ISA or SIPP

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7th Nov '21 by gmtrader

29 comments 723 reads

Which do you add funds too?

The SIPP will have 20% added to any funds but becomes taxable when you withdraw. Imo this is deceiving as for every £100 invested becomes £125 but when taxed you are having £31.25 as tax. Albeit, your first 25% of the account withdrawn is not taxed and also you do have the yearly tax allowance.
On the other hand, there is no 25% added to an ISA but the whole ISA account is un taxable.
So with the idea of growing your account, the ISA imo is the winner. What are other investor’s thoughts on this?

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About the Author

Gmtrader

Premium Member

29 comments

Monty Carlo

8th Nov '21

If you are under 40 then don't forget the Lifetime ISA which is a bit of a hybrid beast that can be very useful indeed, depending on your personal circumstances.

Rusty2

8th Nov '21

I see Aberdeen are in talks with ii, a possible take over.

Rusty2

8th Nov '21

I don't think it is as clear cut as that. If the Govt. give you 20% extra and it grows then you are better off? You can also take 25% tax free and if I understand correctly, pay no tax on withdrawals, if it's under your personal allowance. Even if it over your allowance you won't be paying 25% tax on all of it?

SIPP fees maybe more expensive than ISAs though.

mwjackson

8th Nov '21

Another thing to consider is the timing of your retirement. If you are planning to retire earlier than the retirement age then an ISA might be more suitable.

Rusty2

8th Nov '21

I'm struggling to understand this, could you please explain your reasoning?

john2

8th Nov '21

You can start to draw down from a SIPP from the age of 55.

mwjackson

8th Nov '21

You can't withdraw from your SIPP until you are 55. What if you are in the fortunate financial position to retire earlier than this?

Rusty2

8th Nov '21

But 55 is nowhere near state retirement age.

If you are fortunate enough to retire, before 55, do you need to withdraw from your SIPP?

Logical David

8th Nov '21

The government is now looking at changing the age at which you can access your private pension and possibly SIPP from 55 to 57. No such age limit exists for an ISA.

Rusty2

8th Nov '21

But once you cash in ISAs you loose the tax benefits. I find it better to use other savings or shares outside ISA/SIPPs first and still grow both. It also reduces your tax liability on dividends.

If I retired at 50 or 54, I would not want to be cashing in or selling part of my ISAs, but depends on your circumstances.

mwjackson

8th Nov '21

Not sure I follow. Once inside an ISA all gains and dividends are tax free forever. Drawing down is no different to a SIPP (actually its simpler because there is no limit). The only thing you would be missing out on is your yearly contribution limit but if you have already retired (and no longer contributing) then that's irrelevant anyway?

mwjackson

8th Nov '21

Yes, if your retirement savings are in a SIPP.

Rusty2

8th Nov '21

I’m retired but still increasing my ISA each year, it is a tax haven, no tax on dividends, no capital gains and messing around declaring dividends. Once you take the money out then you can only put back in £20k per year.

Rusty2

8th Nov '21

Seems to be 25% added for basic rate tax payers.

GloucesterBob

8th Nov '21

Actually Bob you are wrong - Duh!

Having done the sums, the SIPP wins, the only downside is you cannot get at it until 55/57, but some may consider that an upside.

Heres my maths

	Starting sum	Grows x10	Grows x20
ISA	10000	100000	200000
SIPP +rebate	12000	120000	240000

SIPP	Tax Free	30000	60000
SIPP	Tax	72000	144000
Total		102000	204000

stehuk

8th Nov '21

If ever you need to rely on means tested state benefits, ISAs count towards capital and severely reduce benefits if over £6000 total capital is held. So first few thousand in an ISA is ok but after that, because pensions don't count as capital for this purpose they can be safer investments for retirement. But if there is a lot invested in pensions, then the lifetime allowance has to be watched out for because anything over the lifetime allowance is heavily taxed.

stehuk

8th Nov '21

Also, because in a pension it's 25% added and (currently) only 20% tax on 75% of the sum withdrawn (after yearly tax allowance), assuming remaining a basic rate tax payer - the pension wins on value anyway. This is ignoring charges which are usually much higher for a SIPP than an ISA. To compare you would really need to do a calculation over the number of years remaining until expected pension age and take account of expected contributions to see if the extra charges outweigh the SIPP advantages. The nearer pension age you are the less the higher SIPP charges make a difference.

But the other thing still to consider is the possibility that you might need not have an income at some point, and would prefer state benefits to using up savings, which of course is more likely in the long run if you are younger.

Rusty2

9th Nov '21

Actually that is wrong, the govt top up by 25%, I have just checked again. If put in £2,880 the govt. will top up to £3,600. ALso on withdrawal the first 12,500 is taxed at 0%, then 20% upto 50,000.

stehuk

9th Nov '21

In your example, 25% of the £3600 is untaxed anyway on withdrawal . So the tax figure is only £576 for a basic rate tax payer. So the £2880 figure grows to £3024. Also, the full state pension is approximately £9500 a year, so assuming this is received then around another £3000 (of your £12,500) a year from other pensions benefits would be untaxed. This bit is likely to change a lot though depending on changes to state pension and annual tax allowance in the future.

Rusty2

9th Nov '21

Another advantage of SIPPs is tax on some overseas dividends, such as Somero Enterprises Inc (LON:SOM), they can reclaim all the tax that has been deducted, ie 30%, in an ISA you would only get 15% back.

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Gmtrader

29 comments

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