SIPP or ISA for spare cash and endowment?
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Larry_M
Posts: 40 Forumite
I have approximately £3000 spare cash, and in two years time my endowment policy (approx. £17000) will be maturing, so I'm wondering what the best thing would be to do with the £3000 now and then the endowment money later, either stick it into my existing S&S ISA or open a SIPP.
My situation: I'm 50, in the LGPS, standard rate tax payer, mortgage paid off, currently packing my Prudential AVC with as much as I can afford each month. I have £10000 in a cash ISA for emergencies, holidays etc, and £18000 in a S&S ISA.
Having read a bit on the subject of S&S ISA vs SIPP I'm inclined to think I should open a SIPP for these sums in order to gain the tax relief (even though it would be taxed later when drawing down, except for 25%), but would be grateful for any thoughts.
My situation: I'm 50, in the LGPS, standard rate tax payer, mortgage paid off, currently packing my Prudential AVC with as much as I can afford each month. I have £10000 in a cash ISA for emergencies, holidays etc, and £18000 in a S&S ISA.
Having read a bit on the subject of S&S ISA vs SIPP I'm inclined to think I should open a SIPP for these sums in order to gain the tax relief (even though it would be taxed later when drawing down, except for 25%), but would be grateful for any thoughts.
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Comments
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One question might be how long have you been in LGPS and what proportion of your required post-retirement income is LGPS projected to provide. Also your intentions on retiral date might be relevant.
I used part of my mortgage endowment pay-out to make lump-sum APCs into the LGPS itself, rather than AVCs through Prudential or SIPP/ISA. My situation is unusual though and, with relatively few years total LGPS, I wanted the certainty of return on this money to balance against the risk of underperformance of other investments. So for me the APC is acting a bit like an annuity, and the rates seem OK.0 -
Putting it into a SIPP gives you options for early retirement, if you front-run that ahead of your LGPS. You don't say what the retirement age for that is, but you usually take an actuarial reduction for drawing it early relative to scheme retirement age. So by running down a SIPP flat ahead of it an early retiree gets to take out £11000 tax-free each year on money you saved 20% tax going in, or 40% if you are a HRT taxpayer. And you get these options in five years time when you are 55.
If you aren't looking to retire early and you will be earning or getting a pension of more than the personal allowance then the greater freedom of keeping it in an ISA has a lot to be said for it. So it depends on how you see your retirement plans panning out.0 -
You have not given any details of how much pension you need, are due to receive, whether you want to retire early, wife, kids, inheritance etc all of which could skew your planning.
As a starter, I would be ensuring that my AVC would pay out the maximum amount (tax relief in, tax free out); my LGPS pension was sufficient to meet my needs in retirement (guaranteed and inflation proof); then a SIPP to retire early.0 -
One question might be how long have you been in LGPS and what proportion of your required post-retirement income is LGPS projected to provide. Also your intentions on retiral date might be relevant.
I used part of my mortgage endowment pay-out to make lump-sum APCs into the LGPS itself, rather than AVCs through Prudential or SIPP/ISA. My situation is unusual though and, with relatively few years total LGPS, I wanted the certainty of return on this money to balance against the risk of underperformance of other investments. So for me the APC is acting a bit like an annuity, and the rates seem OK.
Thanks for the reply. I've been in the LGPS for 30 years, hope to retire at the earliest opportunity but realistically that would be at age 60, at which time I reckon the LGPS pension would be enough to live on.0 -
You have not given any details of how much pension you need, are due to receive, whether you want to retire early, wife, kids, inheritance etc all of which could skew your planning.
As a starter, I would be ensuring that my AVC would pay out the maximum amount (tax relief in, tax free out); my LGPS pension was sufficient to meet my needs in retirement (guaranteed and inflation proof); then a SIPP to retire early.
I reckon the LGPS pension would be enough to live on if I retired at age 60, plus the AVC of course. so at the moment I'm thinking that a SIPP would just give me some extra options at age 55, not to retire early as I wouldn't be able to get enough into it for that, but maybe some extra cash.0 -
So by running down a SIPP flat ahead of it an early retiree gets to take out £11000 tax-free each year on money you saved 20% tax going in, or 40% if you are a HRT taxpayer. And you get these options in five years time when you are 55.
Not sure that I understand this bit, no doubt due to my lack of knowledge. If I wanted to take money from the SIPP at age 55 wouldn't it be taxed at 20% (apart from the first 25% of it) given that I'd already be over the personal allowance via my salary?0 -
It is kinda accepted on here (as much as anything is accepted apart from DB pensions being great) that drawing a DB pension 8 years early is not the best thing to do (assuming there are no health issues and other funds are available. You need to know how much your pension will be nobbled by retiring at 60 - tables are available online. It will be roughly 5% per year so given your retirement age will be 67ish then you are looking at losing 35% of your pension (with subsequent reduction of your AVC lump sum).
What Emrine is alluding to is that if you pay £13,332 into a pension then given that the tax allowance is going up to £12k you would be able to withdraw all (£16,666) tax free each year and regain 5% on your pension for each year you can manage this.0 -
It is kinda accepted on here (as much as anything is accepted apart from DB pensions being great) that drawing a DB pension 8 years early is not the best thing to do (assuming there are no health issues and other funds are available.
The rough plan I had was that I believe I would be entitled to take flexible retirement at 60 under the LGPS (given my service), which would enable me to carry on working a couple of days a week if I wanted to.What Emrine is alluding to is that if you pay £13,332 into a pension then given that the tax allowance is going up to £12k you would be able to withdraw all (£16,666) tax free each year and regain 5% on your pension for each year you can manage this.
OK, still trying to get this clear in my poor old head. Are you saying that:
1) the 25% tax free withdrawal from a SIPP is 25% tax free PER YEAR?
and
2) the personal tax allowance re the SIPP is looked at separately from the personal allowance being used against my earnings? Can't get two lots of personal allowances surely so I'm guessing this must be wrong
and
3) I could just recycle money in and out of a SIPP to take advantage of all this? I thought there were various complicated rules around recycling?0 -
Not sure that I understand this bit, no doubt due to my lack of knowledge. If I wanted to take money from the SIPP at age 55 wouldn't it be taxed at 20% (apart from the first 25% of it) given that I'd already be over the personal allowance via my salary?
You have stated you want to retire early. You're in a great position to do just that
Take your LGPS at 60. From 55 you can take your SIPP. You have roughly 20k to lob into your SIPP. Taxman will top this up by 5k (more if you are a HRT taxpayer). You can retire early by as much as 25k can last you. Ideally take it out over two years, where you can get it all tax-free and to top up with savings to maintain your spend rate.
That may not be enough to maintain your lifestyle, there's not enough information to say. Though note you won't be saving into a pension and any costs of getting to and from work are gone. Presumably your AVCs work with the LGPS so you can take the entire AVC tax-free (many civil service schemes seem set up like this) it would not be unreasonable to borrow against this to smooth your income (unless you have some other purpose for this) since you are mortgage free.
Sadly one of the best ways to borrow against a pension commencement lump sum is to keep your mortgage longer and discharge the capital with the PCLS, although it probably isn't worth taking one out on your house due to all the one-off costs
As a general rule, early retirees with DB lump sums coming - don't pay your mortgages down early - there speaks the voice of bitter experience. 0 -
The rough plan I had was that I believe I would be entitled to take flexible retirement at 60 under the LGPS (given my service), which would enable me to carry on working a couple of days a week if I wanted to.
OK, still trying to get this clear in my poor old head. Are you saying that:
1) the 25% tax free withdrawal from a SIPP is 25% tax free PER YEAR?
No. Absolutely not. It is 25% of any money you put into the pension. You can either draw it as a lump sum, or using something called UFPLS draw it out over time and 25% of every year's withdrawal is effectively tax-free. For the sums you are looking at that amounts to almost the same thing2) the personal tax allowance re the SIPP is looked at separately from the personal allowance being used against my earnings? Can't get two lots of personal allowances surely so I'm guessing this must be wrong
No - one personal allowance amount per year. If you have retired you aren't earning from work. Part-time working doesn't play well to getting as much out from a SIPP quickly, unless you have longer to do it. e.g earn 6k and you can draw 6k form your SIPP before hitting the personal allowance if it were 12k, if you do it UFPLS you can draw another 1.5k form the SIPP tax-free per year (but you get no pension commencement lump sum)3) I could just recycle money in and out of a SIPP to take advantage of all this? I thought there were various complicated rules around recycling?
take a look at this flowchart. Yes there are such rules, in practice they probably won't apply to you. They're designed to catch out bigger fish.0
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