Contributions to SIPP v ISA when close to retirement

VeganBart

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

I'm looking at it like this

I could pay £100,000 into a Sipp over the next 7 years which the government will top up to £120,000

Or I could pay £120,000 into an ISA so efficiently paying 20,000 in tax

Let's say that my investments do very well and my pot doubles to £240,000

If I then withdraw that out over the course of my retirement I will pay zero tax if it's in an ISA but £36,000 if its in a SIPP

Therefore I would be £16,000 better off by putting it in an ISA over a Sipp

Wouldn't I?

Dazed_and_C0nfused

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

I'm looking at it like this

I could pay £100,000 into a Sipp over the next 7 years which the government will top up to £120,000

Or I could pay £120,000 into an ISA so efficiently paying 20,000 in tax

Let's say that my investments do very well and my pot doubles to £240,000

If I then withdraw that out over the course of my retirement I will pay zero tax if it's in an ISA but £36,000 if its in a SIPP

Therefore I would be £16,000 better off by putting it in an ISA over a Sipp

Wouldn't I?

Despite several people pointing out that was wrong you persist with it. 

If you pay £100k into a SIPP then the gross contributions with the tax relief added is £125k.

If you want to have £120k in the SIPP then you would only pay £96k to the pension company.

Your sums really don't make sense.

For a basic rate payer a SIPP beats an ISA by 6.25%.  That is because of the combination of basic rate tax relief you get on the way in and 25% tax free lump sum on the way out.

Roger175

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

I'm looking at it like this

I could pay £100,000 into a Sipp over the next 7 years which the government will top up to £120,000

Or I could pay £120,000 into an ISA so efficiently paying 20,000 in tax

Let's say that my investments do very well and my pot doubles to £240,000

If I then withdraw that out over the course of my retirement I will pay zero tax if it's in an ISA but £36,000 if its in a SIPP

Therefore I would be £16,000 better off by putting it in an ISA over a Sipp

Wouldn't I?

No, your calculation is incorrect. If you are a standard rate tax payer when paying in and taking out of a SIPP, you will always be 6.25% better off. 

However, if you can get tax relief at 40% when paying in you will be massively better off and furthermore, if you can withdraw any of your pension before SPA and have any spare basic rate band available, you can withdraw more tax free than just the 25% amount.

Using your figures:-
ISA:- 100k in, with 100% growth = £200k - all tax free
SIPP:- 100k in becomes £125k, with 100% growth = £250k

Tax on SIPP is £62.5k tax free and £187.5k taxable @20%, so £212,500 available = 6.25% more

Sarahspangles

QrizB saidm

Edit to add: I think VeganBart deleted their post?

i didn't think that was possible, and the responses are potentially more confusing if someone finds this post later. Hmmm

nicknameless

Dazed_and_C0nfused said:

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

I'm looking at it like this

I could pay £100,000 into a Sipp over the next 7 years which the government will top up to £120,000

Or I could pay £120,000 into an ISA so efficiently paying 20,000 in tax

Let's say that my investments do very well and my pot doubles to £240,000

If I then withdraw that out over the course of my retirement I will pay zero tax if it's in an ISA but £36,000 if its in a SIPP

Therefore I would be £16,000 better off by putting it in an ISA over a Sipp

Wouldn't I?

Despite several people pointing out that was wrong you persist with it. 

If you pay £100k into a SIPP then the gross contributions with the tax relief added is £125k.

If you want to have £120k in the SIPP then you would only pay £96k to the pension company.

Your sums really don't make sense.

For a basic rate payer a SIPP beats an ISA by 6.25%.  That is because of the combination of basic rate tax relief you get on the way in and 25% tax free lump sum on the way out.

Just wanted to note your very polite response and explanation.   A model of forum behaviour (I could not have been so patient ).

dunstonh

I could pay £100,000 into a Sipp over the next 7 years which the government will top up to £120,000

Or putting it the correct way around (and using the correct figures)....

You could contribute £120,000 into a SIPP, which, with basic rate relief, is a £96,000 payment.   Tax relief is a relief, not a bonus.  It reduces rather than increases.

Let's say that my investments do very well and my pot doubles to £240,000

Ignore investment returns.  ISAs and pensions share the same investments at the same cost.    If you hold the same investments in both, you will get the same returns.

If I then withdraw that out over the course of my retirement I will pay zero tax if it's in an ISA but £36,000 if its in a SIPP

£240k if fully taxed at basic rate over the term would be £36,000 tax assuming there was no personal allowance available.
However, as already mentioned multiple times, the value of the pension would be 6.25% higher because tax relief in with 15% effective rate out (75% taxed at 20% = 15%) gives pensions a 6.25% better outcome than the ISA.

Therefore I would be £16,000 better off by putting it in an ISA over a Sipp

No.  The ISA would have a lower fund value because it didn't get tax relief at the start.

Using your £120,000 pension contribution example.....
£120k contribution costs you £96k.   So, if you put £96k in and ISA and a pension over the period you have
£96k in the ISA and £120k in the pension.
As I said above, you can ignore costs and growth as both the ISA and pension can have the same investments at the same charges.    
Now when you can to draw the money, the ISA is £96k as there is no tax.
The pension is £120k but 25% is tax free and 75% is taxable.   That is £18,000 tax.  
£120k minus £18k = £102k

So, pension gives you £102k back and ISA gives you £96k back on the same contribution, assuming basic rate relief on the way in and basic rate tax on the whole amount on the way out.

Aretnap

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

I'm looking at it like this

I could pay £100,000 into a Sipp over the next 7 years...

Or I could pay £120,000 into an ISA...

Erm... yes, if you pay a large amount of money into an ISA you will have more than if you pay a small amount of money into a SIPP. That's fairly obvious. 

Now do the sums again paying £100,000 into a SIPP or the same £100,000 into an ISA, which is a far more useful comparison. 

Secret2ndAccount

Yes, VeganBart is mixing his sums up, and SIPPs are more efficient - typically 6% for tax purposes.

However, I just want to point out one thing:
I currently have 50k in a Money Market Fund in my ISA, and 50k in a MMF in my SIPP. I have decided to keep one half of the sure and steady investment, and move one half into high-risk tech equities, in the hope of doubling my money. I should buy the tech equities in my ISA. If I double my money, the extra 50k will be tax free. If I doubled it in the SIPP, the extra 50k would be taxed at 15%
That's for money already inside the wrappers, where the tax relief is in the past. Keep your safe stuff in your SIPP, and your growthy stuff in your ISA.

bjorn_toby_wilde

Secret2ndAccount said:

Yes, VeganBart is mixing his sums up, and SIPPs are more efficient - typically 6% for tax purposes.

However, I just want to point out one thing:
I currently have 50k in a Money Market Fund in my ISA, and 50k in a MMF in my SIPP. I have decided to keep one half of the sure and steady investment, and move one half into high-risk tech equities, in the hope of doubling my money. I should buy the tech equities in my ISA. If I double my money, the extra 50k will be tax free. If I doubled it in the SIPP, the extra 50k would be taxed at 15%
That's for money already inside the wrappers, where the tax relief is in the past. Keep your safe stuff in your SIPP, and your growthy stuff in your ISA.

That’s an interesting take. I’ll be starting to move money out of my SIPP to ISAs next year to use my basic rate allowance before SPA.  I was thinking of selling the safer stuff first, but I’m now wondering whether that’s the right way to look at it.

VeganBart

Thanks for the replies

I'll get my coat😂