Pension contributions

MetManMark

So I am late 40's and am putting spare cash into both stocks and shares ISA's as well as a SIPP (I also have a civil service pension). The purpose of paying into a SIPP is that I want to have some savings to cover my retirement from age 60-68 when the state pension and alpha kicks in. 
I am thinking about re-balancing such that I pay more into my SIPP.
 
I am aware that what I pay into my SIPP is grossed up and when I take it out again I get 25% cash free. Could I take that to extremes by say putting in pretty much all my salary (up to 60k) and at the same time withdrawing what I need to live on? I mean when I am allowed to take money out of my SIPP (aged 58?).

Obviously all the rules will probably have changed by the time I get there!

Whilst we do have access to a financial adviser, at the moment we are just trying to put in as much as we can across ISAs and SIPPs but in the next few years I think we need to have a bit more of a concrete plan!

Thanks in advance for your thoughts.
M

dunstonh

I am aware that what I pay into my SIPP is grossed up and when I take it out again I get 25% cash free. Could I take that to extremes by say putting in pretty much all my salary (up to 60k) and at the same time withdrawing what I need to live on? I mean when I am allowed to take money out of my SIPP (aged 58?).

Once you access even just a penny of the 75% taxable element of the pension, your future contributions are limited to £10,000 gross p.a.   You are also subject to recycling rules.

Whilst we do have access to a financial adviser, at the moment we are just trying to put in as much as we can across ISAs and SIPPs but in the next few years I think we need to have a bit more of a concrete plan!

What is the point of paying for a financial adviser if you are not using them for financial planning and advice?

tacpot12

Putting as much as you can afford to into your SIPP is a very good idea, to a point. You will have more options if you put more into your SIPP sooner, than if you leave it close to your retirement. 

But you also need to ensure that your mortgage will be paid off, and that you have an emergency fund available in case you lose your job or have a large, unexpected bill.

 

MetManMark

Thanks @dunstonh. I haven't read up on the recycling rules. One for me to consider once I actually retire.

We do have annual meetings with our financial adviser but retirement for me is 13 years or so away. So I am just plugging away at the moment trying to max out my ISA and putting everything over £50k into a SIPP.

M

Juno_Moneta

You say you are maxing out your ISA but … Do you have kids?

I do, and now I'm in my 50s have moved funds from ISA to SIPP for 2 reasons. 

1) under current rules (which govts can change!) ISA funds are part of your estate for inheritance tax purposes, SIPP funds are not. 

2) when I pay the ISA funds into my SIPP (across tax years to stay within limits) I get tax relief as a higher rate taxpayer. A lot actually. 

So I’m ditching ISAs now and just focusing on growing my SIPP. 

I hope your IFA has mentioned inheritance differences between these savings vehicles!

MetManMark

Thanks @Juno_Moneta. Yup, we have two kids. We have been building out ISA's to help our children get on the property ladder in years to come. So we will spend all the ISA's before we pop our cloggs (hopefully!). Basically we are trying to hedge our bets between ISA's and SIPPs. Putting in enough to stay under the higher tax limit and maxing out ISA's every year as best we can. I think the Government is more likely to change rules on SIPPs than it is on ISA's. But we shall see!
M

dunstonh

Putting in enough to stay under the higher tax limit and maxing out ISA's every year as best we can. 

Remember that pension wrapper beats ISA wrapper for funds you intend to draw when retired.  You shouldn't just let the higher rate band drive how much goes where.

MetManMark

dunstonh said:

Putting in enough to stay under the higher tax limit and maxing out ISA's every year as best we can. 

Remember that pension wrapper beats ISA wrapper for funds you intend to draw when retired.  You shouldn't just let the higher rate band drive how much goes where.

Could you explain this please?  As I fall into the higher rate tax band I understand that with a SIPP I will be paying a lower tax band in retirement when compared with currently. And the SIPP has the added advantage of 25% tax free. But is there something else that I am missing here?

I put ~£20k in a SIPP each year and £20k into an ISA each year. The logic being that if I come into some money (potentially through a gift or inheritance) then I can put that in the SIPP (backdating three years if necessary) whereas with the ISA it is use it or lose it so it makes sense to pay into an ISA it when you can. 

kempiejon

I spent 20 odd years filling ISAs and my general investment account with dividends and income generating investments, not really focusing on my pensions outside of the company matching my contributions. Of course ISA limits were only a few £k when I started.
I had a mind for financial independence before being able to access to my pension from 55.
I had a flow of income from my late 40s to supplement my earned income. The change in how dividends were taxed from not at all for basic rate before 2016 to anything above £5k in 2017 meant I chose to redirect all my unsheltered investments to ISAs and my SIPP. I was adding my total salary to the SIPP. I had a fair chunk to shelter and it took a few years of maxing my allowances. Of course the nearer to 55 I get when I will be able to take the lump sum the less of a commitment it is to lock the money away.

As said by @dunstonh up thread if you take any of the 75% income from the SIPP you trigger the Money Purchase Annual Allowance (MPAA) and can only add £10k to the SIPP annually and there's a risk of falling foul of recycling rules. There's probably some homework for you there.

For me there is more flexibility with the ISAs but there's a benefit of tax deferred on a personal pension. I have more in ISAs that my SIPP, I will have an income tax liability on money I take from my SIPP but none from the ISA. Of course SIPPs (currently) are outside of scope for things like inheritance, bankruptcy and benefits perhaps a few other life events - not divorce I think.

Dazed_and_C0nfused

MetManMark said:

dunstonh said:

Putting in enough to stay under the higher tax limit and maxing out ISA's every year as best we can. 

Remember that pension wrapper beats ISA wrapper for funds you intend to draw when retired.  You shouldn't just let the higher rate band drive how much goes where.

Could you explain this please?  As I fall into the higher rate tax band I understand that with a SIPP I will be paying a lower tax band in retirement when compared with currently. And the SIPP has the added advantage of 25% tax free. But is there something else that I am missing here?

I put ~£20k in a SIPP each year and £20k into an ISA each year. The logic being that if I come into some money (potentially through a gift or inheritance) then I can put that in the SIPP (backdating three years if necessary) whereas with the ISA it is use it or lose it so it makes sense to pay into an ISA it when you can. 

Without higher rate relief pension beats ISA by 6.25% for basic rate payers.

£100 into an ISA and you get £100 back.  No tax to pay.

£100 into a SIPP and you get 25% added courtesy of HMRC so you have a pension fund of £125.  When you come to take it back out 25% if taken as TFLS (£31.25) and 75% is taxable income.  If you pay 20% tax on that it's £18.75, leaving £75 post tax.

£31.25 + £75 = £106.25.