Percentage of savings into my pension and isa

Twix70

AlanP_2 Total savings 800 plus tax relief into my SIPP and 200 into my ISA
MovingForwards those figures suit with my plan currently. Thanks!

AlanP_2

Twix70 said:

AlanP_2 Total savings 800 plus tax relief into my SIPP and 200 into my ISA
MovingForwards those figures suit with my plan currently. Thanks!

But movingforwards is suggesting £1600 pm contributions not the £1000 you have specified so not sure how his figures suit your plan.

Twix70

I realised I should have added a final sentence before I pressed"post" I can probably get the 1600 for my SIPP but the numbers fit with how I have projected my savings at 800/1000/1200 figures for the calculations. 
I will save at the best rate I am able I think I wanted further opinions on my 80/20 philosophy, I am comfortable with my mind process of why I got to that percentage but I think I wanted reassuring by more knowledgable persons that I wasn't completely off with my thoughts.
I certainly want some cash without touching my pension pot or I would pay all of the funds into my SIPP

MovingForwards

Don't forget the monthly pay in figure is inclusive of your tax relief, therefore the amount you personally need to put in is less.

I guess the 20% you want to put into savings will be the bit you don't need to pay in to the SIPP because if the tax relief.

A couple of pointers:
1. There's only so much money you can pay in and that's in relation to your earned income.
2. If you are a higher rate tax payer, you need to claim the extra tax relief back.

Other people will be along after they finish work to go over the ins and outs with your plan / goals.


I'm not experienced, I'm merely learning myself, working my way through all the posts in this section of the forum and worked out how much I wanted when I retire, then had a play with pension calculators to see how my numbers work. I'm also a 'she' 😉

steampowered

ISAs and pensions are both tax efficient vehicles. The difference is whether the money gets taxed "on the way in", or "on the way out".

With a pension, the money does not get taxed on the way in. As you are a basic rate tax payer that is effectively a 20% top-up from the government. But the money can get taxed on the way out when you withdraw it (aside from a tax free lump sum of 25% of your pot).

With a stocks & shares ISA, you do not get a top-up from the government, but the money is tax free to withdraw.

As it sounds like you do not have a big pension pot, you are likely to be earning less than £12.5k in retirement. If that assumption is correct, in financial terms, the pension is the clear winner - because you get the 20% tax relief added on top.

However, an ISA is obviously more flexible if you need to access the money before retirement, so you might decide that losing out on the tax relief is worth it on a portion of your money.

The other consideration is whether your ISA is a savings account, or a stocks & shares ISA. If you are hoping to keep this money for more than 5-7 years, it would make more sense to have it in a stocks & shares ISA, as savings accounts will lose value each year due to inflation.

kinger101

Are you able to contribute to an employer's pension scheme via salary sacrifice?  For basic rate taxpayers in particular, it's a much more tax-efficient method than SIPP.

jamesd

Twix70 said:

I am 49 years old and have a small pension pot and a small amount in a stocks and shares ISA My aim for both is to save for retirement (naturally). I currently split what I save in the following manner, 80% into my SIPP, which is then added to by the government (I am self-employed), the other 20% goes into my ISA Is this a good percentage to build cash and a pension pot?

No.

First, since this is long term, most ISA money should be invested similarly to a pension, so it can grow like one.

A next thing to consider is contingency planning for possible inability to work. Pension money isn't available until age 55 so contingency income has to come from the ISA. This leads to 100% ISA initially (assuming no job with employer contributions), then 100% pension plus one year of contingency spending moved from ISA to pension each year. 

If you have a job with employer contributions or would pay some higher rate income tax, that favours adding a pension part early on. I see that you're self-employed, so that part not relevant unless you have a conventional job as well.

There are constraints:

1. ISA allowance. You might consider putting amounts above this into the pension but that would delay reaching the adequate contingency level, so initially some non-ISA and non-pension accumulating may be appropriate.

2. income limit or annual allowance for pension contributions. If this will block you from doing 100% plus a year of contingency spending then you might need to shift some of the pension part to earlier years.

MovingForwards

kinger101 said:

Are you able to contribute to an employer's pension scheme via salary sacrifice?  For basic rate taxpayers in particular, it's a much more tax-efficient method than SIPP.

He is self-employed.

barnstar2077

I wouldn't put less in the ISA personally.  You don't know what situation you will be in in your sixties.  You may be thanking your lucky stars that you have something to fall back on before you are allowed to access your pension (a number that seems to keep going up!)  Even it it just means you can afford to work part time, it could be a God send. 

semiplural

steampowered's first two paragraphs do get to the nub of this.
However, based on the figures you provided you would (under current figures) be paying basic rate tax so I don't think the rest of the rest of the conclusions stack up.

The pension is slightly more tax efficient as you can take 25% tax free and only pay basic rate tax on the rest. Whereas drawing from the ISA is totally tax free (but with no tax benefit when you put the cash in).
The ISA gives you much more flexibility - you can withdraw however much you want whenever you want (even before retirement). For me personally  that would be more important than the tax benefit (the 25% tax free withdrawal) but at the end of the day that comes down to your own priorities.