Top up Sipp from ISA and then utilise tax free cash for House renovation.

adviceisgood

Hi,

I am struggling to work out which option makes sense.

Currently 56 years old and drawing a DB pension and working (Higher rate taxpayer)

My DB pension is sufficient to cover my living expenses and I have another DB pension growing with my current job.

I pay into a SIPP current value approx 200k and currently contribute 2k net per month.

Looking to retire in maybe 2 years time but prior to this looking to spend some money on redeveloping/future proof house possibly 60 k.

I could fund this from either
1. ISA 

2. get a loan

3.Max my contribution into the SIPP this year from the ISA and then withdraw a tax free amount of  38k and  rather than pay the 2k monthly into the Sipp use this amount to put into redevelopment so total of 24k and 38k to cover cost of redevelopment.

This would allow me to benefit from Higher rate tax on my contributions into Sipp but would  reduce my taxfree SIPP allowance moving forward.

Which option makes more sense I am struggling to see why I shouldn't utilise the SIPP option 3? 

af1963

Choosing option 2 rather than the others would be a gamble that your investment returns plus tax relief in the ISA and SIPP would be more than the interest paid on the loan,   Whether that's likely or not will depend on things like the interest rate paid, and what you are investing in.

As long as you're able to take out the 25% tax free on any new contributions ( i.e you are not close to hitting the overall limit for tax free cash), then getting as much as possible into your SIPP is often a good idea, to benefit from the tax relief.  That could mean, in your case, paying anything up to your whole earned salary (net) into the SIPP, either as regular contribs or from the ISA, or both. And then looking at what's left to fund the building work, either from the ISA or from tax free cash.

Linton

Option 3: Maxing a SIPP contribution beyond what you normally contribute and then withdrawing a Tax Free Lump Sum sounds very much like pension recycling. This is against HMRC rules as it gives you a second tax free sum from the same money - it doesnt matter in which order you do the transactions. Pension recycling is a topic which has been much discussed in the past.


Are you likely to be a higher rate tax payer in retirement, perhaps when you start receiving State Pension? That may affect the calculations as it makes taking retirement income from the ISA much more attractive.

senor_naranja

You mention redeveloping your house , Would this include anything to improve Energy Efficiency ? . If so you may want to consider a Green Loan - Nationwide do this for those who have a mortage with them , there are others(Virgin, Natwest , Coventry)
Currently I'm new so not allowed to post links but just google "Uk Green Mortgages"

senor_naranja

senor_naranja said:

You mention redeveloping your house , Would this include anything to improve Energy Efficiency ? . If so you may want to consider a Green Loan - Nationwide do this for those who have a mortage with them , there are others(Virgin, Natwest , Coventry)
Currently I'm new so not allowed to post links but just google "Uk Green Mortgages"

Green Mortagages are 0% free options that run alongside your current mortgage term 

poseidon1

A vote in favour of option 2 loan route.

Gives you maximum flexibility, given you may in near future be in receipt of two DB pensions, opportunity to drawdown/ UFPLSs from SIPP, and you keep your ISA powder dry for future tax free income withdrawal ( if you wish), for ongoing mortgage funding.

Depending on your credit rating even an unsecured personal loan maybe possible ( but higher interest rate, and reduced repayment term), so mortgage may be a more comfortably affordable outgoing. 

If you do find loan repayments unwieldy in future you retain the option to use combination of SIPP and ISA to get rid of it.

There seems to be a general  knee jerk desire to get rid of mortgage debts into retirement, without considering the benefit of retaining continued access to liquid funds especially where those funds are growing tax free in ISAs.

adviceisgood

Hi,
Thank you for all your responses and a little more research is needed to see if the green mortgage loan would be suitable so thank you for the suggestion.

Linton in respect of the pension recycling it is over 5 years since i retired so none of the funds that are being paid into the Sipp have come from a tax free pension payment and any payments into Sipp would be from an ISA and my understanding is this is not recycling.
In retirement I would be a basic rate tax payer .

Poseidon your suggestion of the loan is a sensible suggestion and it allows me to retain  flexibility,I did pay off my mortgage a number of years ago which was a relief (may be a little knee jerk) but can now understand your  point re continued access to liquid funds.

ali_bear

If it was me I would be looking at using the funds in ISA to pay for the house improvements. But also compare with the cost of getting a mortgage loan to cover it. Assume you're going to repay the loan in a few years time from TFC and/or PCLS? A hybrid approach would be a loan to cover the main work and draw on the ISA for extras or contingencies.