Tax free cash into ISA

Shaun_Imeson

I am thinking of drawing down my tax free cash from my SIPP at £20k a year and moving into my ISA (investing in the same mix of funds that the SIPP had been invested in)
My reason for wanting to do this is to give me easy access to the money when I want it and also to avoid any issues with possible future changes to tax free money from the SIPP.
I cannot see any reason not to do this. Any thoughts?

bjorn_toby_wilde

The potential downside is that by taking £20k tax free you crystallise a further £60k. The £60k and any future growth on that £60k in the SIPP will be taxable when it’s taken.

An alternative might be if you took 20k net after tax as a UFPLS. Then you would be paying the tax up front on 75% of it but any future growth in an S&S ISA would be tax free.

Depends on your circumstances and tax situation which would work best for you.

Marcon

How much is currently in your SIPP?

zagfles

bjorn_toby_wilde said:

The potential downside is that by taking £20k tax free you crystallise a further £60k. The £60k and any future growth on that £60k in the SIPP will be taxable when it’s taken.

An alternative might be if you took 20k net after tax as a UFPLS. Then you would be paying the tax up front on 75% of it but any future growth in an S&S ISA would be tax free.

Depends on your circumstances and tax situation which would work best for you.

How exactly is that a downside? The £60k crystallised will be taxed exactly the same as 75% of the uncrystallised £80k. Same after growth, £60k x growth x tax rate = 75% of £80k x growth x tax rate.

Taking UFPLS and paying tax up front makes zero difference if tax rates and tax brackets are the same, and the pension and ISA are invested the same. Multiplication is commutative. 

leosayer

Shaun_Imeson said:

I am thinking of drawing down my tax free cash from my SIPP at £20k a year and moving into my ISA (investing in the same mix of funds that the SIPP had been invested in)

My reason for wanting to do this is to give me easy access to the money when I want it and also to avoid any issues with possible future changes to tax free money from the SIPP.
I cannot see any reason not to do this. Any thoughts?

Easy access: Accessing tax free cash from a SIPP is hardly any more difficult than withdrawing from an ISA.

Future tax increases: If you think the government may reduce the pension lump sum allowance then might they also not consider reducing the tax benefits of an ISA as well? 

A good reason not to do this is if it will stop you moving other funds into an ISA.

Moving assets from a SIPP to an ISA can make sense if you are close the LSA or as a tax smoothing exercise eg. to avoid paying higher rate tax in the future.

bjorn_toby_wilde

zagfles said:

bjorn_toby_wilde said:

The potential downside is that by taking £20k tax free you crystallise a further £60k. The £60k and any future growth on that £60k in the SIPP will be taxable when it’s taken.

An alternative might be if you took 20k net after tax as a UFPLS. Then you would be paying the tax up front on 75% of it but any future growth in an S&S ISA would be tax free.

Depends on your circumstances and tax situation which would work best for you.

How exactly is that a downside? The £60k crystallised will be taxed exactly the same as 75% of the uncrystallised £80k. Same after growth, £60k x growth x tax rate = 75% of £80k x growth x tax rate.

Taking UFPLS and paying tax up front makes zero difference if tax rates and tax brackets are the same, and the pension and ISA are invested the same. Multiplication is commutative. 

You’re right of course and I didn’t think that through. What I was thinking about, but not communicating well was that situation where tax rates aren’t the same.

If, for example, you’re still employed and paying higher rate tax but will be paying lower rate in retirement it makes sense to take the tax free cash first.

If on the other hand you were moving money out of a SIPP to avoid higher rate tax later - say when SP kicks in, I’d have thought UFPLS would be better.

Rereading the OPs post the second scenario isn’t appropriate.

zagfles

bjorn_toby_wilde said:

zagfles said:

bjorn_toby_wilde said:

The potential downside is that by taking £20k tax free you crystallise a further £60k. The £60k and any future growth on that £60k in the SIPP will be taxable when it’s taken.

An alternative might be if you took 20k net after tax as a UFPLS. Then you would be paying the tax up front on 75% of it but any future growth in an S&S ISA would be tax free.

Depends on your circumstances and tax situation which would work best for you.

How exactly is that a downside? The £60k crystallised will be taxed exactly the same as 75% of the uncrystallised £80k. Same after growth, £60k x growth x tax rate = 75% of £80k x growth x tax rate.

Taking UFPLS and paying tax up front makes zero difference if tax rates and tax brackets are the same, and the pension and ISA are invested the same. Multiplication is commutative. 

You’re right of course and I didn’t think that through. What I was thinking about, but not communicating well was that situation where tax rates aren’t the same.

If, for example, you’re still employed and paying higher rate tax but will be paying lower rate in retirement it makes sense to take the tax free cash first.

If on the other hand you were moving money out of a SIPP to avoid higher rate tax later - say when SP kicks in, I’d have thought UFPLS would be better.

Rereading the OPs post the second scenario isn’t appropriate.

Yes, all that makes sense. The other scenario is if OP need a big lump sum for a big purchase eg a house and needs more than the tax free cash available in the SIPP and is forced to use taxable pension income. Then taking taxable income over a few years eg through UFPLS or taxable drawdown may be better than doing it in one go and paying higher rates of tax. 

LHW99

Future tax increases: If you think the government may reduce the pension lump sum allowance then might they also not consider reducing the tax benefits of an ISA as well?

It's only possible to work with what is known now. The OP is proposing a gradual (ish) drawdown, that could be changed presumably if ISA rules change (hopefully not retroactive). There are proposed IHT on pensions changes too, so much review of pension use is likely to take place if they come in IMO

dealyboy

OP I did this ... access to funds in an ISA is immediate and without charge (iWeb) whereas a SIPP has charges and a drawdown management process.