holding fees, so you may benefit from this.

With the SIPP, the idea is to pay in to claim up to the higher tax rate tax relief and no more to maximise and utilise the tax relief. The other savings will go into S&S ISA for the flexibility of freedom of access to funds.

I do the same too. Except that my other savings is above the ISA annual allowance so some of them end up in unwrapped investment accounts. Also, don't forget to keep an emergency fund outside the stock market. I use a combination of interest paying current accounts and easy access savings accounts to keep my emergency fund.

I am interested to hear how others manage their SIPPs and ISA concurrently. Do you have a different strategy with the SIPP and ISA?? Given the more rigid and fixed horizon of the SIPPs, do people tend to take more 'risk' in their SIPP?

I'm currently not taking more risk in my SIPP than my ISA. Partly because both of them are already in pretty risky investments with the potential of 50% loss in a market crash, and I'm not comfortable to take more risks.

I am leaning towards a passive approach and will be opting for long term funds rather than changing funds every few years so I am trying to work out my long term strategy right at the start.

I have the same thinking, but I wouldn't mind to adjust my strategy as I learn more about it. If the adjustment requires me to switch funds, I will do that.

Accum vs Income funds
There are no dividend tax implication in SIPPS as with ISA, so there wouldn't be any issues with accumulation funds. Is there any other issues other than having the trouble of reinvesting income funds if this is the preferred option?

Depends on your fund of choice and balancing strategy, hold the dividends as cash may help you avoid the need for selling funds, therefore saves you some trading costs.
I personally balance my funds by contributing more money to the ISA/SIPP, so I don't need to sale funds. I know this won't work for forever. If the pot is big enough and the difference between funds is above my planed contribution amount, I would have to sale some of the funds.

Annual Allowance
I gather that the annual allowance allows you to claim tax relief up to the level of your earning in the year, up to a maximum of 40,000 per year. And this can be backdated to last few years.

This is not correct. The annual allowance is not about claiming tax relief. Please see https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief and https://www.gov.uk/tax-on-your-private-pension/annual-allowance for details.

My question would be if I missed out claiming on the higher rate tax relief last year, would I still be able to claim on it?

If you've only missed out the claiming part, then you can still claim it. Just call HMRC, they will sort it for you out over the phone.
But you can't claim anything if you've also missed out the contribution part. The pension contribution cannot be backdated.

I suppose you have to have paid in to the SIPP in the particular tax year to be able to claim on for that additional tax relief. (I.e. You cannot pay into your SIPP this tax year and claim for additional tax relief from last few years income? That would be a bit cheeky )

This is correct.

Higher Rate/Additional Tax Relief
Am i correct to say the tax relief claimed for higher tax payers into SIPPs is done by adjusting the tax code and not by cash into the SIPP?

The higher rate / additional rate tax relief is not done by cash into the SIPP. But it isn't necessarily done by tax code adjustment. If the number is too big for that, you may expect a cheque or back transfer from HMRC.

Lifetime allowance
I will need to keep a lookout for this when I do have a bigger pot size. I gather I will need to get a figure for my pension from the DB scheme and multiple this by 20 and add this to the value of the SIPP to get an overall figure. Once I reckon I might hit this ceiling, i should consider stopping additional contributions.

I'm not familiar with DB pension, others may be able to help with the calculation.
I just want to add one thing to this, the lifetime allowance is not about how much you (and your employer, etc.) have paid into your pension, but rather the total value of your pension at the time of certain events.
So even you've stopped contributing to your pensions after you think you may go above the limit, a good performing stock market could still bring you over the limit.

Any other SIPPs pitfalls I need to lookout for?
How has everyone used SIPPs in their overall financial independence/investment strategy?

The political/policy risk is perhaps the greatest unknown factor we have to deal with i suppose. Hope all this planning is not for naught.

I think the biggest risk for people in 20s is exactly what you said - the political/policy risk. Nobody knows what may change in 30-40 years time. But we can only hope for the best and prepare for the worst.

darkidoe

Linton wrote: »

Your description of Annual Allowance is incorrect...


There are 2 separate limits. The earnings limit refers to all pension contributions (gross) you personally (not employer or Salary Sacrifice) have made to any of your pensions. This is limited to your gross earnings in any tax year. There is no carry forward.


The Annual Allowance of £40K includes all contributions (gross) anyone including you have made to any of your pensions in any tax year. There is carry forward from the 3 previous tax tears. For DB pensions the employer contribution is calculated from a formula - it isnt the real one since the employer doesnt make a cash contribution to your pension. Never having had a DB pension I will leave the explanation to others.


Basic rate tax ispaid into your pension, the higher rate component is paid to you either via your tax code or by cash payment. So if you are planning a contribution to your SIPP you work out the gross amount and then subtract 20% for the actual payment.

Ah that makes a lot more sense. I think for most people we wouldn't be contributing close to the annual allowance limit regularly.

darkidoe

Mr.Saver wrote: »

But you can't claim anything if you've also missed out the contribution part. The pension contribution cannot be backdated.

Ah that was what I was looking for. Shame we can't backdate the contributions.

Mr.Saver wrote: »

I'm in my late 20s too, but don't have a DB pension

I know DB pension schemes are very valuable but I don't have much concept of how it compares to alternatives out there. I wonder how does your DC pension compare in terms of benefits?

dividendhero

TBH I don't treat my SIPP any different to my ISA. Both are long term, globally income orientated...

Mr.Saver

darkidoe wrote: »

I know DB pension schemes are very valuable but I don't have much concept of how it compares to alternatives out there. I wonder how does your DC pension compare in terms of benefits?

My DC pension is the auto-enrolled workplace pension, and my employer only pays the minimal required by law - 2% of my qualifying salary (not gross salary).

So, what is qualifying salary? Qualifying salary is the earnings between £6,032 and £46,350 in 2018-2019 tax year. That is at most £40,318. The 2% of maximum eligible salary is £806.36, this is the most I can get in the 2018-19 tax year from my employer.

Yes, the employer contribution minimal is going to raise to 3% in the 2019-2020 tax year, and the qualifying salary range will increase a bit too. But by how much? From what I've found on the gov.uk website, the qualifying salary range is going to increase to earnings between £6,136 to £50,000, and 3% of that is £1,315.92. With my own contribution and tax relief, all put together is 8% or £3,509.12 per year.

If someone is to start work in April this year, earn above £50,000, do nothing about their pension, and retire in 40 years, even with an unrealistic 0% inflation and 15% rate of investment return, the pension pot can only get to a bit over £150k, with 4% withdraw rate in retirement, that is an annual income of around £6,000 - even less than the state pension.

I bet any DB pension for a person who worked for 40 years would beat that £6,000 per year retirement income.

darkidoe

Mr.Saver wrote: »

My DC pension is the auto-enrolled workplace pension, and my employer only pays the minimal required by law - 2% of my qualifying salary (not gross salary).

So, what is qualifying salary? Qualifying salary is the earnings between £6,032 and £46,350 in 2018-2019 tax year. That is at most £40,318. The 2% of maximum eligible salary is £806.36, this is the most I can get in the 2018-19 tax year from my employer.

Yes, the employer contribution minimal is going to raise to 3% in the 2019-2020 tax year, and the qualifying salary range will increase a bit too. But by how much? From what I've found on the gov.uk website, the qualifying salary range is going to increase to earnings between £6,136 to £50,000, and 3% of that is £1,315.92. With my own contribution and tax relief, all put together is 8% or £3,509.12 per year.

If someone is to start work in April this year, earn above £50,000, do nothing about their pension, and retire in 40 years, even with an unrealistic 0% inflation and 15% rate of investment return, the pension pot can only get to a bit over £150k, with 4% withdraw rate in retirement, that is an annual income of around £6,000 - even less than the state pension.

I bet any DB pension for a person who worked for 40 years would beat that £6,000 per year retirement income.

Doesn't sound great if its the only pension one has. Can you do additional voluntary contributions that employer matches?

I have decided to go for a HL SIPP and will be starting with a small sum initially. I have decided to go for a smaller companies tilt in the SIPPs as it will likely have a 30 year investment period. Who knows whether smaller companies will continue their alpha but it doesn't harm to start way ahead if it does. Would be an interesting 30 year experiment. Lol.

darkidoe

My SIPPs tax relief has just come in, so I will be buying into the market soon. I think I will be using my SIPPs as a smaller companies tilt in my general portfolio.

Firstly because it is less accessible so would be more protected from me getting to it in volatile growth years. Secondly because I believe the data that has been out there as described by Linton and others about smaller companies alpha. I will try to limit this to be about 10 percent of my overall portfolio, so I think the risk would be manageable. As the value in my SIPP is not large, I will probably begin in 2-3 smaller company funds in specific geographical areas (EUR/UK/Japan).

I wonder if there are EUR smaller company funds that include UK or are they historically separate? It would be nice to have less funds as possible just to consolidate things abit.

On another note, I have written to HMRC for tax relief last week (calling them is such as pain), so would be expecting a reply in a few weeks. I hope it doesn't just disappear into the system.

AlanP_2

Mr.Saver wrote: »

Yes, the employer contribution minimal is going to raise to 3% in the 2019-2020 tax year, and the qualifying salary range will increase a bit too. But by how much? From what I've found on the gov.uk website, the qualifying salary range is going to increase to earnings between £6,136 to £50,000, and 3% of that is £1,315.92. With my own contribution and tax relief, all put together is 8% or £3,509.12 per year.

If someone is to start work in April this year, earn above £50,000, do nothing about their pension, and retire in 40 years, even with an unrealistic 0% inflation and 15% rate of investment return, the pension pot can only get to a bit over £150k, with 4% withdraw rate in retirement, that is an annual income of around £6,000 - even less than the state pension.

I don't think you are allowing for the compounding effect there.

Using this calculator https://www.thecalculatorsite.com/finance/calculators/savings-calculators.php, £290 pm for 40 years at 15% interest and 0% inflation creates a pot of £6,683,534.45.

In reality though your point is valid as 15% after inflation return is not going to happen and inflation will eat into the real value of the pot.

AnotherJoe

I have two SIPPs and an ISA plus for historic reasons a few fund and share accounts with investments that are somewhat stuck due to CGT so I'm burning them down within the limit each year.
I have very different strategies in those three. Initially for historic reasons and now, because its simpler to manage this way.
SIPP1, four trackers comprising three* global tracker funds one property. 90% equities 10% property. My "passive portfolio"
SIPP2, a mish mash of active pooled investments and a few shares all intended to be held for the fairly long term. My "active portfolio"
ISA, a failed** experiment at high dividend paying investments, gradually being migrated to longer term holds mostly ETFs and shares. Just bought some so-called "alternative energy" (mostly solar and wind) investments there though in a few years I think coal gas and oil will be the alternative and these will be mainstream and that's why I'm getting into these now (and arguably shoudl have done a year or two ago but whatever)


* three because it was meant to be two, but for one of the two i was stuck between two choices and was getting analysis paralysis so just went 50/50 in both. Their performance has been almost identical.

** failed because though the dividends have been good I dont like seeing the capital decline and overall its done worse than both SIPPs.