SIPPs - better than ISAs?

[zico]

I know the basics of SIPP, which I understand as giving you tax relief (for your personal rate) so to get £1,000 invested, a 40% taxpayer only needs to put £600 into their SIPP, while a standard-rate taxpayer needs to put £800 into their SIPP.

My question is about how much I benefit. I have retired, have a works pension, and I'm arranging my other income streams so as to stay just below the 40% taxpayer bracket.

Here's my understanding - grateful if you could please comment and correct where appropriate.

As a 20% taxpayer, I can put in £800, and £1,000 will be invested.
There are no capital gains tax.
When I withdraw the money, 25% is tax-free, and the remaining 75% will be taxed at 20%.
So I'll get £250 + £750X (1-0.2%) = £850.

(For simplicity, I'm excluding inflation and the rise in investment value, as I don't think that changes the underlying principle.)

So, £850/£800 = 6.25% benefit from putting money into a SIPP.

By comparison, if I invest in an ISA, it seems to me I get less benefit than from a SIPP.
I avoid capital gains tax (as in the SIPP)
If I invest £800 in an ISA, than I can withdraw £800 tax-free in the ISA.
However, I'm missing out on the 25% tax-free element of the SIPP, so overall there's more benefit to a SIPP.

There's a limit of £10k contributions to a SIPP, but is this only activated when I start taking money out of a SIPP?
Until then, it seems that even though I'm taking a company pension, I could actually pay an amount into my SIPP equal to my company pension - is that right?

Thanks in advance for any thoughts and suggestions.

( I have already looked on the internet to find clear guidance on SIPP rules if you're already getting a company pension, but I haven't been able to find anything that makes it clear. In particular, on my question of SIPP v ISA, most articles just say, "oh, they're just different, it's up to you").

[Dod101]

But the whole of any withdrawal from an ISA is tax free, not just 25% as with a SIPP. Furthermore the rules keep changing with SIPPs. Your own circumstances will determine the benefit of the tax relief on SIPP contributions of course.

Furthermore, any assets held in a SIPP can usually be passed on to the next generation without any charge to IHT. There are though conditions as to how the funds can be accessed.

In all therefore I do not think we can be black and white about the merits of a SIPP vis an ISA. So much depends on your individual circumstances.

Dod

[Alaric]

There's a limit of £10k contributions to a SIPP, but is this only activated when I start taking money out of a SIPP?

The most basic rule is that SIPP contributions come from income from employment. If you don't have any, and pension or investment income doesn't count, the maximum you can put in per year is £ 2880 to which £ 720 will be added, so £ 3600 in total. There's a modest gain as although you pay tax when the money is taken out, there is the 25% tax free facility. In terms of free money it's a limited benefit and you may have provider charges eating away at it as well.

[Lootman]

But the whole of any withdrawal from an ISA is tax free, not just 25% as with a SIPP. Furthermore the rules keep changing with SIPPs. Your own circumstances will determine the benefit of the tax relief on SIPP contributions of course.

The rules for ISAs could be changed in the future as well. And at least with a SIPP the tax benefit is in the past and locked in. With ISAs much of it is in the future. So I think legislative risk is present for both - it is just that historically ISA changes have been benign.

For me the over-riding factor is the return I get. And the better my portfolio does, the more happy I am that I am in an ISA and not a SIPP. Because there should never be any tax, nor any tax reporting and record-keeping.

I do not have a SIPP.

[Loup321]

Here's my understanding - grateful if you could please comment and correct where appropriate.

As a 20% taxpayer, I can put in £800, and £1,000 will be invested.
There are no capital gains tax.
When I withdraw the money, 25% is tax-free, and the remaining 75% will be taxed at 20%.
So I'll get £250 + £750X (1-0.2%) = £850.

So, £850/£800 = 6.25% benefit from putting money into a SIPP.

By comparison, if I invest in an ISA, it seems to me I get less benefit than from a SIPP.
I avoid capital gains tax (as in the SIPP)
If I invest £800 in an ISA, than I can withdraw £800 tax-free in the ISA.
However, I'm missing out on the 25% tax-free element of the SIPP, so overall there's more benefit to a SIPP.

I think you have summarised it perfectly with this. Alright, the limits on what you can put in are different, and it needs to be earnings for the SIPP, so after retirement being restricted to £2880 per annum is possibly not as flexible as you would like. But for those of us still earning it makes much more sense to use a SIPP for savings for the future (you can't access it until you are 55, possibly later if you're still quite young). I did exactly the same calculation and came to the same conclusion, so started my SIPP about 5 years ago.

[mc2fool]

I know the basics of SIPP, which I understand as giving you tax relief (for your personal rate) so to get £1,000 invested, a 40% taxpayer only needs to put £600 into their SIPP, while a standard-rate taxpayer needs to put £800 into their SIPP.

Actually to get £1,000 invested a 40% taxpayer needs to put £800 into their SIPP, on which the SIPP provider claims the additional £200 from HMRC for them, and then the taxpayer declares the £1000 gross contribution on their next self assessment return and their higher rate threshold is raised by that amount, resulting in them paying £200 less tax than they would have. The end net effect is the same ... eventually.

There's a limit of £10k contributions to a SIPP, but is this only activated when I start taking money out of a SIPP?
Until then, it seems that even though I'm taking a company pension, I could actually pay an amount into my SIPP equal to my company pension - is that right?

No. You can only contribute to a SIPP from earnings. Pensions don't count. If you have no earnings (or earnings of less than £3,600) then you can contribute only up to £2,880pa, on which you'll get the uplift to £3,600, even if you don't pay any tax at all.

[Urbandreamer]

There's a limit of £10k contributions to a SIPP, but is this only activated when I start taking money out of a SIPP?
Until then, it seems that even though I'm taking a company pension, I could actually pay an amount into my SIPP equal to my company pension - is that right?

No. The fact that you are taking a pension means that the MPAA limit is already active. It would also only be relevant if you have paid work (as already said).
https://www.unbiased.co.uk/discover/pen ... wance-mpaa

Basically ignore SIPP's now you are retired.

[mc2fool]

Basically ignore SIPP's now you are retired.

They can still bung in £2,880pa, get it uplifted to £3,600 in the SIPP and, if they are/become a HRT, get an additional 20% relief.

[ursaminortaur]

There's a limit of £10k contributions to a SIPP, but is this only activated when I start taking money out of a SIPP?
Until then, it seems that even though I'm taking a company pension, I could actually pay an amount into my SIPP equal to my company pension - is that right?

No. The fact that you are taking a pension means that the MPAA limit is already active. It would also only be relevant if you have paid work (as already said).
https://www.unbiased.co.uk/discover/pen ... wance-mpaa

If the only company pension he has accessed is a DB pension then the MPAA won't have kicked in as it only applies to money purchase (DC) schemes.
So if he was receiving payments from a DB pension only and also was still in employment then he could open a SIPP (and/or join his employer's occupational pension scheme) and contribute upto the minimum of his earnings and the Annual Allowance of £60,000.

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/money-purchase-annual-allowance-mpaa

Defined Benefit arrangements

If you receive a scheme pension from any defined benefit arrangement this will not trigger the MPAA.

[Gerry557]

Generally with a SIPP the advantages are limited access to funds until age 55 (so you can't spend it) IHT advantages potential. A bigger pot to grow as you get tax relief added at the beginning. Some company added funds potential too. Hopefully you can pay in whilst on a higher tax rate and remove when you become a lower tax payer. Obviously tax rates can change by the time you come to draw out. 25% tax free withdrawal.

One of the disadvantages is not having access to the funds pre retirement. So it's both an advantage and a disadvantage. So if you loose your job and can't pay the mortgage your £8m pension pot won't help.

ISAs grow tax and CGT free. Generally you have instant access to funds but you don't get any top ups. Both have limits on what you can pay in but the SIPP depends on how much you earn. If you are not disciplined you might spend it on things you don't need but might help with the mortgage if you loose your job.

Ideally you would have both, topped up to max.

Some will transfer pension monies into an ISA when they get chance. So it depends on your own circumstances, risk profile, company additions tax in v's tax out. What the rules might be in future. So it can be hard to see which is best. The figures might work for 25% tax but what happens when it's upped to 33% on an election. Although most left wing think tanks always propose taking away any advantage if you have built up any wealth.

[kempiejon]

I think SIPPs are excluded from bankruptcy proceedings, from benefit calculations and some carehome fees.
ISAs included in all the above
Neither have protection in divorce.

[Kantwebefriends]

"If you receive a scheme pension from any defined benefit arrangement this will not trigger the MPAA."

There's a clause missing there, to wit "because us civil servants get defined benefit pensions".

[zico]

I'm taking occasional lump sums from a Voluntary Contribution pension as well as my company pension. However, the Voluntary Contribution pension isn't from the same fund as my SIPP. Does this make a difference?

[Urbandreamer]

I'm taking occasional lump sums from a Voluntary Contribution pension as well as my company pension. However, the Voluntary Contribution pension isn't from the same fund as my SIPP. Does this make a difference?

The distinction is between DB (Defined benefits) and DC (Defined contribution).

DB promises x% of your final salary (or average of final n years).
DC is a pot of money that you build and then spend.

Do those Voluntary contributions promise a given percentage of your final salary? I suspect that it is a DC scheme, as my free standing AVC scheme was (before I folded it into the company DC scheme).

I confess that I assumed that your "company scheme" was a DC scheme as many DB schemes have closed. I have two company pensions. One is DB the other DC.

Ps the reason that I had free standing AVC's was that the company could deny access to the DB scheme until 65, should it chose to do so or if you left. I can access DC schemes now, as I'm over 55. I have chosen not to access them (company or SIPP) until I'm convinced that I won't return to work due to the MPAA effect.

[zico]

My company pension is DB (government pension) and the pension I dip into as and when is a Additional Voluntary Contribution (so DC) scheme, which has nothing to do with my company pension.
But the DC scheme I withdraw from is not the same as the SIPP that I put money into.

I know the rules are there to stop re-cycling money from a pension back into the pension, but I can't see whether the principle still applies if I'm taking pension money from a different scheme in order to fund a SIPP.

[SebsCat]

My company pension is DB (government pension) and the pension I dip into as and when is a Additional Voluntary Contribution (so DC) scheme, which has nothing to do with my company pension.
But the DC scheme I withdraw from is not the same as the SIPP that I put money into.

If you have taken any money from any DC scheme (other than tax-free pension commencement lump sums) then you will be subject to the MPAA rules. But unless you have actual earned income (ie basically via employment) then this is moot and you are restricted to the £2880 net, £3600 gross subscription limit. If you do have earned income then the MPAA rules currently allow you to contribute up to the minimum of £10k gross or the amount earned.

[edited to specify minimum rather than maximum!]

[ursaminortaur]

"If you receive a scheme pension from any defined benefit arrangement this will not trigger the MPAA."

There's a clause missing there, to wit "because us civil servants get defined benefit pensions".

The MPAA also won't be triggered by your using your DC fund to buy an annuity ( which is pretty much what a DB pension in payout provides ). Most of those with annuities will not have been civil servants though.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

The MPAA won’t normally be triggered if:

You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases.

[xxd09]

I think there is room and probably a need for both tax free wrappers in an investors portfolio
(Not many tax free bonuses in today’s savings markets)
I used a SIPP as a worker in accumulation phase to gain from a 40% tax relief-I was a high earner for a period
I was aiming for 20% tax rate on retirement-this has proved to be the case
This policy allowed the SIPP to grow well with a big tax boost every year
I lived off the 25% tax free cash withdrawal for some years at retirement
Meant I was cushioned against a stockmarket drop at retirement -allowed SIPP(and ISA) to continue to grow
Drawback-SIPP withdrawal only available after age 55-I in fact retired at 57
I also used ISA as a savings vehicle for extra available cash which SIPP could not absorb
Did all these same procedures for my wife
Withdrawals in retirement have involved both wrappers -drawing for one or the other or a mixture of both as required
xxd09

[AshleyW]

The big uncertainty is the potential for changes in legislation. It already seems certain that the government wants to scrap the IHT exemption for SIPPs and at some point, the treasury is going to wake up to the loss of revenue due to the generous £20k/year ISA allowance. Hopefully, any change will only affect new contributions.

Assuming current tax rates and legislation is unchanged then for all investors SIPPs beat ISAs. Most retirees will have the same or a lower tax rate than during their working lives and will have had employer contributions and if using salary sacrifice may have had reduced NI contributions. So even without the 25% tax-free withdrawal, they will be better off than had they put post-tax-Ni income into an ISA.

Of course over a 40-year investment horizon, many things are likely to change, and for those with sufficient disposable income, a combination of maxing out the benefit of an employer's contribution to a SIPP and putting as much as possible into ISAs will be the ideal.

[xxd09]

The 40% tax relief on pension contributions for higher earners has been under assault for years-every budget?
Never happened yet
Governments need to be careful
The top few pay most of the income tax -killing the goose that lays the golden eggs seems to be a step too far for Labour as well as Conservatives-so far!
xxd09