Stupid question of the day! Isa vs sipp

anonmoose

Am I correct in understanding that when I draw my pension I am taxed as if it was income (beyond the 25% tax free allowance) but my isa gains are completely tax free therefore not declared.

So to keep tax to a minimum it would be wise to have some isa as you can take that out once you have hit the tax threshold from your SP and sipp drawing each year.

If I understand correctly even though you get the relief in the pension, you are taxed on 3/4 of it when it comes out unlike the isa.

So you could use your annual allowance, then take your tax free 25% then you can take extra from isa without being taxed?

I am just trying to work out optimal ratio to have in sipp to isa for tax purposes.

Please let me know if I am misunderstanding this.

xylophone

Am I correct in understanding that when I draw my pension I am taxed as if it was income (beyond the 25% tax free allowance) but my isa gains are completely tax free therefore not declared.

Yes, this is the case.

Yes, you can realise gains in your ISA and no tax is due.

dunstonh

So to keep tax to a minimum it would be wise to have some isa as you can take that out once you have hit the tax threshold from your SP and sipp drawing each year.

You need to be careful of letting the tax tail wag the dog.

If you contribute to an ISA and a pension, then even with the tax paid at the other end, the pension beats ISA unless you are a basic rate taxpayer whilst contributing and higher rate in retirement or you are going to exceed the LTA.

MX5huggy

No SIPP beats ISA. 

For a 20% tax payer (on income and on taking the pension). It’s a 6.25% win. 

 £1000 paid into SIPP has tax relief added (25%) so it becomes £1250 you then withdraw it all 25% tax free £312.50 and £937.50 pay 20% tax on (£187.50) so you get out £1062.50.

An ISA would just be £1000 in £1000 out.

If Sunak keeps his promise of 19% income tax SIPP will improve.

If you can manage your retirement you could get the whole lot out under the tax allowance. 

If you’re a 40% tax payer while earning then 20% in retirement things are better. An outlier case of 20% when earning and 40% in retirement would be better to use ISA. 

anonmoose

OK thanks I thought it was 6.25% better so thanks for confirming that huggy. We are lower rate (OH only just) on way in and on way out.

The problem is the amount I can pay into my pension is lower than my OH as my allowable expenses are significant and bring my net profit down to not much more than the tax threshold. So I will be allowed to put in probably £13-£16k in every year.

We are in a position to max our pensions because I had an inheritance so we are going to add a lump sum to husbands pension.

But this does mean in 10yrs my OHs pension will be quite a bit bigger than mine because of my inheritance!

We plan on staying together but know one knows what the future holds and it does make me slightly uncomfortable that our pensions will be quite unbalanced and it will be my inheritance that basically paid for his pension boost. 

What would others do in this situation? 

squirrelpie

"What would others do in this situation?"

Personally, I would:

(1) max out my pension contributions for the year

(2) max out my ISA contributions for the year

(3) put some money in a general savings/investment account so I could look at repeating (1) and (2) for a few years at least (CGT and interest exemptions mean these should be largely tax free)

(4) depending on lots of factors - ages, mutual trust, various amounts of money, consider giving some to OH on the basis that they will give back from their ISA as possible/sensible to put into yours and from their pension when old enough

(5) Know (or check otherwise) their pensions & savings have appropriate expression of wish, clauses in will, etc statements in place?

anonmoose

Thanks squirrelpie.  I should add for context we are mid 40s been together over 20yrs and shared our money joint accounts etc all that time. Married about 5yrs and have 2 teenagers so we in a stable situation. I control all the finances as it's not his thing and I even set up his new sipp to put a chunk of my inheritance money in.

My dilemma is that I know the sipp for him with all the money is the most financially sensible but would leave me potentially vulnerable in the future. Also I won't get any more inheritance in future but he probably will.

I was thinking maxing my isa and putting the same in his sipp. Depending on stock market we might max out an isa for him also or just pay house off in full. 

We are married so in theory it would be split equal anyway in case of separation but I don't know how that works in practice with pensions. To be honest I feel a bit doom monger even thinking about these scenarios!

squirrelpie

Glad to hear you're in a happy place. I don't think too much about separation myself, more about the until death part, but then we're older than you so perhaps the chances are different I think you're right about equal shares but I don't know the details for sure. I suppose that if you keep bank statements etc showing how you transfer the money around you should be proof against losing too much if things did turn ugly. It's not pleasant thinking about all the things that can go wrong (the much maligned bus running over people is a convenient fiction) but it's better to be prepared and not panic later IMHO.

Given the present state of the world, once the obvious is done as you plan it might be worth just stashing the rest somewhere reasonably safe and waiting at least until next tax year to see how the world looks then.

WYSPECIAL

If it’s a long marriage (include cohabitation beforehand for that) with children involved then any deviation from a 50:50 split would be based upon need.

If it still makes you nervous don’t pay a lump sum into his pension but increase his contributions instead. That way it will be drip fed in and your lump sum will be eroded slowly rather than disappearing into his pension overnight.

Bimbly

If you are under 40, look at the Lifetime ISA which gives you tax relief on the way in:
https://www.moneysavingexpert.com/savings/lifetime-isas/

ADDED: I've just read above that you are mid-40s, so this doesn't apply to you. Leaving it here in case someone else pops by and finds it useful.

anonmoose

Thanks Bimbly it's a good idea but yes we missed the boat on LISAs. 

I think in the case of death of either of us the finances are fairly straightforward as we both have dc pots with each others names as beneficiary.

I guess the 'what if we split up' question popped into my head because a couple of people I know had seemingly happy marriages breakdown when they became empty nesters. I guess it's a big life change and they realised they had nothing in common any more.

The reality is we have always been chalk and cheese and I expect we will have lots of independent interests in retirement as we always have so I can't see why we would hit problems.

Empty nest/retirement seems a pressure point for lots of couples though.

Anyhow thanks for all the comments I feel it has helped.