To SIPP or not?

Bluemoon_Citizen

I am currently working full time and contributing, along with employers contributions, to a final salary pension scheme. I am also making regular monthly investments into a stocks and shares ISA.
I fully intend to stay in my occupational scheme, but I am struggling to get my head around whether there would be any benefit in me redirecting my monthly investments into a SIPP instead of the ISA. I understand there are tax breaks when contributing to a SIPP, but then after 25% has been taken the rest of the pension is taxable income, whereas drawdown from my ISA would be tax free.
I am 56 years old and don't currently have a SIPP, and in all probability will be working for a further 10 years or so. Have I left it too late to start a SIPP?

SonOf

I understand there are tax breaks when contributing to a SIPP,

A SIPP is a type of pension. Money purchase pensions are a tax wrapper (like an ISA).

but then after 25% has been taken the rest of the pension is taxable income, whereas drawdown from my ISA would be tax free.

An ISA doesnt get tax relief going in but doesnt get taxed on the way out.
Pensions get taxed on the way out but get tax relief going in.

I am 56 years old and don't currently have a SIPP, and in all probability will be working for a further 10 years or so. Have I left it too late to start a SIPP?

Pension beats ISA for tax efficiency in most cases when you are over age 55 (and before age 55 if you are able to leave the money). Whether a SIPP is best for you or not is a different matter as we dont have enough info to say what type of pension is most suitable.

Basic rate taxpayer gets 20% relief when contributint. On the way out, there is no tax up to the personal allowance and then a net effective 15% tax on basic rate band (25% tax free, 75% taxable = 15%). It is also outside of your estate.

The only real times that the pension tax wrapper is not better than ISA is if you are going to be taxed at higher rate in retirement but are currently a basic rate taxpayer. Or, you are likely to breach the lifetime allowance.

I am currently working full time and contributing, along with employers contributions, to a final salary pension scheme.

Just noting that employer contributions are meaningless in respect of your pension as its a DB scheme.

cloud_dog

You have to remember that your ISA contributions have already been taxed so they are not tax free, although no taxation is applied on withdrawal.

Also, it depends if you were considering retiring before your company scheme normal retirement age. You could then draw any personal pension/SIPP monies to include your personal allowance (£12.5k) per year tax free, thereby minimising any taxation on your pension withdrawal.

Pensions are also outside of benefits consideration or inheritance tax consideration (until 75), so it all depends on your circumstances and your plans.

Albermarle

The tax advantage of a pension over an ISA is 6.25% for most people . Most people means - basic rate taxpayers when contributing and when taking it .
If you are a higher rate taxpayer today and will be a basic rate taxpayer in retirement , then the benefit is much higher .
A SIPP is generally for investors with at least some basic knowledge of investing. Otherwise probably a stakeholder or personal pension is better.

AlanP_2

You haven't said what DB scheme you are in, but have you investigated whether there is anytjing that can run alongisde that from the employer?

LGPS for example offers an associated AVC scheme that is a DC pension pot.

Bluemoon_Citizen

Many thanks for the responses.

I did consider AVCs but they didn't appeal to me.

As a basic rate taxpayer (who will continue to be so in retirement) it sounds as though running a SIPP alongside my occupational pension would make good financial sense. I can always leave the existing money invested in my ISA to supplement my income in retirement.

My thoughts now are is ten years long enough to build up a big enough pension pot in the SIPP.

cloud_dog

Bluemoon_Citizen wrote: »

My thoughts now are is ten years long enough to build up a big enough pension pot in the SIPP.

Big enough for what?

You haven't indicated if you want to retire before your company scheme NRA, if so then how many years before hand, what benefits are associated with the DB scheme, what income are you looking for after you retire, what disposable income do you have, etc, etc.

For example, if the DB scheme will provide you with exactly the income you are looking for (don't forget state pension), and you think you may want to retire one year early then the SIPP/pension only needs a pot of money to cover that one year's income.

SonOf

I did consider AVCs but they didn't appeal to me.

AVCs are largely out-of-date and can be improved upon by other options. Although there are still some viable and good value AVCs out there. Stakeholder and PPP being the other two types that may be viable. In some scenarios, S&S ISAs and LISAs can be best as well (LISA not being available to you eliminates that).

My thoughts now are is ten years long enough to build up a big enough pension pot in the SIPP.

A SIPP is just a tax wrapper. You need to stop thinking of it as a product.

When you invest, you look at all the tax wrappers available to you and decide which (or combination of) are most suitable for your investments. A timescale of 10 years is irrelevant (and in reality, it would unlikely be 10 years as you are not likely to draw the whole lot in one go)
So, in your case, you should be comparing ISA (and unwrapped potentially) and pension as tax wrappers not products.

Albermarle

My thoughts now are is ten years long enough to build up a big enough pension pot in the SIPP

Well however big it is it will be better than not having it at all !
You should give some thought as to what type of investments you would hold in the SIPP. Risk level etc
If you are lacking knowledge in this area then suggest you do some googling and keep an eye on this forum . A SIPP is generally for investors with at least some basic knowledge of investing. Otherwise probably a stakeholder or personal pension is better.

Bluemoon_Citizen

[QUOTE
You should give some thought as to what type of investments you would hold in the SIPP. Risk level etc
If you are lacking knowledge in this area then suggest you do some googling and keep an eye on this forum . A SIPP is generally for investors with at least some basic knowledge of investing. Otherwise probably a stakeholder or personal pension is better.[/QUOTE]

I have been investing in a S&S ISA for many years, with reasonable success (in a rising market) so am fairly confident about my choice of asset class or fund/trust etc. That is not to say that my success will inevitably continue.

My question now is more about whether redirecting my future investments into a pension rather than an ISA would be the best move for me.

jamesd

Bluemoon_Citizen wrote: »

My thoughts now are is ten years long enough to build up a big enough pension pot in the SIPP.

ISA as the advantage of being 100% available vs pension unavailable until 55 then 25% can be taken whenever desired tax free without penalties.

Say you have £100 after tax to invest. In the ISA that's £100 invested. In the pension it's £125 after tax relief. Take out 25% tax free early, leave the 75% taxable for later to avoid triggering the MPAA. Eventually you have £125 * 0.25 + £125 * 0.5 * 0.8 = £106.25 after tax relief. That 6.25% tax relief gain applies to all money paid in and taken out at basic rate, assuming you don't get to the lifetime allowance threshold.

This means that you have a free of investment risk way to add 6.25% to your ISA returns: run the ISA money through the pension. For each £100 in you can take out £31.25 tax free lump sum for ISA refilling, leaving £93.75 in the pension for later.

There are restrictions on recycling pension tax free lump sums into new pension contributions and the rules do catch taking money from investments and replacing it. One permitted threshold is withdrawing £7,500 of tax free lump sum per rolling twelve month period (not tax or calendar year, twelve months elapsed time). £7,500 is 25% of £30,000 so provided your gross pay is at least £30,000 you can pay £30,000 gross (£24,000 before tax relief) into the pension and rapidly take out £7,500 of it.

If your gross pay is higher you can pay in more but can't take out 25% of it all, just £7,500. Once you've exhausted your ISA pot you can continue to take the delayed 25% bit each year until caught up.

There's an alternative recycling rule that can be used later. If the increase in expected contributions measured over the two tax years before the lump sum, that tax year and the following two years is no more than 30% of the lump sum it's fine. If you've been using ISA money you'll eventually reset the starting point for the increase to make the apparent increase nil, so the tax free amount allowed.

Earlier I wrote about replacing savings being caught, so why doesn't that catch the increase in base in the last paragraph? Because normal retirement planning is allowed and it's normal for someone who recognises the benefits of pension vs ISA to want to use that benefit. But HMRC could try to regard £7,500 of the new base level !!! being due to recycling.

What I wrote about in the last two paragraphs probably doesn't matter to you because you probably don't have enough ISA money or pay for the delay in sticking to £7,500 tax free lump sum every twelve months to matter.