Drawdown SIPP to invest in S&S ISA?

Linton

AlanP_2 said:

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.

In both cases you end up with £51K. 

Thrugelmir

Albermarle said:

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 . 

SIPP's involve far more administration. ISA's can be totally fee free. 

Thrugelmir

frogonalog said:

As per the title, the simple question is, would that be a good move or not?

Bottom line is that you can only use the annual ISA allowance once. Nor is there any certainty that there won't be political tinkering with ISA's in the future. Personally I intend to maximise the full allowance while it's available. 

Notepad_Phil

Thrugelmir said:

frogonalog said:

As per the title, the simple question is, would that be a good move or not?

Bottom line is that you can only use the annual ISA allowance once. Nor is there any certainty that there won't be political tinkering with ISA's in the future. Personally I intend to maximise the full allowance while it's available. 

The latest changes to the LTA and personal allowances have made me wonder afresh about crystallising everything to get the full 25% tax-free sum ASAP and move them to S&S ISA's (I'd obviously leave the remaining 75% in the SIPPs). My only concern is the luking thought in the back of my mind that I'd just know that a year or two after doing such a thing the government would make some change to restict their advantages in some way.

ukdw

I've personally changed my mind a few times on this and am currently pursuing the ISA approach.

If you we older or less healthy then your spouse then the argument would sway more towards leaving as much as possible in the SIPP due to the current tax free pre 75 pension death option.

The converse point to this is making maximum use of the 20% tax band now may work out better in the long run as it's already been signalled in the budget that the size of this band is being frozen for a few years (which is a reduction in real terms). Plus who knows what is going to happen to tax rates and ISA limits in the future.  

Both your spare 20% tax band and the annual £20k isa limits are 'use it or lose it'
Having your money in an ISA also does gives you more flexibility in case you ever need a big cash sum quickly. It would be a shame to have to pay 40% tax if you ever needed an amount larger than your spare 20% allowance.

frogonalog

AlanP_2 said:

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.

But isn't this calculation only looking at the short to mid term?  Surely it's only considering what is happening during the drawdown period?
I know that no matter how I take the SIPP money, there will be no tax on the first 25% of the pot & the rest will be taxable.
Using today's allowances & legislation, I have enough headroom in the LR tax bracket such that I could draw down the SIPP pot in approx 5 years after which any income tax due on it will have been paid.  After that, if I'm lucky, there's possibly a couple of decades or more of further growth that currently would be tax free.

frogonalog

Thrugelmir said:

frogonalog said:

As per the title, the simple question is, would that be a good move or not?

Bottom line is that you can only use the annual ISA allowance once. Nor is there any certainty that there won't be political tinkering with ISA's in the future. Personally I intend to maximise the full allowance while it's available. 

Thanks for this.  I'm not currently using my ISA allowance so this would not be a problem (apart from the possible changes in legislation which I could do nothing about anyway).  I don't think there will be any "spare" income above what I have now so I have no intention of making further investments apart from reinvesting dividends.  If I happened to have any "excess" over & above the yearly limit, I could also use my wife's ISA allowance.

LHW99

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

Could still be worth comparing II with your current arrangement, if you were happy to have both ISA & SIPP with one provided (some people aren't, but as you keep a reasonable cash amount you may not need to worry about a provider's systems going AWOL for a week, or a takeover / failure causing disruption for a couple of months).

If you have an ISA & a SIPP with II there are no additional fees for the ISA.

Thrugelmir

frogonalog said:

Thrugelmir said:

frogonalog said:

As per the title, the simple question is, would that be a good move or not?

Bottom line is that you can only use the annual ISA allowance once. Nor is there any certainty that there won't be political tinkering with ISA's in the future. Personally I intend to maximise the full allowance while it's available. 

Thanks for this.  I'm not currently using my ISA allowance so this would not be a problem (apart from the possible changes in legislation which I could do nothing about anyway).  I don't think there will be any "spare" income above what I have now so I have no intention of making further investments apart from reinvesting dividends.  If I happened to have any "excess" over & above the yearly limit, I could also use my wife's ISA allowance.

ISA's can hold cash. Doesn't have to be stocks and shares. 

Secret2ndAccount

frogonalog said:

But isn't this calculation only looking at the short to mid term? 

Nope.

Surely it's only considering what is happening during the drawdown period?

Nope.

....  After that, if I'm lucky, there's possibly a couple of decades or more of further growth that currently would be tax free.

Assuming the tax rate stays at 20%, and you withdraw the money sensibly, then you end up with 15% less than you had in the SIPP.  If you invest it for 10 years, and double it, it will still be 15% less. Wait another decade and double it again. It will still be... yep, 15% less.

100k in the SIPP = 100k. 10 yrs later = 200k. Carefully withdrawn, you get out 170k

100k withdrawn = 85k. 10 yrs later = 170k - that's 15% less than inside the SIPP.

I'm about the 6th person to illustrate this for you, so let me try to clarify it in a slightly different way:

The amounts of tax you pay between the two scenarios are different. Pay no attention to that. It doesn't matter. Not one bit. Makes no difference. It's the final amount you receive after tax that matters. And that amount will be the same, SIPP or ISA, assuming you use the same investments.

Reasons why you might wish you'd taken the money out (or left it in).

1. You need a large amount of money in a hurry. You wish you had withdrawn it as you could end up paying extra tax to get it out of the SIPP.

2. Changes to the 20% tax rate, the 25% lump sum rule, or the rules for ISA's. Impossible to predict future legislation changes.

3. Inheritance tax issues. ISA forms part of your estate; SIPP can, to an extent, pass outside your estate. Doesn't seem to be a concern for you.

4.  Pension approaching lifetime allowance. Then you would want to get the money out of the pension. You can quickly assess whether this should be a concern for you. Do you think your total payments from all your pensions, over your lifetime, might be more than £1 million? If so, then you need to start looking into this sooner, rather than later. If you won't hit the million, it is not a concern.