FIREside Chats

Retireinten

Deleted_User said:

Busy_Mee said:

Morning all. I have been busy claiming the tax relief on my contributions into my SiPP this morning, so I thought I would share the calculation here.

By way of background I am a Civil Servant with a good DB pension and tax free lump sum when I retire. I am very cautious and have been wary of investing in any additional pensions because  (a) I already have good pension provision and (b) I grew up with lots of horror stories about people losing their life savings in pension funds that went wrong.

However I was persuaded by some good people on here that a SIPP would be a tax efficient vehicle for savings, as I am a HR tax payer.

I invested in Vanguard Target Retirement 2025 accumulation fund in 2019 and 2020 and here is what has happened to my investments:

19/20.                 £12000+ 20% immediate tax relief from pension provider.                   =£14400
20/21.                 £15000+ 20% immediate tax relief from pension provider.                   =£18000
                                                                                                           Total.                      = £32400
                                                                                                    

                                                                                                     Fund is now worth.       =£37197.39

Tax relief claimed from HMRC on 40% £12k                                                                            555.00
                                                               £15k.                                                                           862.80
                                                                                                                      Total.          =.  38,615.19

The initial investment of £27k is now worth £38,615.19

However pension contributions attract tax relief on the way in, but you have to pay tax on 75% of it on the way out. Which should look like this :

Current fund.               £37,197.39
25% tax free.                 £9,299.35
Taxable.                        £27,898.04
Tax.                                   5,579.61
=.                                   £22,318.43
+ Tax free.                          9,299.35
+ Tax relief.                            555.00
+ Tax relief.                            862.80

Total.                               £33,035.58

Therefore the initial investment of £27k is now worth £33,035.58 after all the tax implications.

I hope that all makes sense and people find it useful to see some real figures on how this works.

Hi @Busy_Mee

Thank you for this - really informative and helpful! You mentioned 'you have to pay tax on 75% of it on the way out'. I wondered if this is still applicable if the amount withdrawn in any tax year is less than the threshold for tax? For example, if one were to withdraw £8k in a tax year, would they still be liable for tax on this amount? If this is the case, I'm just wondering what the benefits of a SIPP would be over, for example, an ISA. Thank you again for your help!

With a SIPP or private pension you can drawdown your tax free allowance of £12,570 every year without paying any tax, plus 25% of your pot is tax free. There are various ways to drawdown from your pensions but one way is to take £16,760 each year, 25% of which is tax free and the remaining £12,570 would be fully offset by the tax allowance, meaning no tax to pay at all.


We should be able to set my husband up in such a way that he can drawdown without paying any tax when we retire. Whereas I have a good defined benefit scheme which is already worth £14,500 in todays money at 60, so I will be paying basic rate tax from this age irrespective of any pension planning I do. 

Busy_Mee

Glad it helped. And yes  if you don't have any other income you could withdraw up to the tax threshold without incurring tax. 

I think the difference between SIPP and ISAs is the advantage of having the tax relief invested on top of your funding. In my example above I invested £15k but an additional £3k was added. An ISA would just have £15 k in. Given these are long term investments, that would probably make quite a difference over a number of years.
HR tax payers also get the additional tax relief as I did above.

The other main difference is that you can draw out of a S&S ISA at any time, a SIPP you can't draw on until minimum pension age.

Hope that helps, others may be able to offer additional advice.

[Deleted User]

@Retireinten, thank you! This makes perfect sense. Wishing you the best of luck with your retirement plans.

@Busy_Mee, yes absolutely - I have recently opened a SIPP with Vanguard and it's satisfying to see 20% added on every payment. Until now, I've believed an ISA is the pinnacle of saving, but delighted to have discovered the SIPP! 

Thank you both for taking the time to respond!

slowlyfading

Can't believe I've only just noticed this thread - it's right up my street, so to speak. I have, for a long time, been in pursuit of FIRE on a relatively small household income. I am one of those annoying YouTubers who talk about it often I will post this and then have a read back properly of the thread!

But, in answer to your questions:

• Why am I investing? Mr SF and I are investing to bridge the gap between retiring early and our pensions kicking in. So we need to fund around 17 years or so. Our sums are fairly small (I have a detailed YT video on our early retirement budget) so our investments don't need to be as big as some say.
  
• How much do I think I'll need? Our aim is to get around £18,000 a year - £12,000 a year from dividend income plus the additional in growth, as and when needed.
  
• How am I going to get there? Well, I invest between £600 - £800 a month into a s&s ISA. Mainly into dividend income paying stocks and funds, though not exclusively. I also have two experimental portfolios which are more risky and looking at growth rather than income.
  
• How long do I have? 16 years approx. to get there. Eeek!
  

becky_rtw

Good to see you SF 😎

Your saving thread really helped me get organised this year. 

slowlyfading

becky_rtw said:

Good to see you SF 😎

Your saving thread really helped me get organised this year. 

Glad to know it helps!

edinburgher

@Deleted_User - it depends where in Scotland you live! 😉

taka

^^^^

What he said! It is painfully expensive in my bit of Scotland! 😆

Nice to see you slowlyfading. 😀

[Deleted User]

Very true @edinburgher. I live on the edge of Dumfries and Galloway so pretty cheap here! However, I am comparing it to having lived in Reading previously. Where abouts are you @taka?

gallygirl

edinburgher said:

@gallygirl - I thought that was already happening? SIPP @ 58 is the assumption I'm basing retiring at 58 on (68 for state pension)

Crikey - I took my eye off the ball when it didn't need to be on it any more! Though it doesn't appear to be enshrined in law yet? That raises the ISA stakes then.