Is it still worth contributing to SIPP?

Tom6565

I am in a quandary, I am 60, looking to retire soon. I have a DB pension starting soon worth about £15k a year and a SIPP of about £800k. I have money in my own business and have a choice as to whether to put that into my SIPP or just leave it there to draw down on in dividends as and when, but it will get no growth. My fundamental question is, I know you can only draw £268k tax free out (I am probably going to use UFPLS), so does that mean it's literally not worth having a pot of over £1073k as I'll be paying full tax on any drawdown? I fill my ISA allowance each year so not many other investment routes (GIA seems a world of grief).  Just doesn't seem to make sense to pay more money in, even though I'd get a few years growth, as I'm just storing up tax issues for myself later on. In a few years the SIPP will (hopefully) reach £1.073m anyway just from growth, so really no need to add more now. In short, I suppose my question is why does anyone likely to be paying higher rate tax in retirement have a SIPP bigger than £1073k?

Triumph13

Tom6565 said:

I am in a quandary, I am 60, looking to retire soon. I have a DB pension starting soon worth about £15k a year and a SIPP of about £800k. I have money in my own business and have a choice as to whether to put that into my SIPP or just leave it there to draw down on in dividends as and when, but it will get no growth. My fundamental question is, I know you can only draw £268k tax free out (I am probably going to use UFPLS), so does that mean it's literally not worth having a pot of over £1073k as I'll be paying full tax on any drawdown? I fill my ISA allowance each year so not many other investment routes (GIA seems a world of grief).  Just doesn't seem to make sense to pay more money in, even though I'd get a few years growth, as I'm just storing up tax issues for myself later on. In a few years the SIPP will (hopefully) reach £1.073m anyway just from growth, so really no need to add more now. In short, I suppose my question is why does anyone likely to be paying higher rate tax in retirement have a SIPP bigger than £1073k?

The only reason to do that deliberately now would be if you were getting either employer contributions or an even higher rate of tax relief going in - be that because of 45% tax, Sal Sac, child benefit clawback, PA clawback, parental contributions to student loans, or whatever.  Of course many people get there accidentally because growth was more than budgeted, or because the rules changed.  The £1,073k limit is definitely a feature, not a bug, as there is no real public interest in giving people tax incentives to save more than that.

Tom6565

Triumph13 said:

Tom6565 said:

I am in a quandary, I am 60, looking to retire soon. I have a DB pension starting soon worth about £15k a year and a SIPP of about £800k. I have money in my own business and have a choice as to whether to put that into my SIPP or just leave it there to draw down on in dividends as and when, but it will get no growth. My fundamental question is, I know you can only draw £268k tax free out (I am probably going to use UFPLS), so does that mean it's literally not worth having a pot of over £1073k as I'll be paying full tax on any drawdown? I fill my ISA allowance each year so not many other investment routes (GIA seems a world of grief).  Just doesn't seem to make sense to pay more money in, even though I'd get a few years growth, as I'm just storing up tax issues for myself later on. In a few years the SIPP will (hopefully) reach £1.073m anyway just from growth, so really no need to add more now. In short, I suppose my question is why does anyone likely to be paying higher rate tax in retirement have a SIPP bigger than £1073k?

The only reason to do that deliberately now would be if you were getting either employer contributions or an even higher rate of tax relief going in - be that because of 45% tax, Sal Sac, child benefit clawback, PA clawback, parental contributions to student loans, or whatever.  Of course many people get there accidentally because growth was more than budgeted, or because the rules changed.  The £1,073k limit is definitely a feature, not a bug, as there is no real public interest in giving people tax incentives to save more than that.

thank you yes that's what I'm thinking, the only tax relief I get is that I dont pay 25% Corporation tax on that contribution as it reduces company profits, so I'm gaining 25% to lose 40% later. I guess I will get growth on that amount in a SIPP, say 10% a year versus nothing if it just sits there in the company. thats the only other consideration, so that might help pay the tax, but I'm still not much better off.  

MallyGirl

You will lose 40% on 75% of the withdrawal ( don't forget the 25% tax free element)

enthusiasticsaver

I would focus on stocks and shares isas instead. We funded our early retirement on a mix of SIPPS, DB pensions and Stocks and Shares ISAs and are still withdrawing on the ISAs as they are tax free on the way out.  I definitely would not put any more in the SIPP if your DB pension will use your whole tax allowance.  You will struggle to get any out without going into the higher tax bracket. 

Marcon

Tom6565 said:

I am in a quandary, I am 60, looking to retire soon. I have a DB pension starting soon worth about £15k a year and a SIPP of about £800k. I have money in my own business and have a choice as to whether to put that into my SIPP or just leave it there to draw down on in dividends as and when, but it will get no growth. 

Why won't it get any growth? If it's your own business then, as a director, you have a responsibility to act in the best interests of the business...which in this case would tally nicely with your own best interests!

Tom6565 said:

Triumph13 said:

thank you yes that's what I'm thinking, the only tax relief I get is that I dont pay 25% Corporation tax on that contribution as it reduces company profits, so I'm gaining 25% to lose 40% later. I guess I will get growth on that amount in a SIPP, say 10% a year versus nothing if it just sits there in the company. thats the only other consideration, so that might help pay the tax, but I'm still not much better off.  

If you are paying CT at 25%, then you are making profits of at least £250,000 - so why would you leave those funds sitting doing nothing, and not making any sort of investment return? Your Mem&Arts are likely to give you the directors very broad investment powers - maybe now is the time to ensure you are making good use of those powers?

Marcon

enthusiasticsaver said:

I would focus on stocks and shares isas instead. We funded our early retirement on a mix of SIPPS, DB pensions and Stocks and Shares ISAs and are still withdrawing on the ISAs as they are tax free on the way out.  I definitely would not put any more in the SIPP if your DB pension will use your whole tax allowance.  

OP has already said they fully fund their ISA each year. The DB scheme isn't going to use the whole LSA - not if the annual pension is £15K. It's the £800K SIPP that will be munching up a hefty slug of the LSA.

enthusiasticsaver said:

You will struggle to get any out without going into the higher tax bracket. 

As 'struggles' go, that's hardly such a desperate one. If you are paying higher rate tax, it's because you have the income to do so! People can get overly obsessed with tax considerations to the point of being blinded to everything else.

Given that OP appears to own a company earnings profits of at least a quarter of a million pounds a year, but as a director hasn't taken any action on behalf of the company to invest the surplus funds being held within the company, it sounds as if one of the best 'investments' they could make would be some decent professional advice. They might, for example, want to set up 3 'small pots' in addition to their SIPP and get an extra bit of tax free cash on top of the LSA in respect of those...

Tom6565

Marcon said:

Tom6565 said:

I am in a quandary, I am 60, looking to retire soon. I have a DB pension starting soon worth about £15k a year and a SIPP of about £800k. I have money in my own business and have a choice as to whether to put that into my SIPP or just leave it there to draw down on in dividends as and when, but it will get no growth. 

Why won't it get any growth? If it's your own business then, as a director, you have a responsibility to act in the best interests of the business...which in this case would tally nicely with your own best interests!

Tom6565 said:

Triumph13 said:

thank you yes that's what I'm thinking, the only tax relief I get is that I dont pay 25% Corporation tax on that contribution as it reduces company profits, so I'm gaining 25% to lose 40% later. I guess I will get growth on that amount in a SIPP, say 10% a year versus nothing if it just sits there in the company. thats the only other consideration, so that might help pay the tax, but I'm still not much better off.  

If you are paying CT at 25%, then you are making profits of at least £250,000 - so why would you leave those funds sitting doing nothing, and not making any sort of investment return? Your Mem&Arts are likely to give you the directors very broad investment powers - maybe now is the time to ensure you are making good use of those powers?

It's not my own business and I'm not a Director. I dont really want to get into all that here, just assume its a pot of money sat there doing not a lot.

ali_bear

Given the not-altogether-unlikely event of Reform getting into power, with a former stockbroker at the helm, it remains a possibility that the TFLS limit could be scrapped within the next decade. Just saying. 

Tom6565

MallyGirl said:

You will lose 40% on 75% of the withdrawal ( don't forget the 25% tax free element)

yes I guess my point was if I have maxed the tax free cash out because I have over £1037k, I cant take more than £268k out tax free, then I'm paying 40% on all the rest? This is my quandary really, why go over £1037k when the tax free cash is capped at 25% of that?

Tom6565

enthusiasticsaver said:

I would focus on stocks and shares isas instead. We funded our early retirement on a mix of SIPPS, DB pensions and Stocks and Shares ISAs and are still withdrawing on the ISAs as they are tax free on the way out.  I definitely would not put any more in the SIPP if your DB pension will use your whole tax allowance.  You will struggle to get any out without going into the higher tax bracket. 

I'm maxing out the ISAs. That's the dilemma!  It is making me lean away from the SIPP though... I agree