SIPP vs ISA balance

Firefly12345

Hi,

[First world problem post alert….]

For a top rate taxpayer at what point do people think its worth focusing on ISAs at the expense of the SIPP. Generally I think SIPP is no brainer when saving tax of 47% so I have focused all my efforts there.

Today I have a SIPP of 970k [contributing 3k / month] and ISA of 30k [contributing1k / month]. Is there a case to trim SIPP contributions to the company match min and add the difference into my ISA? The contributions would change to 2.1k and 1.65k for SIPP and ISA respectively. This would max out the ISA yearly limit. I'm 50 so at least 5 years to go.

The ideas behind this are

1. The bigger the ISA the more options to retire before 57.
2. All of my eggs are in the SIPP basket and I'd like to redress the balance. I distrust government and 'pension millionaires' will be an easy target.
3. Barring terrible stock market performance I'm guaranteed to get to the tax-free lump sum limit.
4. Barring terrible stock market performance it will be hard to get all of the money out at less than a 40% marginal rate. Now that the IHT rules have changed I ideally don't want to hand over a pension in my estate.

The con is….. Not saving 47% at source is just mathematical suicide! Not doing this just feels like the wrong move….

FF

Woodstok2000

If the money going into your pension from now on will be coming out in future with a 40% tax applied, the marginal difference is only really 7%. It's still a reduction, but youre paying that for a diversified portfolio that gives you more retirement options and reduces your risk overall. Only you can decide how much value you place on that, but it seems like the sensible play to me.

Phossy

This may be helpful

https://youtu.be/zHVKhOoEmMQ?si=q5ntQY4BZ4eBIFkx

Rattusnorvegicus

Max out the S&S ISA,and the cash ISA and then the SIPP.

I wouldnt worry about not being a higher rate tax payer for the rest of your life. You're likely to be an additional rate payer.

You're well past that limit, but my upcoming NHS care in old age thanks you for your contribution.

Enjoy it! I dont fully think people realise exactly how much that pot generates over 28 years of retirement, and exactly how much people need to withdraw to drain it, even if its dumped into ISAs.

poseidon1

Since your first post in 2021 your pension pot appears to have doubled in value, but your ISA only achieved a relatively modest increase in size.

Seems to me you are entitled to take your foot off the pedal in terms of personal pension contributions and start building a meaningful ISA pot for the tax free income it can produce in the years to come.

Bear in mind unspent DC Pensions become liable to IHT after 2027, so having the flexibility to choose which of your SIPP/ISA pots to fund your retirement gives you more flexibility compared to your current 'one trick pony' SIPP journey.

I retired at 57 ( now 68), and have been busily contributing maximum £20k annual ISA funding to accumulate an ever growing tax free income resource. I am also growing the Sipp by active investment changes to get it from its current £500k to nearer £600k when UFPLSS drawdowns will be taken to replace current rental income. I am a 40% tax payer.

The key for me has been diverse income sources I can adjust and tweak to take account of changing circumstances as well as the changing tax landscape. Your current approach lacks diversity, therefore lacks flexibility.

Clive_Woody

I'm a similar age with similar sized pension/ISA pots and distribution, and recently had the same revelation.

I used ChatGPT to do some modelling around different distributions and draw down startegy to optimise tax liability - I am not a big AI user but found it very useful to do. I have rebalanced my pensions (majority was in lifepath type funds, now around 50% of funds will remain in this, while the other 50% is in 100% equity fund to maintain growth).

My focus now is on building my ISA pot and have structured this into 3 funds (a Trading212 Pie) with a chunk in cash as my insurance for when markets go bad and as an inital draw down portion of money (to be topped up in good times), a portion in bond type ETF and the rest in Vanguard all world ETF for growth.

I have a sort of plan for draw down based on these pots and relative risk and impact of market downturns. I am far from an expert, but it was sobering to realise I had neglected my ISA, but there is time to rebalance and prepare for my exit from work.

I'd suggest having a play in ChatGPT - put in your numbers, what you are invested in and what you want to achieve and see what it spits out. I found it quie educational, others may disagree.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/81870055#Comment_81870055

The key for me has been diverse income sources I can adjust and tweak to take account of changing circumstances as well as the changing tax landscape. Your current approach lacks diversity, therefore lacks flexibility.

I very much agree with this. Being able to control your tax liability with a combination of tax free and tax deferred withdrawals is a great retirement tool.

Firefly12345

https://forums.moneysavingexpert.com/discussion/comment/81870055#Comment_81870055

Good spot. I have averaged 11% annual growth in my SIPP. I only started adding to the ISA last year, before that it was just part the emergency fund and I'd use it use it for cars / holidays / whatever.

Thanks for all of the comments. Seems like everyone agrees that maxing the ISA is the best policy. I think I'll instruct work that I want to make the change.

FF

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/81870198#Comment_81870198

Just FYI I think people should avoid ISA withdrawals before retirement as much as possible and allow any gains to compound tax free.