How to pick a SIPP - and is it worth it?

WindfallWendy

I'm feeling quite in a pickle as I've recently moved jobs and my new pension doesn't have an investment builder element, so overpayment (of around £3k/yr) is not particularly valuable. 

I want to add to a pension, to make use of tax relief and avoid hitting the 40% income tax threshold (Gross salary is £56k, £53k after automatic pension payments), so think I will have to set up a SIPP.

My reasoning for saving into a pension rather than an ISA is also because I want to ideally retire in my early 60s at the latest. Current forecasts indicate a DB income of £14k/p.a with some lumpsum payments too. But I'd like to resist claiming on that as soon as I can, so might start claiming that at 60/62. I'm 47 now, so I'm looking to invest for 12-15 years or so.

But I'm nervous of picking the wrong one, or making the wrong decision, and maybe I shouldn't put money away for 10+ years. And maybe I can't take money out as easily as I'd hope. But I'm banking on taking out 25% tax free for a few years to tide me over... But I feel like I'm inadvertently setting myself up for a massive tax bill. And also, is the 25% tax free thing likely to be something government clamps down on??

I guess I probably just need to bite the bullet and do it, but any insight from experience or those who know better would be gratefully received. What could go wrong and how do I avoid it?? 😳🤔🫣

Dazed_and_C0nfused

WindfallWendy said:

I'm feeling quite in a pickle as I've recently moved jobs and my new pension doesn't have an investment builder element, so overpayment (of around £3k/yr) is not particularly valuable. 

I want to add to a pension, to make use of tax relief and avoid hitting the 40% income tax threshold (Gross salary is £56k, £53k after automatic pension payments), so think I will have to set up a SIPP.

My reasoning for saving into a pension rather than an ISA is also because I want to ideally retire in my early 60s at the latest. Current forecasts indicate a DB income of £14k/p.a with some lumpsum payments too. But I'd like to resist claiming on that as soon as I can, so might start claiming that at 60/62. I'm 47 now, so I'm looking to invest for 12-15 years or so.

But I'm nervous of picking the wrong one, or making the wrong decision, and maybe I shouldn't put money away for 10+ years. And maybe I can't take money out as easily as I'd hope. But I'm banking on taking out 25% tax free for a few years to tide me over... But I feel like I'm inadvertently setting myself up for a massive tax bill. And also, is the 25% tax free thing likely to be something government clamps down on??

I guess I probably just need to bite the bullet and do it, but any insight from experience or those who know better would be gratefully received. What could go wrong and how do I avoid it?? 😳🤔🫣

I don't get your logic re a large tax bill.

Say you add £3k gross and receive higher rate relief on it all.  That is a net cost to you of £1,800 (£2,400 you paid into the pension less £600 personal tax saving).

When you come to take that £3k back out of the pension £750 will be a TFLS.  £2,250 will be taxable income.  Potentially with no tax if you have spare Personal Allowance.  Or £1,800 net of basic rate tax.

So you get £2,550 or £3k back for your original £1,800.

I think extra pension is the tax efficient option, especially if you plan on using the SIPP as a bridge between stopping work and getting your DB and State Pensions.

Just don't forget you only get higher rate relief on the amount you would pay higher rate tax on.  So £3k might be your sweet spot but you still get basic rate relief (within the pension) on larger amounts.

The above assumes you haven't omitted details of any other income sources and the TFLS cap of ~£268k isn't going to be a factor.

Voyager2002

There are two levels of decision to make: you have to choose a SIPP provider, and then you have to choose how to invest the money that you put in your SIPP. When choosing a provider, be aware of their fees and charging structure, and watch out for providers who charge hefty fees once you have taken money out (gone into "drawdown").

When it comes to choosing investments, you might invest in something that loses most or all of its value (such as the Russian holdings that I had in my SIPP: they are still there but cannot be traded). Or you might make the opposite error, and choose something so low-risk that it does not even keep up with inflation.

WindfallWendy

Dazed_and_C0nfused said:

WindfallWendy said:

I'm feeling quite in a pickle as I've recently moved jobs and my new pension doesn't have an investment builder element, so overpayment (of around £3k/yr) is not particularly valuable. 

I want to add to a pension, to make use of tax relief and avoid hitting the 40% income tax threshold (Gross salary is £56k, £53k after automatic pension payments), so think I will have to set up a SIPP.

I don't get your logic re a large tax bill.

Say you add £3k gross and receive higher rate relief on it all.  That is a net cost to you of £1,800 (£2,400 you paid into the pension less £600 personal tax saving).

When you come to take that £3k back out of the pension £750 will be a TFLS.  £2,250 will be taxable income.  Potentially with no tax if you have spare Personal Allowance.  Or £1,800 net of basic rate tax.

So you get £2,550 or £3k back for your original £1,800.

I think extra pension is the tax efficient option, especially if you plan on using the SIPP as a bridge between stopping work and getting your DB and State Pensions.

Just don't forget you only get higher rate relief on the amount you would pay higher rate tax on.  So £3k might be your sweet spot but you still get basic rate relief (within the pension) on larger amounts.

The above assumes you haven't omitted details of any other income sources and the TFLS cap of ~£268k isn't going to be a factor.

Sorry, I'm always confusing on this point. And maybe I'm completely wrong in when the 40% threshold kicks in. 

But I figure if I can keep my taxable income at £50k, then I will never hit the 40% income tax threshold. I don't want to earn an extra £5k, and then have to pay £2k of it in tax, and only receive £3k when I could put all that £5k into a pension.

Marcon

WindfallWendy said:

I'm feeling quite in a pickle as I've recently moved jobs and my new pension doesn't have an investment builder element, so overpayment (of around £3k/yr) is not particularly valuable. 

Sounds like you were in USS?

Why do you believe that paying into a SIPP would be a better idea than paying more into your new employer's scheme? You'll get the same amount of tax relief either way. If you can pay contributions by salary sacrifice to your employer's scheme (highly unlikely they'd pay into your SIPP if you set one up), then you get an NI saving - do they offer salary sacrifice? If not, now would be a good time to suggest they do.

Edit - just looked at your post from earlier this month and see you are now eligible for Civil Service pension arrangements: https://forums.moneysavingexpert.com/discussion/6585167/csp-alpha-vs-partnership-and-getting-a-sipp#latest

Reading that post you seem to be pretty confused about a lot of things, not least the massive value of a DB scheme especially as you get older. Maybe do a bit more research before you take steps to do real damage to your financial stability in later life? Flexibility isn't the same thing as security - and on its own, flexibility rarely pays the bills quite so efficiently as a guaranteed income.

WindfallWendy

Voyager2002 said:

There are two levels of decision to make: you have to choose a SIPP provider, and then you have to choose how to invest the money that you put in your SIPP. When choosing a provider, be aware of their fees and charging structure, and watch out for providers who charge hefty fees once you have taken money out (gone into "drawdown").

When it comes to choosing investments, you might invest in something that loses most or all of its value (such as the Russian holdings that I had in my SIPP: they are still there but cannot be traded). Or you might make the opposite error, and choose something so low-risk that it does not even keep up with inflation.

I was thinking of going with Vanguard (purely because that's where my ISAs are) and letting them (or whoever I go with, I suppose) manage the portfolio. I'd probably go high risk since I only have 10 years or so. But the understand they automatically reduce the risk as retirement approaches.

I guess comparison sites will help with the provider decision... Arg... All starting to feel inevitable.

One other question.... The tax relief.... That is paid into the pension account, is it? So I pay in £200 and £240 lands in there? Or do HMRC pay in once a year or something? I ask because I received some rental income last summer, and I have savings interest of over £1000, so on my self assessment tax return they are currently forecasting that I will owe £500, so I was hoping to put in a lump sum in to my new pension to offset having to pay a tax bill. 

Marcon

WindfallWendy said:

Voyager2002 said:

There are two levels of decision to make: you have to choose a SIPP provider, and then you have to choose how to invest the money that you put in your SIPP. When choosing a provider, be aware of their fees and charging structure, and watch out for providers who charge hefty fees once you have taken money out (gone into "drawdown").

When it comes to choosing investments, you might invest in something that loses most or all of its value (such as the Russian holdings that I had in my SIPP: they are still there but cannot be traded). Or you might make the opposite error, and choose something so low-risk that it does not even keep up with inflation.

I was thinking of going with Vanguard (purely because that's where my ISAs are) and letting them (or whoever I go with, I suppose) manage the portfolio. I'd probably go high risk since I only have 10 years or so. But the understand they automatically reduce the risk as retirement approaches.

I guess comparison sites will help with the provider decision... Arg... All starting to feel inevitable.

One other question.... The tax relief.... That is paid into the pension account, is it? So I pay in £200 and £240 lands in there? Or do HMRC pay in once a year or something? I ask because I received some rental income last summer, and I have savings interest of over £1000, so on my self assessment tax return they are currently forecasting that I will owe £500, so I was hoping to put in a lump sum in to my new pension to offset having to pay a tax bill. 

If you pay £200 into your SIPP from post-tax income, the SIPP provider will add basic rate tax relief of £50 (not £40) - the relief at 20% relates to the gross contribution. It won't reduce any tax you need to pay in respect of rental income and savings interest.

WindfallWendy

Marcon said:

WindfallWendy said:

I'm feeling quite in a pickle as I've recently moved jobs and my new pension doesn't have an investment builder element, so overpayment (of around £3k/yr) is not particularly valuable. 

Sounds like you were in USS?

Why do you believe that paying into a SIPP would be a better idea than paying more into your new employer's scheme? You'll get the same amount of tax relief either way. If you can pay contributions by salary sacrifice to your employer's scheme (highly unlikely they'd pay into your SIPP if you set one up), then you get an NI saving - do they offer salary sacrifice? If not, now would be a good time to suggest they do.

Edit - just looked at your post from earlier this month and see you are now eligible for Civil Service pension arrangements: https://forums.moneysavingexpert.com/discussion/6585167/csp-alpha-vs-partnership-and-getting-a-sipp#latest

Reading that post you seem to be pretty confused about a lot of things, not least the massive value of a DB scheme especially as you get older. Maybe do a bit more research before you take steps to do real damage to your financial stability in later life? Flexibility isn't the same thing as security - and on its own, flexibility rarely pays the bills quite so efficiently as a guaranteed income.

I looked into how much additional benefit I'd get with £300/month *on top* of what I already pay into Alpha, and it's not much, and isn't going to offer the flexibility I want. I don't want to go with the alternative to Alpha (Partnership?) because I do want DBs that Alpha offers. But I also want a bit of investment builder (yes, I was with USS and I quite liked what they were offering, but my Boss wasn't tolerable any more so I left). So I'm planning on having Alpha and a SIPP.

So, I am sticking with the alpha and maximising whatever I can get out of my employer. But once that has topped out, and if my taxable salary is still around the 40% threshold, I want to pay money into a SIPP to avoid paying that at 40%.

However, setting it out like this, I realise that I'm not going to be able to avoid that, since any money going into my SIPP will be post-tax income. But..... Presumably it will reduce my taxable income when it comes to my tax return submission, as I'll report the pension lump sum payments. 

What a palava. I think I'll just go down to 90% FTE instead and get an extra 26 days off each year from work 😄

Dazed_and_C0nfused

WindfallWendy said:

Marcon said:

WindfallWendy said:

I'm feeling quite in a pickle as I've recently moved jobs and my new pension doesn't have an investment builder element, so overpayment (of around £3k/yr) is not particularly valuable. 

Sounds like you were in USS?

Why do you believe that paying into a SIPP would be a better idea than paying more into your new employer's scheme? You'll get the same amount of tax relief either way. If you can pay contributions by salary sacrifice to your employer's scheme (highly unlikely they'd pay into your SIPP if you set one up), then you get an NI saving - do they offer salary sacrifice? If not, now would be a good time to suggest they do.

Edit - just looked at your post from earlier this month and see you are now eligible for Civil Service pension arrangements: https://forums.moneysavingexpert.com/discussion/6585167/csp-alpha-vs-partnership-and-getting-a-sipp#latest

Reading that post you seem to be pretty confused about a lot of things, not least the massive value of a DB scheme especially as you get older. Maybe do a bit more research before you take steps to do real damage to your financial stability in later life? Flexibility isn't the same thing as security - and on its own, flexibility rarely pays the bills quite so efficiently as a guaranteed income.

I looked into how much additional benefit I'd get with £300/month *on top* of what I already pay into Alpha, and it's not much, and isn't going to offer the flexibility I want. I don't want to go with the alternative to Alpha (Partnership?) because I do want DBs that Alpha offers. But I also want a bit of investment builder (yes, I was with USS and I quite liked what they were offering, but my Boss wasn't tolerable any more so I left). So I'm planning on having Alpha and a SIPP.

So, I am sticking with the alpha and maximising whatever I can get out of my employer. But once that has topped out, and if my taxable salary is still around the 40% threshold, I want to pay money into a SIPP to avoid paying that at 40%.

However, setting it out like this, I realise that I'm not going to be able to avoid that, since any money going into my SIPP will be post-tax income. But..... Presumably it will reduce my taxable income when it comes to my tax return submission, as I'll report the pension lump sum payments. 

What a palava. I think I'll just go down to 90% FTE instead and get an extra 26 days off each year from work 😄

No, relief at source pension contribution to a SIPP do not reduce your taxable income.

If you hand over say £2,000 to a pension provider who manages a SIPP for you they will add £500 in basic rate tax relief.  So you have £2,500 in your pension.

When you file your return you need to include these relief at source contribution on the return. They will increase your basic rate band from £37,700 to £40,200 (using my example).  This might not save you any tax.  It might mean £2,500 more of your income is taxed at 20% instead of 40%, saving you £500 in income tax.  

And there can be knock on effects like it means you get the full £1,000 savings nil rate band (aka Personal Savings Allowance) or become eligible for Marriage Allowance.

NB.  You would never include your Alpha contributions in the pension contribution section of a tax return.

Voyager2002

WindfallWendy said:

Voyager2002 said:

There are two levels of decision to make: you have to choose a SIPP provider, and then you have to choose how to invest the money that you put in your SIPP. When choosing a provider, be aware of their fees and charging structure, and watch out for providers who charge hefty fees once you have taken money out (gone into "drawdown").

When it comes to choosing investments, you might invest in something that loses most or all of its value (such as the Russian holdings that I had in my SIPP: they are still there but cannot be traded). Or you might make the opposite error, and choose something so low-risk that it does not even keep up with inflation.

I was thinking of going with Vanguard (purely because that's where my ISAs are) and letting them (or whoever I go with, I suppose) manage the portfolio. I'd probably go high risk since I only have 10 years or so. But the understand they automatically reduce the risk as retirement approaches.

People usually choose higher-risk investments when they have more time, and lower risk as they get closer to retirement. That is certainly the thinking behind the Vanguard 'Lifestyle' products that are intended to provide pensions.

kempiejon

If one is retired for decades then equities are still useful for inflation beating growth. I have never really understood the inclination to evolve to an ever higher percentage of bonds as one ages. Yes when living off investments it is worth mitigating sequence of returns by asset allocation and some level of bonds and cash holdings with something like buckets or a gilt ladder. Some are lucky and have a DB pensions or one can annuitization  of some capital.
I look at my cash bonds as an absolute amount rather than a % of portfolio.