ISA vs SIPP - impact of IHT change

Juno_Moneta

So conventional wisdom has suggested in the past that we should build up as much as possible in our ISAs prior to retirement then live off of that as an income source when retirement starts - before drawing from our SIPPs which was taxable above the personal allowance. This would potentially leave more outside of IHT to leave our dependents. Great. 

But now that SIPPs are within our estates for inheritance tax purposes - the same as ISAs - I am questioning why I should continue to bother with my ISA?

The tax on SIPP withdrawals I save (defer) by living off my ISA for a few years is now replaced by the SIPP IHT my dependents will pay on my death. 

And further - isn’t the best course of action now to close my ISA and feed that money into my SIPP (over different tax years assuming ISA is > 60k right now) to benefit from pension contribution tax relief?

Are ISAs pointless for SIPP owners now - and if so will this lead to the unintended consequence of mass closures?

El_Torro

I'm not sure I follow your logic. Pensions have just been made worse so we should put more money into them and close our ISAs. I don't follow. 

ISAs have their place. You can take as much out of them as you want without worrying about income tax and you can access them whenever you want. It was true before and it's still true today that pensions are more tax efficient than ISAs, that doesn't mean that ISAs don't have their place though.

Juno_Moneta

There are a ton of articles online suggesting the “ISA first” approach , eg from Brewin Dolphin:

” Should I draw from ISA or pension first?

Pensions usually sit outside your estate, which means they can be passed on to any beneficiaries free of IHT. The theory is that by drawing money from ISAs first, you'll benefit from more tax-efficient retirement income and pass on a bigger pot of money to your loved ones.”

I am suggesting this approach is now invalidated. I might as well just use a SIPP, draw what I want, pay tax - or my dependents will pay tax anyway. 

Why would I delay accessing my SIPP by trying to build up an ISA before retirement?

El_Torro

An ISA is useful in various circumstances. If you want to retire before 55 / 57 for example. Even if you don't want to retire early it can be useful for one off big expenditures.

Let's say a pensioner has enough taxable income from pensions (including state pension) to spend £50k a year. I guess there aren't that many pensioners out there who spend this kind of money, there'll be some though. That pensioner then needs to spend £45k on fixing up their house. If they take the money out of their pension they will have to pay 40% tax on the whole withdrawal, taking £75k out of their pension. If they had that money available in an ISA they could withdraw it tax free. 

To be honest I haven't read any of the articles you refer to about taking ISA money first. I'm just saying that ISAs are useful regardless of how much Inheritance Tax the estate may or may not pay. 

Martico

I see an issue with your original assertion about conventional wisdom. A SIPP has always trumped an ISA as a vehicle for savings earmarked for retirement years, and that's not changed. So max your SIPP payments before  considering ISA payments, unless you may want to use ISA funds before a certain age. 

squirrelpie

Juno_Moneta said:

There are a ton of articles online suggesting the “ISA first” approach , eg from Brewin Dolphin:

So why not ask the authors of those articles whether they're going to change them now, or just wait until they've had time to do so?

Juno_Moneta

Is that sarcasm?
No I won’t be contacting the authors of various internet articles. 

Seriously why does everything you post on forums these days attract such negativity and criticism? 

Juno_Moneta

Thank you, I came here for opinions like yours!

Pat38493

Juno_Moneta said:

Thank you, I came here for opinions like yours!

As above it depends on your tax position and your intended drawdown strategy e.g. you may need some ISA money in order to avoid crossing into higher tax rates during early retirement if you have higher spending in the first years.  

you may also be able to achieve the same thing by taking some or all of your tax free cash up front, but then you might as well drip feed it into an ISA anyway.

gm0

1 Wrapper hedging against government tax raids

Once particular pro pension saving tax incentives are exhausted (annual allowance).  I think this still makes sense.

2 Or for age gated access flexibility. 

All this is as it was.  I don't see that the savings incentives have altered.

Isa access flexible below pension access age - sipp not.

Tax reliefs and IHT treatment are as per unknown future rules far in the future

I feel "spend pension last" has largely been an IFA spread meme anyway to nudge people towards what was the best approach (for some) under current rules. A crowd with houses and investibles to need IFAs.  And who haven't understood the tax code and its many exemptions and interacations.  And need to be herded efficiently.

bjorn_toby_wilde

gm0 said:

Or for age gated access flexibility. 

Sorry, I follow the rest, but what does that mean?