Contributions to SIPP v ISA when close to retirement

Julezy101

Hello,

I'm sure I must be missing something obvious here but....

e.g. 8k into a SIPP grossed up to 10k (so 2k 'free') but when you come to drawing it out if your SP and other pensions use up your tax free allowances then you pay 20% tax getting it out (2K).

So does it make any difference whether you contribute to your SIPP or ISA?

Thanks

FIREDreamer

Julezy101 said:

Hello,

I'm sure I must be missing something obvious here but....

e.g. 8k into a SIPP grossed up to 10k (so 2k 'free') but when you come to drawing it out if your SP and other pensions use up your tax free allowances then you pay 20% tax getting it out (2K).

So does it make any difference whether you contribute to your SIPP or ISA?

Thanks

25% of the pension can be taken out tax free, if you have the requisite tax free lump sum allowance remaining (25% of the old lifetime allowance).

NoMore

£100 into ISA is £100 on withdrawal

£100 into Pension becomes £125 after basic tax relief. On withdrawal you get 25% tax free (£31.25) leaving £93.75 to be taxed at 20% (£75) so total from pension is £106.25 from initial £100 deposit. 

Its down to the 25% tax free which is truly tax free, having never paid tax on contribution or withdrawal, unlike ISA (contributions from taxed income) or rest of pension (taxed on withdrawal)

Julezy101

NoMore said:

£100 into ISA is £100 on withdrawal

£100 into Pension becomes £125 after basic tax relief. On withdrawal you get 25% tax free (£31.25) leaving £93.75 to be taxed at 20% (£75) so total from pension is £106.25 from initial £100 deposit. 

Its down to the 25% tax free which is truly tax free, having never paid tax on contribution or withdrawal, unlike ISA (contributions from taxed income) or rest of pension (taxed on withdrawal)

@NoMore @FIREDreamer Great thanks for your replies - Yes I'd not accounted for the 25% tax free portion. So the SIPP contribution does beat the ISA :-)

kempiejon

Julezy101 said:

Hello,

I'm sure I must be missing something obvious here but....

e.g. 8k into a SIPP grossed up to 10k (so 2k 'free') but when you come to drawing it out if your SP and other pensions use up your tax free allowances then you pay 20% tax getting it out (2K).

So does it make any difference whether you contribute to your SIPP or ISA?

Thanks

I will contrive to extract some of my SIPP income before state pension age so not all of my personal allowance has been used. 25% tax free extracted plus 10 years income extraction before SP eats most of the allowance. Of course tax rates, allowances etc can queer plans with such a long timeframe.

Julezy101

kempiejon said:

Julezy101 said:

Hello,

I'm sure I must be missing something obvious here but....

e.g. 8k into a SIPP grossed up to 10k (so 2k 'free') but when you come to drawing it out if your SP and other pensions use up your tax free allowances then you pay 20% tax getting it out (2K).

So does it make any difference whether you contribute to your SIPP or ISA?

Thanks

I will contrive to extract some of my SIPP income before state pension age so not all of my personal allowance has been used. 25% tax free extracted plus 10 years income extraction before SP eats most of the allowance. Of course tax rates, allowances etc can queer plans with such a long timeframe.

Yes that's what I am planning to do before I get to 67...

VeganBart

My thinking 

ISA is preferable to SIPP if you expect your investments to grow by more than 25% as tax savings on the way out will more than offset savings on the way in no?

NoMore

VeganBart said:

My thinking 

ISA is preferable to SIPP if you expect your investments to grow by more than 25% as tax savings on the way out will more than offset savings on the way in no?

You can invest in the same things in an isa or a sipp. So growth of investments is irrelevant for comparing the two. Tax treatment is the difference. See my earlier post for why. 

Aretnap

VeganBart said:

My thinking 

ISA is preferable to SIPP if you expect your investments to grow by more than 25% as tax savings on the way out will more than offset savings on the way in no?

No, not unless you expect it to grow so much that you end up having to pay a higher rate of tax when you eventually withdraw it. Otherwise it makes no difference, as tax on the way out merely takes off a proportion of the total equal to the tax relief on the way in. ie

X x 1.25 x Y x 0.8 (pension return) = X x Y (ISA return)

Where X is the amount you pay in and Y is the rate of growth over the time you save it

Or accounting for the tax free portion of the withdrawal 

X x 1.25 x Y x 0.85 > X x Y

Sarahspangles

VeganBart said:

Aretnap said:

VeganBart said:

My thinking 

ISA is preferable to SIPP if you expect your investments to grow by more than 25% as tax savings on the way out will more than offset savings on the way in no?

No, not unless you expect it to grow so much that you end up having to pay a higher rate of tax when you eventually withdraw it. Otherwise it makes no difference, as tax on the way out merely takes off a proportion of the total equal to the tax relief on the way in. ie

X x 1.25 x Y x 0.8 (pension return) = X x Y (ISA return)

Where X is the amount you pay in and Y is the rate of growth over the time you save it

Or accounting for the tax free portion of the withdrawal 

X x 1.25 x Y x 0.85 > X x Y

Ok so let's say I pay £100,000 into my ISA 

With tax relief that becomes £120,000

My investments do very well and my pot grows to £180,000

If over the course of my retirement I withdraw that amount my tax bill will zero

If I pay £100,000 into a sipp and it grows to £150,000 my tax bill will be £30,000

No?

No, because you don’t get tax relief on your ISA, you get tax relief on your SIPP contributions

ISA - £100k is 100k (no tax relief)
SIPP - £100k becomes £125k (with tax relief)

Then you get your investment growth.
You get it out of your ISA with no tax hit
You get it out of your SIPP with 25% of it tax free and pay 20% tax on the rest (assuming that’s your tax rate at the time)

The SIPP is more like HMRC loaning you 25% of your original contribution upfront to invest.

QrizB

VeganBart said:

No?

No.

VeganBart said:

Ok so let's say I pay £100,000 into my ISA
With tax relief that becomes £120,000

ISAs don't get tax relief. Your £100k is still £100k.

50% growth will turn it into £150k.

VeganBart said:

If I pay £100,000 into a sipp and it grows to £150,000 my tax bill will be £22,500 (allowing for 25% tax free)

SIPPs do get tax relief. £100k becomes £125k

50% growth turns it into £187.5k.

After 25% tax-free and 29% tax on the rest, you're left with £159k and change.

Edit to add: I think VeganBart deleted their post?