SIPP not getting any tax free

zagfles

gravlax said:

zagfles I wish it was as easy as that with the tax maths comparison. But I already take up my dividend and CGT allowances from other taxable investments. So if I take money out the SIPP wherever I invest it the gains will be fully taxed.

That's why I am uncertain about the idea of taking money out the SIPP where it can compound tax free for as long as possible. But by crystallising it early it locks in the current value below the LTA so it can keep growing even beyond the LTA limit but without any LTA tests until age 75. 

So you're going to be using your full CGT allowance every year in retirement??

OK lets go with that. Let's also assume you pay higher rate tax on dividends while invested unwrapped.

If you leave the potential £125k TFLS in the pension it grows at 7%pa over 10 years to £246k.

Higher rate dividend tax is 33.75%. So if we assume growth is 2% dividends and 5% capital gain, dividends after tax will be 1.325%. Assume dividends reinvested, makes net growth after dividend tax 6.325%, compounded over 10 years gives £231k.

So you have either £246k in the pension, which will be subject the income tax on withdrawal, or £231k unwrapped, which will be subject to CGT on cashing in.

If you're a basic rate taxpayer in retirement, the £246k in the pension will be subject to 20% income tax and so get you £197k after tax.

The £231k unwrapped would be charged at 10% capital gain, but only on the gain, not the full amount. The gain would be quite complicated to work out as some of the £231k is reinvested dividends over 10 years, but definitely less than (231k-125k), so CGT would be less than £11k. So at least £220k after CGT.

If you're a higher rate tax in retirement, it's even worse, as the pension would be charged at 40% tax on the lot, whereas the unwrapped capital gain would be 20% and only on the gain. £148k after income tax from the pension or £210k unwrapped after CGT.

So even if you're fully using your ISA allowance on other stuff, even if you'll be fully using your CGT allowances every year in retirement on other stuff, it seems you're still be better off taking the TFLS from the pension and investing unwrapped!

Feel free to challenge my maths - I may have missed something!

gravlax

zagfles said:

gravlax said:

zagfles I wish it was as easy as that with the tax maths comparison. But I already take up my dividend and CGT allowances from other taxable investments. So if I take money out the SIPP wherever I invest it the gains will be fully taxed.

That's why I am uncertain about the idea of taking money out the SIPP where it can compound tax free for as long as possible. But by crystallising it early it locks in the current value below the LTA so it can keep growing even beyond the LTA limit but without any LTA tests until age 75. 

So you're going to be using your full CGT allowance every year in retirement??

OK lets go with that. Let's also assume you pay higher rate tax on dividends while invested unwrapped.

If you leave the potential £125k TFLS in the pension it grows at 7%pa over 10 years to £246k.

Higher rate dividend tax is 33.75%. So if we assume growth is 2% dividends and 5% capital gain, dividends after tax will be 1.325%. Assume dividends reinvested, makes net growth after dividend tax 6.325%, compounded over 10 years gives £231k.

So you have either £246k in the pension, which will be subject the income tax on withdrawal, or £231k unwrapped, which will be subject to CGT on cashing in.

If you're a basic rate taxpayer in retirement, the £246k in the pension will be subject to 20% income tax and so get you £197k after tax.

The £231k unwrapped would be charged at 10% capital gain, but only on the gain, not the full amount. The gain would be quite complicated to work out as some of the £231k is reinvested dividends over 10 years, but definitely less than (231k-125k), so CGT would be less than £11k. So at least £220k after CGT.

If you're a higher rate tax in retirement, it's even worse, as the pension would be charged at 40% tax on the lot, whereas the unwrapped capital gain would be 20% and only on the gain. £148k after income tax from the pension or £210k unwrapped after CGT.

So even if you're fully using your ISA allowance on other stuff, even if you'll be fully using your CGT allowances every year in retirement on other stuff, it seems you're still be better off taking the TFLS from the pension and investing unwrapped!

Feel free to challenge my maths - I may have missed something!

I think you could well be right. I can't see anything to challenge there. Thanks!