SIPP or ISA as additional savings vehicle

AnotherJoe

bd10 wrote: »

Million thanks everyone for the pointers!!

So, I ran some numbers, hope that makes sense: Let's assume a real yield of 5% taking platform fees into account. I also assume that I remain a higher rate tax payer and that the 20% refund via tax return remains in place.
The defined contribution pot would be worth 451,130 at retirement. Assuming that the lifetime allowance is still at 1,055,000, that would leave a gap of 603,869 which would need to be split between SIPP and share ISA. Taking the same real yield of 5%, that would translate into 11,251 annual savings over 26 years. But because I ma getting 20% relief and 20% refund, 11,251 / 1.44 = 7,813 per year.

Now, assuming 7% real yield net of fees which would be a lot more aggressive:
The defined contribution pot would be 631,772 and 423,227 would be the gap to the lifetime allowance. At 7%, this number would be reached with 8,816 per year savings over 21 years. Again assuming 20% tax relief and return, that would only be 6,122 per year for the SIPP. Any excess would end up in the share ISA.

Running the numbers made me realise that I actually need a split between SIPP and ISA, maybe 60/40 or 50/50. This of course depends on real yield assumptions and whether I want to retire on schedule or a few years earlier. But also squirreling money away into an ISA gives extra flexibility when it comes to another deposit for a property.

There's one somewhat risky assumption you've made in all that.

That high rate tax relief stays (and that you remain a high rate earner).
I sugegst its better to grab the HR tax relief until you think that with growth going forward you'll eventually nudge against LTA, and then switch to ISA.

bd10

Totally agree. This is purely theoretical and given where we politically stand at the moment, anything is possible and I also think that there will be some sort of tax grab, be it that the current or new gov't will scrap the 20% relief and/or refund. This calculation was just a baseline case. I'll need to expand on that playing out various scenarios.
Look, the assumptions on real yield are nothing but assumptions. The past performance of my funds etc outperformed 5% by a good margin. We might get hit with a equities crash if Donnie Trump think it's wise to pick a proper fight with the Chinese over trade. Or we might get another credit crisis with all that free cash sloshing around. Who knows.

But you're absolutely right, I'll be shifting the percentages towards my SIPP for now, this freebie might stop soon.

Reed_Richards

AnotherJoe wrote: »

It isnt tax free at all. Dont forget you paid tax on the way into the ISA

.
I wasn't forgetting that any more than I was forgetting that pension payments are taxed as earnings. The fundamental problem is that you need 20;20 foresight to get it right; the best anyone can do is calculations based on reasonable assumptions.

AnotherJoe wrote: »

The evidence so far is that there are far fewer people splurging their money than the fears that were raised by those inclined towards nanny-statism. I'm not going to search for it but there was a very recent study showing what had happened since the changes, which reported that pensioners were being (in general) too cautious with their spending.

I am very pleased to hear this. I did a search myself; perhaps the IFS report referred to in this article is what you are remembering? https://www.moneymarketing.co.uk/retirees-not-recklessly-spending-pension-wealth/

System

You mean that people who have had the fiscal wherewithall about them to save and invest in a pension so they have a decent amount to live on in retirement aren't so stupid as to blow it all in one go? Well colour me surprised, who'd have ever guessed that would happen?

MK62

The pension freedoms were only introduced 4 years ago and the markets have been relatively benevolent in that period, despite a rocky start......how do they really know that over-55s exercising those freedoms are being too cautious, when they have a reasonable expectation their pot may need to last another 25-30+ years, the returns and inflation during that period are unknown, they may need to fund social care, may be subject to future tax grabs, and are unlikely to be given benefits beyond the state pension should it all go horribly wrong?

Too cautious?,......more like just being prudent imho...;)

cloud_dog

bd10 wrote: »

Running the numbers made me realise that I actually need a split between SIPP and ISA, maybe 60/40 or 50/50. This of course depends on real yield assumptions and whether I want to retire on schedule or a few years earlier. But also squirreling money away into an ISA gives extra flexibility when it comes to another deposit for a property.

I think you need to be clear on the purpose of your 'savings'. You started off by referring to:

bd10 wrote: »

How would you weigh up a SIPP vs an ISA for primarily retirement savings?

In relation to 'retirement savings', and assuming you do not wish to retire before age 55 (currently), then my opinion is that a pension is the best option for your money (HRT payer).

You also mention your workplace pension operates salary sacrifice so, unless you are barred from increasing you own workplace pension contributions I am unsure why you would not use this route for any pension contributions. You would benefit by an additional NI reduction of 2% on your contributions.

For shorter term, flexible savings/investments then yes, an ISA is the better option (purely from its flexibility but not from a financial perspective).

coyrls

bd10 wrote: »

Assuming that the lifetime allowance is still at 1,055,000, that would leave a gap of 603,869 which would need to be split between SIPP and share ISA.

The LTA should increase by inflation.
The LTA does not apply to ISAs, so there is no requirement to split the LTA gap accross a SIPP and an ISA.

bd10

coyrls wrote: »

The LTA should increase by inflation.
The LTA does not apply to ISAs, so there is no requirement to split the LTA gap accross a SIPP and an ISA.

When doing the math I assumed all numbers to be adjusted for inflation. It is reasonable assumption in my eyes as my base salary is inflation adjusted each year, so my contributions etc will also increase with the rate of inflation. I do not know whether the LTA has been increased beyond the rate of inflation or not.

bd10

cloud_dog wrote: »

I think you need to be clear on the purpose of your 'savings'. You started off by referring to:



In relation to 'retirement savings', and assuming you do not wish to retire before age 55 (currently), then my opinion is that a pension is the best option for your money (HRT payer).

You also mention your workplace pension operates salary sacrifice so, unless you are barred from increasing you own workplace pension contributions I am unsure why you would not use this route for any pension contributions. You would benefit by an additional NI reduction of 2% on your contributions.

For shorter term, flexible savings/investments then yes, an ISA is the better option (purely from its flexibility but not from a financial perspective).

To be fair, I am not 100% sure which way I want to play it: Over the next few years I might need funds to upsize my accommodation. Will need more space. I could work on the premise that my current property might give me enough additional equity. Possible, but given the political mess we're in, not sure. That that would not be needed, then the primary objective would be to save for retirement. I have done my budget for this year and my savings would not be required for anything (holidays etc all paid up or saved up separately), I would not touch them.
My decision on the split (SIPP vs ISA) would be based on risk vs. reward. Reward in terms of state subsidies vs. the unknown risk how to get it out, plus the risk of not being able to get it out before 55 and/or the big question mark what rules might be in place in 20 years and all of a sudden new restrictions/levies/taxes will be in place.

My biggest worry is political. Not short term, but long term: if we are looking at household financing: so much bought on credit, BT cards carrying debt forward, real wages in decline for the past 10 years, so finances are tight. Then the prospect of 1/3 of the young generation not being able to buy a place at all. Even among my relatively well paid friends and colleagues the worries of pensions (which is by no means representative but telling) mirrors the general trend. The squeeze will be on in 10-15 years maybe. And then what. This crisis will be bigger than what we currently have with Brexit. No government will allow this to happen, would be political suicide to have a large part of a generation in poverty when they retire (or keep pushing into their 70s). That's why I have a squeezy feeling having a SIPP pot locked away. I remember well many years back when the German minister for pension and social services declared "the pension is safe". Less than 5 years down the line, the state pot was half empty and tax hikes all round...