ISA or SIPP

tigerspill

Hi,
As I get into retirement, I have always had it in my head that I would take the 25% of the pension as TFLS up front.  And If I didn't need the money I would put it in an ISA.
I am now doing more detailed thinking about what money I take and when.
Are there advantages / disadvantages in holding money in an ISA or SIPP.  Assuming the assets held are the same.  And also ignoring the inheritance benefits of having the money in a pension.  
Basically trying to work out whether to take money from a pension when I can (after 25% TFLS all will be taxable due to having DB pensions using the tax free allowance.  Or taking it when I actually need is - which is better.
Maybe this requires much more information to help decide.  If so, what considerations should I ve thinking of?

Thanks

zagfles

Assuming no change in tax rates, no potentially wasted allowance, LTA issues etc, they are identical. Leaving aside peripheral issues such as inheritance, benefits etc. And assuming you can get it all into an ISA straight away.

The mathematically challenged will say things like "but you get more tax free cash if you phase drawdown", or "all growth in the pension is taxed at income tax rates", both of which are true, but both of which miss the point that they are irrelavent to the end result.

Albermarle

Therefore considering the above comments there is no need to bother taking the TFLS and starting a new ISA. You might as well just leave it where it is.
In fact depending exactly how you take the pension and your own tax position , leaving the TFLS in the pension can give you more options . As Zagfles says there is no direct benefit , but the IFA's who comment on this forum always say , if you do not need the TFLS for anything specific, then leave it where it is .

TBC15

What size is the tax free lump sum? What’s the value of your investments outside of an ISA/Pension?

Thrugelmir

If you are selling and buying similar assets. Then you may suffer the spread or incur dealing charges. In undertaking the transaction. 

dunstonh

 I have always had it in my head that I would take the 25% of the pension as TFLS up front.  

With drawdown, it was often best not to take the tax free cash up front and the 2015 adjustments made that even more so.  

With annuities, it was nearly always best to take the 25% up front.

Phased flexi-access drawdown can result in the least tax paid (so greater amount received) over your lifetime.  However, it depends on the amounts involved.

- which is better.

Whichever method that best achieves the objective in the most tax-efficient way.

The general rule of thumb is not to take money from the pension unless there is a justification for doing so.  Sometimes that justification can be tax efficiency. i.e. you may not need the money but it may be better to take some for tax reasons.   Other times, you may need £x either up front or per annum (or both) and you then fit the best method to fit that whilst taking into account current and future taxation.

zagfles

The fundamentals are incredibly simple. If you're always going to be in the basic rate band, then £1 in the pension is worth 85p outside. It doesn't matter when the tax is applied, now or later, so long as the tax rate doesn't change. And so long as there's no tax on growth (as applies to a pension or ISA, but not unwrapped unless you can make use of allowances).

Simple mathematical principle that multiplication is commutative, ie order doesn't matter:

investment x growth x tax hit = investment x tax hit x growth

Applies however you slice and dice with phased drawdown etc, there's nothing magical even if you insist on using long terms like "phased flexi-access drawdown" to make it sound clever, the end result is the same, assuming the same tax rates. Model it in a spreadsheet if you don't get the maths.

But things to watch out for are making full use of the personal allowance, avoiding higher rate tax, avoiding LTA problems, inheritance and benefits considerations, transaction costs, ISA limits, potential changes in tax rates or rules etc.

dunstonh

Applies however you slice and dice with phased drawdown etc, there's nothing magical even if you insist on using long terms like "phased flexi-access drawdown" to make it sound clever, the end result is the same, assuming the same tax rates. Model it in a spreadsheet if you don't get the maths.

You cannot assume everything is the same as that does not happen in the real world. Indeed, after saying the above, you then qualify it with a bunch of things that can make phasing better.   

There is also the behavioural issue where far too many draw the 25% and plonk it in a savings account.  With phasing, they could have increased the amount they take with their pension income tax-free knowing that they could still draw 25% of the remaining fund at any time.

The term phased drawdown has been around nearly 20 years. It is a recognised method despite you thinking that it has too many letters for you to understand.   The addition of "flex-access" in 2015 does add more letters but it was purely to differentiate it from the different types of drawdown (with the old methods which are now classed as flexible drawdown and capped drawdown).

kinger101

If one's estate my be liable to IHT, there's a very strong case for leaving inside the SIPP.  

zagfles

dunstonh said:

Applies however you slice and dice with phased drawdown etc, there's nothing magical even if you insist on using long terms like "phased flexi-access drawdown" to make it sound clever, the end result is the same, assuming the same tax rates. Model it in a spreadsheet if you don't get the maths.

You cannot assume everything is the same as that does not happen in the real world. Indeed, after saying the above, you then qualify it with a bunch of things that can make phasing better.   

Or worse. For instance someone close to the LTA may be better crystallising as much as possible early on. Also changes in tax rates, use of personal allowance, BR band etc could work either way, could make phasing better or worse. 

It's that sort of thing, and the others I highlighted, possibly a few other issues as well, that'll make a difference, one way or another. But to imply it's fundamentally better to phase shows a lack of mathematical knowledge.

It still could be true that phasing in most cases would be the right thing to do - but if it is it's because of the peripheral issues highlighted. Those are what should be looked at, rather than starting from the viewpoint that phasing is fundamentally better.

There is also the behavioural issue where far too many draw the 25% and plonk it in a savings account. 

Well, yes, if there's a change in investment strategy then that's the issue rather than phasing/not phasing.

With phasing, they could have increased the amount they take with their pension income tax-free knowing that they could still draw 25% of the remaining fund at any time.

Or they could use what they've already drawn and is sitting in an ISA growing at the same rate.

The term phased drawdown has been around nearly 20 years. It is a recognised method despite you thinking that it has too many letters for you to understand.   The addition of "flex-access" in 2015 does add more letters but it was purely to differentiate it from the different types of drawdown (with the old methods which are now classed as flexible drawdown and capped drawdown).

I understand it perfectly well, it just makes it sound more complicated for non pension geeks. Why would anyone want to do that? Phased drawdown will do in a generic discussion, unless you're comparing the legacy and current drawdown methods. BTW it's "flexi-access" not "flex-access". Too many letters maybe

tigerspill

Hi folks,
I want to say an initial thanks to all that have responded.  I haven't had time yet to go through the comprehensive detail that you have posted - but didn't want to ignore this.
Lots for me to understand more I and I will come back with more information - and probably questions

Thanks so far!