Folio Management | ISA - SIPP Ponderings

21st Feb '17 by Joy Woodstock

23 comments 10567 reads

Till now, I have been doing the bulk of my investing within my SIPP account with HL, with just a small amount in Stocks & Shares ISA Account. I am well over 55, so I am pondering the wisdom of taking some of my tax free portion from the SIPP (thus moving the necessary funds into drawdown account to accomplish this), and maxing out my ISA each year with these funds. As all these holdings are tax free - SIPP & ISA - except for withdrawals from the Drawdown eventually, I can't quite get my head around whether there is a benefit to growing the money in an ISA as opposed to just keep growing it in a SIPP, if I have no immediate plans to use any of it for income or retirement money, but will eventually. I am wondering if I am missing something here, and what the best strategy will be. I really appreciate any thoughts any of you may have on this - do you go towards ISA or SIPP as a preference - if you are near or past 55? Your thoughts on this much appreciated.

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pka

21st Feb '17

This subject has been discussed on some other web sites. Some examples are:

http://monevator.com/sipps-vs-isas-best-pension-vehicle/

https://www.sippclub.com/sipp-or-isa/

https://www.share.com/stocks-and-shares-isas-explained/isas-vs-sipps-which-would-you-choose/

I think the consensus of these articles is that SIPPs are now more tax advantageous than ISAs (although that depends on your individual circumstances), but ISAs are more flexible (particularly if you might want to extract a large amount of money in any one year).

However, if your SIPP portfolio is already big enough for its value after modest future growth to possibly exceed one million pounds by the time you're 75 years old, I think you might be better off investing in an ISA than a SIPP, because the tax charge at the age of 75 on SIPP portfolios over one million pounds seems to be punitive.

Joy Woodstock

So helpful pka - the articles you sent a link to are a useful wrap up/summary and yes, there is the one million pounds issue, should I be fortunately enough to get there by 75. Inflation by then may make it seem not so rich though.

You're welcome, Joy.

By the way, if you also have a 'defined benefit' company pension, you should be aware that it might contribute to the one million pounds 'lifetime allowance'. There's more info about that here:

https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

The one million pound lifetime allowance will be indexed to inflation from 2018, according to this web page:

https://www.ftadviser.com/2015/03/18/pensions/personal-pensions/lifetime-allowance-to-be-index-linked-from-ai6aro3antwjxDGzVXZgZL/article.html

One of the problems with contributing to SIPPs is that governments keep on changing the rules, so it's hard to know what future governments will do with their tax advantages. But hopefully any future changes to the rules will not be retrospective on existing SIPPs.

gus 1065

Hi PKA.

I agree that the constant changing of the pension rules has made planning very difficult. When I started taking a more active interest in pensions (like many it was in my mid 40's) the LTA was then set at £1.8m and at this higher level and the then prevailing annuity rates would have provided a pretty comfortable income. At a £1m ceiling with the current low annuity rates the difference between salaried income and pension income is much more of a step change. Shame we don't all have the same gold plated occupational schemes like MPs ....

FWIW, in a recent discussion with an IFA, he speculated that at some point there may be a policy shift to do away with the concept of the LTA as a quid pro quo for reducing or even removing the tax concessions on pension contributions (the obvious problem being how to deal with the treatment of pension assets built up under the old regime). I suspect there will be plenty more tinkering to come.

Best,

Gus.

rhomboid1

Hi Gus

Why would you buy an annuity at current rates, why not derisk and diversify your SIPP to a large number of strongly financed shares that pay a reasonable and growing dividend ? Not risk free but close enough given how wide the differential is against the poor annuity rates currently?

Fwiw I went for exemption as it was likely to be best long term for me.

jonesj

The following is an opinion, not advice:
SIPPS are particularly attractive for any income taxed at a 40% marginal rate of tax now, if your pension would be taxed at a standard rate of tax. ie You get higher rate tax relief on what you put in now, but standard rate when retired.

With ISAs, you get no relief on contributions, but any income from the ISA is tax free. So if you expected to have the same marginal tax rate now as when retired, an ISA is approximately as efficient as a SIPP. However, the ISA has a flexibility advantage, so if there was some disaster like Prime Minister Corbyn, cashing the whole lot in and emigrating is easier.

As far as I can see, taking the 25% tax free lump sum and reinvesting it into an ISA makes sense, although even for (say) a £400,000 SIPP, it would take several years to contribute £100,000 into your ISA. Even there, if you paid in £15240 now, £20,000 in April and used your capital gains allowance for any gains made whilst the remaining £64760 is in non tax sheltered accounts, I suspect it could work out.

andrewdb

Just my 2p.
A lot of it comes down to your personal circumstances and beliefs.

Broad-brush:
in a sipp you pay in pre tax, no tax on inv returns and pay 75% of your marginal rate on payments (assuming you take no TFCS)
in an isa you pay in post tax, no tax on inv returns and, pay 0% of your marginal rate on payments

Some of the judgement comes down to
Is the tax rate you are paying now higher than you think you will be paying in retirement - or less?

There are other issues
- different rules on IHT - at this point you really need proper advice
- once you start taking a pension, I think the max cont to a pension drops 40K to 10K to stop recycling
- cheaper to run an ISA

My dad takes money out of his pension that he got 40% tax relief on, makes sure he does not pay more than basic rate, places the spare in an isa, gets tax free income from that.
Makes him happy

slopsjon

The following is what I do, not advice.

I'm 55 and have been maxing my ISA's out but wasn't contributing to my SIPP. I also do peer 2 peer lending which produces untaxed interest. I'm now in the 40% tax bracket so I am contributing to my SIPP enough to get full tax relief on the 40% tax so that I only pay 20% on my earnings.

The thinking behind this is that I expect to be in the 20% tax bracket when I start drawing my pension and most of the contribution I make to the SIPP would have gone on tax @40%.

I won't be taking the 25% lump sum as I already have money available to max my ISA's for a few years yet. If I stopped making contributions to my SIPP and didn't have cash available to put into my ISA's then I would look at taking the lump sum and using that to put into my ISA.

I think the government is more likely to mess around with SIPPS but I wouldn't rule a government coming up with a tax on ISA's.

Flackwell

22nd Feb '17

PKA - the £1m limit is an issue whatever your age - albeit more penal after 75

Jones - ISA's are as you say tax free now but whose to say what will happen in 5 years time.

For example, students used to get free tuition, you could contribute an unlimited amount to your pension pot before it was capped at £1.8m, £1.5m and now £1.0m etc etc.

If governments were to remove exemption from tax, I personally would have thought it would be from ISA's first, in preference to pensions - imagine the headlines otherwise

Hi Rhomboid,

I agree fully with your comment and have no intention of taking on an annuity for the foreseeable future. I was simply trying to make the point that the pension income one used to be able to accumulate before tax kicked in was a lot higher about 10 years ago but has been significantly reined in by the combined impact of the much lower LTA and the lower annuity return from any given pot. Constant tinkering by the politicians, especially when investment returns are such a significant variable, make forward planning a bit of a lottery.

Best,

Gus.

TheWatchmaker

Very much depends on your personal circumstances, plans and timescales.
ISA has the flexibility to withdraw whenever and as much as you wish.
SIPP has lock in until 55+ and taxed on withdrawals after 25% tax free lump sum. The big benefit of SIPP is on tax relief when paying in if in 40%/45% income tax brackets. Assuming that you are in lower tax bracket at time of withdrawals then there is a significant gain.

I am very nearly 52 and expecting to retire at 55. It appears to currently be advantageous for me to load up my SIPP. I am still attempting to build and grow a pot of money. Once I retire then it will be more a case of protecting the pot. Growth will become less important (but not undesirable).
Up until last year I was loading my ISA which gave me flexibility if I retire before 55 and need some cash boost.
The %return I expect to get from the SIPP (in managed funds) in the next 3 years (when tax relief is factored in) out-strips my likely %return in an ISA (individual shares). If I don't take SIPP money at 55 then the differential dwindles as the tax relief gain gets thinned out each year. In which case continuing to load my ISA may have been better. You have to look at your likely scenarios and make your judgement.

I am also wary that pension rules are a potential target for rule changes which may mess up how and when I can utilise my SIPP money.
My thinking is that it is useful to have several pots of money in different schemes rather than all my eggs in one basket. This should lessen the impact of any rule changes that might happen to spoil my plans.

24th Feb '17

Such helpful input - thanks so much all you generous folk. I think the fact that we dont know how tax rules will change in future makes diversity into different wrappers the best choice for me. Often comes down to diversifying doesnt it, rather than consulting the crystal ball. Mine can often be faulty!

Flackwell.
Who knows what will happen to ISA or Pension tax perks in 5 years time ?

What I do know is if things get really bad, under current rules you can cash in your ISA and emigrate with the money. Meanwhile, I read somewhere that the number of QROPs which you can move your pension to has been cut drastically.

The government already has a £1million cap on pensions, which effectively caps the tax payer on a lower pension than MPs may build up in just 20 years. Hardly fair.
Whilst I'm not affected by that yet, if inflation gets out of control and the government doesn't move the limit, then even people with very poor pensions could be caught by it.

Whilst we're on the subject, I continually hear talk of tax relief at 40% being abolished. MPs and other public sector people get their final salary pension contributions effectively made tax free. But abolishing 40% tax relief would mean I have to firstly pay tax for their LARGE pensions & make a contribution to my SMALL pension out of post tax income.

Sort of robbing the poor to pay the rich. Very very unfair, yet the media never raise that point when raising the topic. How do we start a campaign ?

Don't honestly know - as most people imo don't give a monkey's - but I am in full agreement with the points you make

Cuthbert C

Watchmaker

you said ".. The %return I expect to get from the SIPP (in managed funds) in the next 3 years (when tax relief is factored in) out-strips my likely %return in an ISA (individual shares)…."

With respect your statement is quite misleading.

The investment return you achieve on a two portfolios - one held within a SIPP wrapper and the second in an ISA wrapper has got absolutely nothing to do with the wrapper and everything to do with the investments you choose to invest in. The original question was "which is best a SIPP or an ISA?". The answer is all to do with tax treatment, taxable income at different stages of life, inheritance tax, transferability of assets at death etc etc etc. It Has nothing to do with the use of managed funds vs individual shares - you can put individual stocks in either your SIPP or your ISA, likewise managed funds.

Jonesjeff, you wrote:
"The government already has a £1million cap on pensions, which effectively caps the tax payer on a lower pension than MPs may build up in just 20 years. Hardly fair.
Whilst I'm not affected by that yet, if inflation gets out of control and the government doesn't move the limit, then even people with very poor pensions could be caught by it."

With respect, that's not correct, because the one million pound lifetime allowance will be indexed to inflation from 2018, according to this web page:

https://www.ftadviser.com/2015/03/18/pensions/personal-pensions/lifetime-allowance-to-be-index-linked-from-ai6aro3antwjxDGzVXZgZL/article.html

Hi Tournesol,
Guess it depends on how you interpret what I wrote.

I agree with your comment:
'It Has nothing to do with the use of managed funds vs individual shares - you can put individual stocks in either your SIPP or your ISA, likewise managed funds'

I wasn't making a statement about what you should hold in either SIPP or ISA.

I was answering the question 'do you go towards ISA or SIPP as a preference' and tried to illustrate how I utilise them.

I was merely stating how I use my SIPP and my ISA. I only have funds in my SIPP and only have shares in my ISA. I would expect, and on average achieve, a better return on individual shares than from investments in funds. However, with the tax relief factored in for a SIPP, I expect to achieve a better overall gain on the SIPP (even though it is in funds and not individual share) over the several years.

Regards
Geoff

The government is constantly fiddling around with pensions legislation. The current government might INTEND to inflation index the max pension limit, but all it needs is a change of government, a change of chancellor or just a need to raise money and that intention is scrapped. No one can say with any certainty whether the limit will be indexed with inflation for the next 10 years or not.

As for how to run these, well I treat my ISA, SIPP and standard share trading accounts as one portfolio.
The only & rather obvious exception is that I prefer to configure it so that I use my capital gains tax allowance for the non-tax sheltered account, rather than stuff that with dividend payers.

Brilliant Leader

25th Feb '17

For non ISA/SIPP holdings there is a £5k dividend allowance, maybe worth bearing in mind alongside the CGT allowance.

ISA - SIPP ponderings

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Joy Woodstock

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