Does a SIPP pension really save you that much, if at all, after eventual TAX and charges.

jimlad68

I am just considering the tax benefits of SIPPs (not company pension) and come to some alarming conclusions!

[1] While working, if I put into my SIPP pension I save tax, but when I retire and take pension, if still on same tax rate, other than the 25% tax free lump sum, I then pay tax I would have paid before, in the meantime (especially for SIPP providers) I would pay various charges (up to 0.45% every year and often withdrawal fees etc), so over many years the 25% tax free lump sum would be greatly eroded.
So worker + taxman lose, SIPP provider gains!

[2] If I am working, paying higher rate of income tax, and contribute, then when I retire, if I then pay lower rate tax I am quids in.

[3] If I have finished work and just contribute £2800/3600 (with 20% gov "freeby") a year to SIPP, but then end up paying tax at higher rate, I have lost out majorly.
So worker loses, taxman gains, SIPP provider gains!

[4] For someone working at 20% tax rate for all or part of their working career, who for whatever reason end up paying higher rate of tax in retirement, lose out majorly.
So worker loses, taxman gains, SIPP provider gains!

[5] And then there is the situation whereby if you are not careful and withdraw too much from your SIPP in one tax year, you will pay at a higher rate of tax.

Is my understanding wrong?

AlanP_2

No different to any other DC pension.

If you pay BR tax while working and then HR tax in retirement then you lose the tax advantages. Most people are not in that position though so do get a tax benefit.

If you are BR on way in and BR on way out the 25% TFLS means you get a 6.25% return before fees and investment gains or losses.

jimlad68

AlanP wrote: »

No different to any other DC pension.

If you pay BR tax while working and then HR tax in retirement then you lose the tax advantages. Most people are not in that position though so do get a tax benefit.

If you are BR on way in and BR on way out the 25% TFLS means you get a 6.25% return before fees and investment gains or losses.

- Yes, but, from my memory (a few years ago now!), my DC from my company also allowed the company to add contributions, and there were no fees. e.g. Hargreaves Lansdown charge 0.45 %, others are cheaper but have other charges, annual or whenever you withdraw.

- So you do not disagree with my scenarios, just that it is similar to a standard DC but with the charges.

Cheers

Marcon

Are you factoring in the fact that your pension is invested in a tax-favoured environment, with all the advantages that brings?

Paul_Herring

While working, if I put into my SIPP pension I save tax, but when I retire and take pension, if still on same tax rate, other than the 25% tax free lump sum, I then pay tax I would have paid before, in the meantime (especially for SIPP providers) I would pay various charges (up to 0.45% every year and often withdrawal fees etc), so over many years the 25% tax free lump sum would be greatly eroded.

1) If you're a 20%er while earning and a 20%er in retirement, you effectively drop that 20% to 15% due to the TFLS.
2) You're going to pay at least some of those various charges if you invest in the same things outside of a pension with post-tax income.

For someone working at 20% tax rate for all or part of their working career, who for whatever reason end up paying higher rate of tax in retirement, lose out majorly.

While theoretically possible, for most it's going to be unlikely.

And then there is the situation whereby if you are not careful and withdraw too much from your SIPP in one tax year, you will pay at a higher rate of tax.

Don't withdraw more than the starting limit for 40%

jimlad68

Marcon wrote: »

Are you factoring in the fact that your pension is invested in a tax-favoured environment, with all the advantages that brings?

I think so? The obvious alternative would be an ISA, which as far as I can tell has the same tax-favoured environment. In addition, unless you are going to do many transactions, running a comparable funds ISA with say iWeb is much cheaper than an ISA or SIPP with Fidelity or Hargreaves Lansdown.

Basically as far as I can see SIPPs have a lot of charges; partly fair enough as they do seem to need a lot more admin, but probably also less competition.

Please correct me if I am wrong.

jimlad68

Paul_Herring wrote: »

1) If you're a 20%er while earning and a 20%er in retirement, you effectively drop that 20% to 15% due to the TFLS.
2) You're going to pay at least some of those various charges if you invest in the same things outside of a pension with post-tax income.

By my very rough, not accounting for compound interest etc, charges of .45% could eat up the 5% advantage over 10-15 years and as you say there would be other charges elsewhere, but as I said elsewhere "... simple ISAs are much cheaper ..."
So is the "less gain than it seems after charges" worth all the extra admin hassle, and your money being tied up when an ISA would not be.

Thrugelmir

Reinvestment of income will make a sizable difference though. Nor is there any need to pay 0.45%. On a reasonable pot 6% is worth having. Depending upon your income at the time. A lot more could be withdrawn tax free as well.

jimlad68

Thrugelmir wrote: »

Reinvestment of income will make a sizable difference though. Nor is there any need to pay 0.45%. On a reasonable pot 6% is worth having. Depending upon your income at the time. A lot more could be withdrawn tax free as well.

- Reinvestment of income should be similar for ISA or Fund/Share account.

- I am sure it is a moving target, but I've checked around and charges differ depending on if you are just saving long term or in drawdown etc and "for my circumstances in drawdown" I found Fidelity cheapest at .35%, but their SIPP website (which I suspect had just changed while I was moving), is, shall I say "a pain" and unhelpful. I am now waiting to see what the Vanguard SIPP charges will be like (It's a long time coming).

- All in all, the 25% tax free lump sum is probably worth it, my point is the SIPP managers take a good share and there is a lot of admin and you can easily pay HRT if you are not careful.

dunstonh

[1] While working, if I put into my SIPP pension I save tax, but when I retire and take pension, if still on same tax rate, other than the 25% tax free lump sum, I then pay tax I would have paid before, in the meantime (especially for SIPP providers) I would pay various charges (up to 0.45% every year and often withdrawal fees etc), so over many years the 25% tax free lump sum would be greatly eroded.
So worker + taxman lose, SIPP provider gains!

Dont forget your personal allowance. You wont use it all up with the state pension. Some of the income from the pension will be tax free. Plus, your personal allowance goes up over time.

There are no withdrawal fees (unless you pick a provider that happens to have them. Most do not.

Charges on investments are lower than charges on savings accounts. Only difference is that one is explicit and the other implicit.

[3] If I have finished work and just contribute £2800/3600 (with 20% gov "freeby") a year to SIPP, but then end up paying tax at higher rate, I have lost out majorly.
So worker loses, taxman gains, SIPP provider gains!

If you are not a higher rate taxpayer in working life then you are unlikely to be one in retirement.

[4] For someone working at 20% tax rate for all or part of their working career, who for whatever reason end up paying higher rate of tax in retirement, lose out majorly.
So worker loses, taxman gains, SIPP provider gains!

If you are married or have a partner then plan better so you are not in that position.

[5] And then there is the situation whereby if you are not careful and withdraw too much from your SIPP in one tax year, you will pay at a higher rate of tax.

So take more care and plan better.

Dont forget no capital gains tax or dividend tax and no IHT.

- I am sure it is a moving target, but I've checked around and charges differ depending on if you are just saving long term or in drawdown etc and "for my circumstances in drawdown" I found Fidelity cheapest at .35%, but their SIPP website (which I suspect had just changed while I was moving), is, shall I say "a pain" and unhelpful. I am now waiting to see what the Vanguard SIPP charges will be like (It's a long time coming).

You can get cheaper than 0.35% and not have withdrawal charges. Vanguard doesn't look like it is going to be a SIPP. They are started to refer to it as a personal pension. No point setting up a SIPP which is restricted to a couple of dozen options. It will appeal to the fanboys but as Vanguard are not the best in every area, you would have to compromise on your investments and that could be more costly than any small charges difference.

jimlad68

dunstonh wrote: »

Dont forget your personal allowance. You wont use it all up with the state pension. Some of the income from the pension will be tax free.

See your point, but if I already have another big enough pension that is not relevant, if not you would certainly do well to make your personal pension enough to take advantage.

There are no withdrawal fees (unless you pick a provider that happens to have them. Most do not.

When I last checked that was not my understanding, it seemed to be cheaper %+ more fees OR no/small fees + bigger %, perhaps I missed some (I was looking at SIPPs)


One thing you do confirm is a lot of careful planning!!!

Thanks for those observations.