Withdraw from sipp to fund ISA?

fizio

Irrespective of possible budget changes..

I have a decent DB which gets me close to 40% tax bracket and also have a 6 figure sipp in drawdown. My spending means I don’t have spare to continue to fund  ISA so have been mulling over gradually withdrawing from sipp at 40% and putting into ISA. I don’t really need the money from either anytime soon and not bothered about inheritance. 

The main arguments for leaving is a possible future change in tax thresholds may mean I can withdraw some at 20% and the money will grow bigger in the sipp than if it was 40% less to start with. 

The main argument for putting it in the isa is that it will be future protected after a one off hit. 

Obviously the likely budget changes to increase tax rates will just mean losing even more at withdrawing time. 

Not sure how the maths works out to see if there is an obvious answer or the usual ‘it depends’ type. 

Just looking for some feedback or ways to make the decision more clear. . 

singhini

Don’t draw at 40% unless you expect higher future tax or value flexibility more.

Use annual basic-rate withdrawals to “feed” your ISA gradually.

Keep monitoring tax thresholds and your DB indexation, your effective tax rate may drift down in real terms.

fizio

singhini said:

Don’t draw at 40% unless you expect higher future tax or value flexibility more.

Use annual basic-rate withdrawals to “feed” your ISA gradually.

Keep monitoring tax thresholds and your DB indexation, your effective tax rate may drift down in real terms.

Unfortunately the DB means I have next to no margin  to make any basic rate withdrawals and fiscal drag will mean I am past HRT just with DB in next few years. Unless the HRT threshold  goes up by a decent amount (unlikely if frozen till 2030) then I cannot see anyway to withdraw from sipp at basic rate - its more likely the 40% will increase rather than go down given teh state of uk finances.

Taking the hit every year and getting it into an ISA means future growth is tax free (assuming no ISA rule changes) versus having the sipp grow faster but HRT tax on exit.. Hard one to decide and I probably need a spreadsheet and crystal ball :-) 

NoMore

You're either paying the tax now or paying it later, if the tax doesn't change it doesn't make a difference when you do it. Where the growth happens doesn't matter (assuming you would invest in the same things in and out of pension).

So it really comes down to what you think your future tax will be compared to now. Which as you say is crystal ball time.

Aretnap

fizio said:

singhini said:

Don’t draw at 40% unless you expect higher future tax or value flexibility more.

Use annual basic-rate withdrawals to “feed” your ISA gradually.

Keep monitoring tax thresholds and your DB indexation, your effective tax rate may drift down in real terms.

Unfortunately the DB means I have next to no margin  to make any basic rate withdrawals and fiscal drag will mean I am past HRT just with DB in next few years. Unless the HRT threshold  goes up by a decent amount (unlikely if frozen till 2030) then I cannot see anyway to withdraw from sipp at basic rate - its more likely the 40% will increase rather than go down given teh state of uk finances.

Taking the hit every year and getting it into an ISA means future growth is tax free (assuming no ISA rule changes) versus having the sipp grow faster but HRT tax on exit.. Hard one to decide and I probably need a spreadsheet and crystal ball :-) 

It makes no odds. You'll find that paying 40% tax now, then letting whatever's left grow by x%, or letting it all grow by x% then paying 40% tax on the whole lot will leave you with the same amount of money either way. No spreadsheet required - it's basic high school maths. 

So it comes down to whether you think that the effective tax rate you'd be paying on withdrawals will be higher or lower in the future. Obviously this is something that you can't know with certainty, but in the short to medium term you are probably correct that it is very unlikely to come down, and that it might go up. (Income tax rates have been trending downwards for over 30 years; clearly that isn't a trend which can or should continue forever).

dharm999

Are you married, does your partner have similar pension arrangements? 

Cobbler_tone

Nor is the ISA limit likely to increase. You may have a more obvious answer in a few weeks.

fizio

I kind of guessed that there was no obvious answer and it mostly depends on future changes to a load of things that are hard to predict. I will start with the budget and see how that affects ISA/Pension and consider withdrawing next years ISA amount - maybe 2 years if income tax is going up next April. 

appreciate the feedback. 

Qyburn

 I think I'd do what you're suggesting, spread your investment between SIPP and ISA.

I think of all the possibilities people are worried about, it is extremely unlikely that tax will be applied to withdrawal from an ISA. So you'd be hedging your bets, securing some on which you've paid 40% but won't pay any more.

There's also the fact that you can pull out a large sum from an an ISA, whereas even if rates don't change the same withdrawal from your SIPP could hit all sorts of horrible higher rates.