Just to confirm, re S&S ISA

sultanoflondon

Hi all,

I'm sure I'm just being a bit dim, but I wanted to confirm the tax-free status about stocks and shares ISAs. Imagine I use my S&S ISA as my primary pension & so I use the entire £20k annual allowance for over 20 years. This will lead to a balance of at least £400k, a fairly sizeable pot.

Am I right in thinking that every penny derived from this £400k pot after I retire is tax free? So I will never be taxed on any capital gains, never be taxed on the income (dividends or any other distributions) I derive from that £400k pot, or indeed any other tax that I have omitted?

Is that right?

ColdIron

Yes, no capital gains or income tax and no tax on withdrawals, you can think of ISAs as being invisible to HMRC. But if this is for a pension why not use an actual pension? You will get a 25% uplift on contributions and the same tax benefits while in the pension. Withdrawals may be taxable but you can take 25% tax free and can use your Personal Allowance to offset some of the remainder. What about employer contributions (if any)? Are you or could you become a higher rate tax payer, if so pensions beat ISAs hands down

sultanoflondon

ColdIron said:

Yes, no capital gains or income tax and no tax on withdrawals, you can think of ISAs as being invisible to HMRC. But if this is for a pension why not use an actual pension? You will get a 25% uplift on contributions and the same tax benefits while in the pension. Withdrawals may be taxable but you can take 25% tax free and can use your Personal Allowance to offset some of the remainder. What about employer contributions (if any)? Are you or could you become a higher rate tax payer, if so pensions beat ISAs hands down

Thanks for your reply!

Forgot to mention that I will probably have an employer pension, but I need to check the details of that. Sorry for being dim, but why would being a higher rate taxpayer make a difference?

grumiofoundation

sultanoflondon said:

ColdIron said:

Yes, no capital gains or income tax and no tax on withdrawals, you can think of ISAs as being invisible to HMRC. But if this is for a pension why not use an actual pension? You will get a 25% uplift on contributions and the same tax benefits while in the pension. Withdrawals may be taxable but you can take 25% tax free and can use your Personal Allowance to offset some of the remainder. What about employer contributions (if any)? Are you or could you become a higher rate tax payer, if so pensions beat ISAs hands down

Thanks for your reply!

Forgot to mention that I will probably have an employer pension, but I need to check the details of that. Sorry for being dim, but why would being a higher rate taxpayer make a difference?

HRT tax payer will get 40% tax relief 'going in' to pension as opposed to basic rate tax payer who gets 20%. 

sultanoflondon said:

I'm sure I'm just being a bit dim, but I wanted to confirm the tax-free status about stocks and shares ISAs. Imagine I use my S&S ISA as my primary pension & so I use the entire £20k annual allowance for over 20 years. This will lead to a balance of at least £400k, a fairly sizeable pot.

If you contributed 20k to pension each year (if basic rate tax payer = 25k with tax relief), your pot would be 500k (plus growth) before tax. If pay 20% tax on 75% of it that is 425k.

If 40% tax payer 20k contribution each year = 33k with tax relief - so pot of 667k before tax.


N. B. If 400k is your only pension pot it may not be that sizeable (depending on cost of lifestyle)

dunstonh

Am I right in thinking that every penny derived from this £400k pot after I retire is tax free?

No.  It will form part of your estate and would be subject to inheritance tax.  It would be free of CGT and income tax though.

 Imagine I use my S&S ISA as my primary pension & so I use the entire £20k annual allowance for over 20 years. This will lead to a balance of at least £400k, a fairly sizeable pot.

Why would you want to do that though?    Pension trumps ISA in terms of tax efficiency.   There are scenarios where S&S ISA does come into play but not as a primary retirement income wrapper.

Alexland

sultanoflondon said:

Forgot to mention that I will probably have an employer pension, but I need to check the details of that.

Consider if contributing more into your employer's pension would better help your objectives than using an S&S ISA. Can be very advantageous if they operate salary sacrifice to save the national insurance on the contribution. Also if you are a higher rate taxpayer and a parent you may find extra pension contributions bring your income back under the limits to claim some or all of child benefit again.