SIPP and ISA savings and tax efficiency

cockerWalker

Hi,
I've turned 50 this year and have finally started to try and put a bit more thought into retirement planning, beyond just "make sure I pay into a pension and have some savings". I'm considering early retirement in my early 60s.

I have two questions if anyone can assist.

1) It seems to me that saving more into a SIPP beyond about £1.25m isn't very tax efficient. If taking max lump sum still leaves you paying higher rate tax on drawdown, then I'm saving higher rate tax on contributions now, just to pay the same rate on withdrawals from (contributions plus growth) in retirement. Am I missing anything in this assessment?

2) I'd be able to access my SIPP from age 57. It seems to me that there would be a clear incentive to withdraw sufficient tax free cash each year to max out ISA contributions for my wife and me if we're not otherwise maximising them. Is there any disadvantage to doing this, as long as only tax free cash is accessed and as long as lump sum recycling rules aren't triggered?

I'm thinking about these in the context of getting the "right" balance between SIPP and ISA saving over the next few years. Obviously complicated by not knowing investment returns!

Thanks for for your time.

Marcon

cockerWalker said:

Hi,
I've turned 50 this year and have finally started to try and put a bit more thought into retirement planning, beyond just "make sure I pay into a pension and have some savings". I'm considering early retirement in my early 60s.

I have two questions if anyone can assist.

1) It seems to me that saving more into a SIPP beyond about £1.25m isn't very tax efficient. If taking max lump sum still leaves you paying higher rate tax on drawdown, then I'm saving higher rate tax on contributions now, just to pay the same rate on withdrawals from (contributions plus growth) in retirement. Am I missing anything in this assessment?

2) I'd be able to access my SIPP from age 57. It seems to me that there would be a clear incentive to withdraw sufficient tax free cash each year to max out ISA contributions for my wife and me if we're not otherwise maximising them. Is there any disadvantage to doing this, as long as only tax free cash is accessed and as long as lump sum recycling rules aren't triggered?

I'm thinking about these in the context of getting the "right" balance between SIPP and ISA saving over the next few years. Obviously complicated by not knowing investment returns!

Thanks for for your time.

If you've got (or will have) £1.25m in your SIPP, have you thought of getting some proper financial advice, which could be (more than) worth its weight in gold? Financial planning based on minimal information from a poster, and replies from random strangers on the internet, might not be the best way to maximise tax efficiency.

Hoenir

cockerWalker said:

I'm thinking about these in the context of getting the "right" balance between SIPP and ISA saving over the next few years. Obviously complicated by not knowing investment returns!

Always remember a very successfull business person I worked for many years ago saying. Better to make too much money and pay some tax.  Rather than let the tail wag the dog. The only certainty when investing is uncertainty. 

Albermarle

Firstly as you are now starting to think more about these items ( quite common once you reach 50), a regular reading of this forum has proved beneficial for many people.

Not sure where the £1.25 Million figure comes from. The max limit on the TFLS, means in fact it is debatable to grow your pension pot more than £1,070,100, if you are going to be a 40% taxpayer in retirement. ( are you sure about this, only a small % of retirees are 40% taxpayers ?) 

There is no particular disadvantage to taking tax free cash from a pension and putting it in an ISA. However there is no advantage from doing it either, as you do not gain anything.

cockerWalker

Marcon said:

cockerWalker said:

Hi,
I've turned 50 this year and have finally started to try and put a bit more thought into retirement planning, beyond just "make sure I pay into a pension and have some savings". I'm considering early retirement in my early 60s.

I have two questions if anyone can assist.

1) It seems to me that saving more into a SIPP beyond about £1.25m isn't very tax efficient. If taking max lump sum still leaves you paying higher rate tax on drawdown, then I'm saving higher rate tax on contributions now, just to pay the same rate on withdrawals from (contributions plus growth) in retirement. Am I missing anything in this assessment?

2) I'd be able to access my SIPP from age 57. It seems to me that there would be a clear incentive to withdraw sufficient tax free cash each year to max out ISA contributions for my wife and me if we're not otherwise maximising them. Is there any disadvantage to doing this, as long as only tax free cash is accessed and as long as lump sum recycling rules aren't triggered?

I'm thinking about these in the context of getting the "right" balance between SIPP and ISA saving over the next few years. Obviously complicated by not knowing investment returns!

Thanks for for your time.

If you've got (or will have) £1.25m in your SIPP, have you thought of getting some proper financial advice, which could be (more than) worth its weight in gold? Financial planning based on minimal information from a poster, and replies from random strangers on the internet, might not be the best way to maximise tax efficiency.

Thanks, I will most likely get some financial advice rather nearer the time I'd be accessing it. At the moment I don't have near that amount, but at current saving plus a high end of realistic returns it's possible I could get there. In the short term it's a given that all my savings will go into pension, but in the medium term it may not be such a given.

cockerWalker

Albermarle said:

Firstly as you are now starting to think more about these items ( quite common once you reach 50), a regular reading of this forum has proved beneficial for many people.

Not sure where the £1.25 Million figure comes from. The max limit on the TFLS, means in fact it is debatable to grow your pension pot more than £1,070,100, if you are going to be a 40% taxpayer in retirement. ( are you sure about this, only a small % of retirees are 40% taxpayers ?) 

There is no particular disadvantage to taking tax free cash from a pension and putting it in an ISA. However there is no advantage from doing it either, as you do not gain anything.

The 1.25m figure came from taking max TFLS leaving roughly 1m, drawing down at 4%, making marginal tax rate 40% when combined with state pension at 67.

The reason I'm considering TFLS to ISA, is that if I do this in the years leading up to retirement then I can get the growth on those lump sums to be tax free, rather than taxable if they stay in the SIPP.

artyboy

Funnily enough, post the announcement by Rachel from accounts that pension pots would fall within IHT calculations, £1.25m is the finger in the air amount that I've seen as a maximum I really want in my pension (and also Mrs Arty's).

Bit of a buffer against the £1.073m limit for TFLS, but just about manageable for estate planning purposes without going too far into the 40% band on withdrawals.

Obviously if it grows massively beyond that because of my astute investment choices then it just creates a nice problem to deal with. But further contributing beyond that level, unless it's with some niche benefits like employer matching, or managing yourself out of the effective 62% tax band, seems a bit pointless.

Dazed_and_C0nfused

cockerWalker said:

Albermarle said:

Firstly as you are now starting to think more about these items ( quite common once you reach 50), a regular reading of this forum has proved beneficial for many people.

Not sure where the £1.25 Million figure comes from. The max limit on the TFLS, means in fact it is debatable to grow your pension pot more than £1,070,100, if you are going to be a 40% taxpayer in retirement. ( are you sure about this, only a small % of retirees are 40% taxpayers ?) 

There is no particular disadvantage to taking tax free cash from a pension and putting it in an ISA. However there is no advantage from doing it either, as you do not gain anything.

The 1.25m figure came from taking max TFLS leaving roughly 1m, drawing down at 4%, making marginal tax rate 40% when combined with state pension at 67.

The reason I'm considering TFLS to ISA, is that if I do this in the years leading up to retirement then I can get the growth on those lump sums to be tax free, rather than taxable if they stay in the SIPP.

The TFLS is 25%, not 20%.

Don't forget (ignoring the upper limit) if you take £20k TFLS that leaves £60k crystallised in the pension.  Whatever that £60k grows to will all be taxable when taken out of the pension.

cockerWalker

artyboy said:

Funnily enough, post the announcement by Rachel from accounts that pension pots would fall within IHT calculations, £1.25m is the finger in the air amount that I've seen as a maximum I really want in my pension (and also Mrs Arty's).

Bit of a buffer against the £1.073m limit for TFLS, but just about manageable for estate planning purposes without going too far into the 40% band on withdrawals.

Obviously if it grows massively beyond that because of my astute investment choices then it just creates a nice problem to deal with. But further contributing beyond that level, unless it's with some niche benefits like employer matching, or managing yourself out of the effective 62% tax band, seems a bit pointless.

Yes, given the absence of any inheritance tax benefits, it seems to me that saving 40% tax on contributions to pay 40% tax on withdrawals is of little benefit, particularly when ISAs are tax free any even dividend tax is lower.
My circumstances are a bit different to yours in that my pension pot is likely to be significantly higher than my wife's, though she will have a small DB pension to help mitigate inflation and investment risk.

Triumph13

Dazed_and_C0nfused said:

cockerWalker said:

Albermarle said:

Firstly as you are now starting to think more about these items ( quite common once you reach 50), a regular reading of this forum has proved beneficial for many people.

Not sure where the £1.25 Million figure comes from. The max limit on the TFLS, means in fact it is debatable to grow your pension pot more than £1,070,100, if you are going to be a 40% taxpayer in retirement. ( are you sure about this, only a small % of retirees are 40% taxpayers ?) 

There is no particular disadvantage to taking tax free cash from a pension and putting it in an ISA. However there is no advantage from doing it either, as you do not gain anything.

The 1.25m figure came from taking max TFLS leaving roughly 1m, drawing down at 4%, making marginal tax rate 40% when combined with state pension at 67.

The reason I'm considering TFLS to ISA, is that if I do this in the years leading up to retirement then I can get the growth on those lump sums to be tax free, rather than taxable if they stay in the SIPP.

The TFLS is 25%, not 20%.

Don't forget (ignoring the upper limit) if you take £20k TFLS that leaves £60k crystallised in the pension.  Whatever that £60k grows to will all be taxable when taken out of the pension.

OP knows that.  They are specifically talking about not having the taxable bit more than £1m as anything contributed above that is likely to attract HRT on the way out.  Adding the max TFLS on top gets to the £1.25M total (in round numbers)

The growth on the taxable part will always be taxable.  Getting the TFLS out as soon as possible looks very sensible as, if it stays inside the pension, any growth on that part becomes taxable too, as long as the lifetime TFLS limit remains fixed.  If OP's wife has lower pension savings, then that, along with ISAs, becomes a very attractive shelter for any tax free cash withdrawn.

cockerWalker

Triumph13 said:

Dazed_and_C0nfused said:

cockerWalker said:

Albermarle said:

Firstly as you are now starting to think more about these items ( quite common once you reach 50), a regular reading of this forum has proved beneficial for many people.

Not sure where the £1.25 Million figure comes from. The max limit on the TFLS, means in fact it is debatable to grow your pension pot more than £1,070,100, if you are going to be a 40% taxpayer in retirement. ( are you sure about this, only a small % of retirees are 40% taxpayers ?) 

There is no particular disadvantage to taking tax free cash from a pension and putting it in an ISA. However there is no advantage from doing it either, as you do not gain anything.

The 1.25m figure came from taking max TFLS leaving roughly 1m, drawing down at 4%, making marginal tax rate 40% when combined with state pension at 67.

The reason I'm considering TFLS to ISA, is that if I do this in the years leading up to retirement then I can get the growth on those lump sums to be tax free, rather than taxable if they stay in the SIPP.

The TFLS is 25%, not 20%.

Don't forget (ignoring the upper limit) if you take £20k TFLS that leaves £60k crystallised in the pension.  Whatever that £60k grows to will all be taxable when taken out of the pension.

OP knows that.  They are specifically talking about not having the taxable bit more than £1m as anything contributed above that is likely to attract HRT on the way out.  Adding the max TFLS on top gets to the £1.25M total (in round numbers)

The growth on the taxable part will always be taxable.  Getting the TFLS out as soon as possible looks very sensible as, if it stays inside the pension, any growth on that part becomes taxable too, as long as the lifetime TFLS limit remains fixed.  If OP's wife has lower pension savings, then that, along with ISAs, becomes a very attractive shelter for any tax free cash withdrawn.

Unfortunately my wife's income is too limited at the moment (she's starting a business) to put more than 3600 into her pension. Of course, a million and one things can change by the time I reach 57.

I'm surprised that I haven't seen more suggestions to move lump sum to ISA as soon as one can online, making me think I'd missed something. What suggested it to me was the realisation that TFLS didn't trigger MPLA and that paying new money into a SIPP that's already part crystallised isn't crystallised. At least that's my best understanding so far.

Several years to get the details hammered out!