Drawdown SIPP to invest in S&S ISA?

frogonalog

As per the title, the simple question is, would that be a good move or not?
I'll expand a bit on my situation & the thinking behind this.

I used to be a HR taxpayer until about 2 years ago.  I then took voluntary redundancy at the age of 57 and was allowed to access my works based Final Salary pension without the normal age related reductions so left after 37 years of pensionable service.   This currently pays approx £28k pa so I am and always will be an income taxpayer.  The FS pension is slightly complicated by taking a "levelling" option which pays a higher rate until I reach SP age when it then reduces.  I cannot say exactly by how much as it is apparently recalculated every year using some secret arcane formula known only to the scheme trustees.   Using the figures that I was given at the time of VR, I roughly calculated that I would be about 77 before I started to lose money.  After speaking to older colleagues who took the same option, when they reached SP age, the difference between their "old" higher rate pension and the new lower rate PLUS the SP, resulted in a rise of approx 3k pa in total (if you see what I mean).  I don't know if that is based on a full SP as they (and I) were contracted out for most of their service.  I personally am paying voluntary NI contributions to make up any shortfall so will get the full amount.

My wife is older & is already drawing her SP but it is well below the full amount due to her work record.  Too late to do anything about this now but at least it leaves her with a large unused tax allowance.  She also has a SIPP which is not yet being drawn & as the £2800 net contribution made every year.

Partially because I was paying HR income tax, & partially because I wanted the option to retire on my own terms, I also have a SIPP.  This is in "mainstream" investments, mostly index trackers with a couple of managed funds thrown in.   The total value is approx 120K.  I have made the £2800 contributions since redundancy for tax reasons which I intend to continue..

There is also a S&S ISA worth about £150k which I have not made contribution to for several years.

My FS pension covers all current living expenses & we also have a decent cash buffer which might last 2 years if all else failed!  Some may say it's too much in cash but it helps me sleep at might.   Mortgage paid off, no big debts.   I have made all investment decisions so far without professional help so while I have become fairly good at saving, I am going to need help & guidance (and maybe advice?) at withdrawing, so here's my thinking.

Hopefully, my investments will rise in value over time.  If so, the more the FS pension rises, the more tax will be due.  So, what if I keep the SIPP invested while drawing down an amount to make up my income to the LR threshold and then reinvest this into the same funds but into the ISA rather than the SIPP?   Would this mean I have paid the necessary income tax & any further rise in value could then be taken tax free?  Also, I think there may be another smallish saving as the charges on the ISA (held with iWeb) would be lower than the charges for holding the SIPP (currently with Bestinvest).  I know there would be charges for the drawdown but this would be the case whenever I took it out.

I would certainly consider taking professional advice if I were to be convince that there is enough value in it, either by directly increasing the value of the funds or by allowing me to avoid expensive mistakes.

So back to the beginning.  Is it a good idea?  Have I overlooked anything.  Are there any major flaws?  Is there a better way?
Sorry for such a long first post & looking forwards to reading your views & opinions.

dunstonh

How is your inheritance tax position?   ISAs are within the estate.  Pensions are not.
How close are you to the lifetime allowance limit?

Also, I think there may be another smallish saving as the charges on the ISA (held with iWeb) would be lower than the charges for holding the SIPP (currently with Bestinvest).

Charges on pensions and iSAs are the same unless you are using a small player.

 I know there would be charges for the drawdown but this would be the case whenever I took it out.

Most providers no longer charge for drawdown.  Again, a small number may do but it's not the norm any more.
As there are so many whole of market investment platforms, you shouldn't have to use charges as a differentiator between the ISA and pension wrapers.

Linton

If you continue to pay basic rate tax and the tax rate remains the same it does not matter whether you accumulate gains in a SIPP and then drawdown or drawdown to an S&S ISA first and then get tax free gains:
If you drawdown before investment gains your get:   (initial capital X 0.8)  X (1+ %investment gain)
If you drawdown after investment gain you get :  Initial Capital X (1+%investment gain) X 0.8
Obviously both are the same.

It does make a difference to HMRC: if you drawdown first they get 20%.  if you drawdown later they get 20% (capital+ investment gain).  So they get more money but they get it later.

frogonalog

We have no-one close to leave anything to so not really worried about inheritance tax.  WRT my lifetime allowance limit, to be honest, I have no idea.  I joined he works pension when I was still a teenager & never had to think about it again.  The SIPP was started when I became a HR taxpayer & also had the idea that I might be able to retire early & defer my FS pension to avooid penalties for taking it before the normal retirement age.  As it turned out, that was not necessary due to being "lucky" enough to be offered VR at just the right time.

It might sound selfish but right now, all I want to do is pay as little tax as I can while We're still alive.  I obviously want my wife to be well sorterd if I go first but when We're dead, they can have the lot.

frogonalog

Linton said:

If you continue to pay basic rate tax and the tax rate remains the same it does not matter whether you accumulate gains in a SIPP and then drawdown or drawdown to an S&S ISA first and then get tax free gains:
If you drawdown before investment gains your get:   (initial capital X 0.8)  X (1+ %investment gain)
If you drawdown after investment gain you get :  Initial Capital X (1+%investment gain) X 0.8
Obviously both are the same.

It does make a difference to HMRC: if you drawdown first they get 20%.  if you drawdown later they get 20% (capital+ investment gain).  So they get more money but they get it later

Sorry but I'm not sure I understand this.   My thinking was that if I drawdown an amount, I pay tax on anything above the first 25%.  If I then invest that sum into the ISA & it grows by (for instance), 50% over it's time in the the ISA, I do not pay any more tax on it.  Whereas, if I left in in the SIPP, I would also be liable to pay more tax on the same growth.  Is this not the case?

Croeso69

frogonalog said:

Linton said:

If you continue to pay basic rate tax and the tax rate remains the same it does not matter whether you accumulate gains in a SIPP and then drawdown or drawdown to an S&S ISA first and then get tax free gains:
If you drawdown before investment gains your get:   (initial capital X 0.8)  X (1+ %investment gain)
If you drawdown after investment gain you get :  Initial Capital X (1+%investment gain) X 0.8
Obviously both are the same.

It does make a difference to HMRC: if you drawdown first they get 20%.  if you drawdown later they get 20% (capital+ investment gain).  So they get more money but they get it later

Sorry but I'm not sure I understand this.   My thinking was that if I drawdown an amount, I pay tax on anything above the first 25%.  If I then invest that sum into the ISA & it grows by (for instance), 50% over it's time in the the ISA, I do not pay any more tax on it.  Whereas, if I left in in the SIPP, I would also be liable to pay more tax on the same growth.  Is this not the case?

Net effect is the same.

You have £20,000 in a SIPP. You take 25% PCLS leaving £15,000 in the SIPP.

(1) Take it from the SIPP now you have £12,000 after tax. Stick it in an ISA and it grows 200% in 10 years so you now have £36,000.

(2) Leave the £15,000 in the SIPP. In 10 years it has grown 200% to £45,000. You take it out of the SIPP then and you also have £36,000 after paying 20% tax.

Linton

frogonalog said:

Linton said:

If you continue to pay basic rate tax and the tax rate remains the same it does not matter whether you accumulate gains in a SIPP and then drawdown or drawdown to an S&S ISA first and then get tax free gains:
If you drawdown before investment gains your get:   (initial capital X 0.8)  X (1+ %investment gain)
If you drawdown after investment gain you get :  Initial Capital X (1+%investment gain) X 0.8
Obviously both are the same.

It does make a difference to HMRC: if you drawdown first they get 20%.  if you drawdown later they get 20% (capital+ investment gain).  So they get more money but they get it later

Sorry but I'm not sure I understand this.   My thinking was that if I drawdown an amount, I pay tax on anything above the first 25%.  If I then invest that sum into the ISA & it grows by (for instance), 50% over it's time in the the ISA, I do not pay any more tax on it.  Whereas, if I left in in the SIPP, I would also be liable to pay more tax on the same growth.  Is this not the case?

You would pay more tax if you left the money in the SIPP but you would not be worse off:

1) Leave £10K in SIPP with a 50% investment return and then drawdown:
The  £10K increases by  £5K in the SIPP making £15K which after tax on drawdown becomes £12K with £3K to HMRC.

2) Drawdown £10K out of SIPP and invest in S&S ISA for 50% return
£10K X 0.8 =£8K goes into your ISA, £2K to HMRC.  This increases to £12K which you get tax free.

frogonalog

Linton said:

frogonalog said:

Linton said:

If you continue to pay basic rate tax and the tax rate remains the same it does not matter whether you accumulate gains in a SIPP and then drawdown or drawdown to an S&S ISA first and then get tax free gains:
If you drawdown before investment gains your get:   (initial capital X 0.8)  X (1+ %investment gain)
If you drawdown after investment gain you get :  Initial Capital X (1+%investment gain) X 0.8
Obviously both are the same.

It does make a difference to HMRC: if you drawdown first they get 20%.  if you drawdown later they get 20% (capital+ investment gain).  So they get more money but they get it later

Sorry but I'm not sure I understand this.   My thinking was that if I drawdown an amount, I pay tax on anything above the first 25%.  If I then invest that sum into the ISA & it grows by (for instance), 50% over it's time in the the ISA, I do not pay any more tax on it.  Whereas, if I left in in the SIPP, I would also be liable to pay more tax on the same growth.  Is this not the case?

You would pay more tax if you left the money in the SIPP but you would not be worse off:

1) Leave £10K in SIPP with a 50% investment return and then drawdown:
The  £10K increases by  £5K in the SIPP making £15K which after tax on drawdown becomes £12K with £3K to HMRC.

2) Drawdown £10K out of SIPP and invest in S&S ISA for 50% return
£10K X 0.8 =£8K goes into your ISA, £2K to HMRC.  This increases to £12K which you get tax free.

OK.  Thanks.  Looks like a non starter then.  Still doesn't feel right somehow though.  Won't the 25% tax free allowance on the pension come into it somewhere?

Linton

frogonalog said:

Linton said:

frogonalog said:

Linton said:

If you continue to pay basic rate tax and the tax rate remains the same it does not matter whether you accumulate gains in a SIPP and then drawdown or drawdown to an S&S ISA first and then get tax free gains:
If you drawdown before investment gains your get:   (initial capital X 0.8)  X (1+ %investment gain)
If you drawdown after investment gain you get :  Initial Capital X (1+%investment gain) X 0.8
Obviously both are the same.

It does make a difference to HMRC: if you drawdown first they get 20%.  if you drawdown later they get 20% (capital+ investment gain).  So they get more money but they get it later

Sorry but I'm not sure I understand this.   My thinking was that if I drawdown an amount, I pay tax on anything above the first 25%.  If I then invest that sum into the ISA & it grows by (for instance), 50% over it's time in the the ISA, I do not pay any more tax on it.  Whereas, if I left in in the SIPP, I would also be liable to pay more tax on the same growth.  Is this not the case?

You would pay more tax if you left the money in the SIPP but you would not be worse off:

1) Leave £10K in SIPP with a 50% investment return and then drawdown:
The  £10K increases by  £5K in the SIPP making £15K which after tax on drawdown becomes £12K with £3K to HMRC.

2) Drawdown £10K out of SIPP and invest in S&S ISA for 50% return
£10K X 0.8 =£8K goes into your ISA, £2K to HMRC.  This increases to £12K which you get tax free.

OK.  Thanks.  Looks like a non starter then.  Still doesn't feel right somehow though.  Won't the 25% tax free allowance on the pension come into it somewhere?

No - the 25% tax free  works in the same way as the 20% tax.  Anything with a % basis will have the effect that which way around you do things will end up the same.

AlanP_2

Won't the 25% tax free allowance on the pension come into it somewhere?

Yes, your 25% tax free lump sum will be worth less if you take it pre-growth.

Take the example above:

You have £20,000 in a SIPP. You take 25% PCLS leaving £15,000 in the SIPP.

(1) Take it from the SIPP now you have £12,000 after tax. Stick it in an ISA and it grows 200% in 10 years so you now have £36,000.

(2) Leave the £15,000 in the SIPP. In 10 years it has grown 200% to £45,000. You take it out of the SIPP then and you also have £36,000 after paying 20% tax.

You have 20K in a SIPP, take £5k TFLS and £15K taxable = £17k to you and £3k to HMRC.

 Put the £12k taxable in an ISA, 200% growth = £36,000

Put the £5k TFLS in an ISA, 200% growth = £15,000

You end up withy £51K and HMRC get £3k now

Leave the whole £20k in a SIPP and get 200% growth = £60k. 

Take 25% TFLS of £15k and pay tax on £45k = £51k to you and £9k to HMRC at a later date.

Albermarle

Charges on pensions and iSAs are the same unless you are using a small player.

Some of the retail SIPPs charge more for a SIPP than an ISA , especially the fixed charge ones like Interactive Investor . Also there can be a drawdown charge and one off withdrawal charges . It is the price you pay for having such a low headline platform fee basically .