DC Company Pension vs SIPP

[the0ni0nking]

I appreciate that elsewhere I have mentioned the likelihood that I will move to Spain at some point after retirement with retirement hopefully a real possibility within 3 years.

However, it's possible that with the flexibility that comes without working anymore I would be able to split my time more effectively and end up maintaining UK tax residency. (I know France recently tried to introduce a new visa for 2nd home owners which was thrown out by the Constitutional Court [more around process then the detail of the legislation] so it'll be interesting to see how that progresses there and also in Spain - I suspect Spain wouldn't want France to out-do them on what is effectively a 2nd home owner super-visa for Brits or those outside of the EU).

I currently contribute 25% of my salary to my company DC pension. The company contribution maxes out at 9% which is achieved when the personal contribution is 5%. It's done through salary sacrifice so there are the NI/tax savings from my perspective.

What I'm wondering and would welcome any thoughts on:

1. Given my contributions above 5% are not matched by the company (my 5% results in them contributing 9% and any increases on my part don't result in the company increasing their 9%), would people consider it wise to simply max my company pension contributions at 5%?

2. If I were to do that, I'd likely set-up a SIPP to keep my total pension contributions flat - so all that would change is part of my contributions would be to company pension and part would be to SIPP? My brief review of the charges from my company pension (Aviva) and those from a SIPP would suggest a SIPP is likely more favourable if I chose appropriately.

3. Given the company pension is DC, would people consider it wise to possible transfer the value of that scheme on a periodic basis into a SIPP? Are there any issues to be aware of in doing this?

4. Upon retirement, I'd likely expect to have surplus income and also be above the personal allowance so could continue to contribute with the basic rate tax benefit as opposed to the higher rate benefit I get now.

Any thoughts welcome.

[genou]

You don't mention your investment intentions for your pension. If you are/intend to sit in ETF global trackers ( as the simplest case ), then the only question is what costs are involved in leaving your contributions in the company scheme compared to a SIPP. Which would be ( SIPP charges + tracker costs there ) vs ( DC charges [ in practice, met by the employer?] + tracker costs there ), so straight arithmetic. As long as you don't fall below employer matching, it otherwise makes no odds where you invest.

As to moving funds from DC to SIPP, there may be terms in the company scheme that don't allow partial transfers. You'd have to ask, but the up/downside is still purely on costs.

If you are in Aviva funds, they may well be in-house only versions of the fund, so you'd have to look carefully at whether it is possible to move the value in specie, or if you'd have to go in to cash to move it to a SIPP. On any funds, you also need to pick your SIPP provider carefully - many have eyewatering ad valorem charges on OIECs which are unlikely to be there in the company scheme.

If you want access to investments not offered by Aviva, that's a different question.

On Spain, have you looked at a Non Lucrative visa? That would require you to be tax resident in Spain, but gets you unlimited Schengen access.

I'm sceptical that it will be possible for any member state to be more generous to non-residents in terms of Schengen access ( a la the aborted French legislation ), so the choice is tax residency or 90-in-180.

[tjh290633]

In my view the amount that you put into your SIPP is dictated by your marginal tax rate. Once you have kept yourself out of the higher rate bands, it is debatable whether you are better investing in a share ISA than the SIPP.

TJH

[kempiejon]

In my view the amount that you put into your SIPP is dictated by your marginal tax rate. Once you have kept yourself out of the higher rate bands, it is debatable whether you are better investing in a share ISA than the SIPP.

TJH

There's still a small tax advantage on the 25% PCLS. ISAs you can take when you like though. SIPPS outwith the estate suit heirs on death. Or bankruptcy.

[Lootman]

In my view the amount that you put into your SIPP is dictated by your marginal tax rate. Once you have kept yourself out of the higher rate bands, it is debatable whether you are better investing in a share ISA than the SIPP.

There's still a small tax advantage on the 25% PCLS. ISAs you can take when you like though. SIPPS outwith the estate suit heirs on death. Or bankruptcy.

A few other down sides of SIPPs versus ISAs:

1) Tax: SIPP income is taxed at your highest marginal income tax rate. ISA income is untaxed. And tax rates are heading higher.
2) Simplicity: SIPP income probably means having a tax code and tax withholding. ISA income does not even have to be declared.
3) Flexibility: An ISA can be liquidated in 2 days and if needed sent outside the UK. A SIPP will always have a UK tax liability.
4) Risk: That 25% PCLS deal could go away. In fact I never saw the public policy value of it. And more generally pension rules are tinkered with far more than ISA rules.
5) Cost: ISA fees are typically lower than SIPP fees. My ISA effectively has no fees.

[TallInvestor]

I was in a similar position a couple of years (apart from the Spain bit). I discovered that I could do a partial transfer from my company DC scheme (which was with Standard Life) to my SIPP and continue to get the benefits of salary sacrifice on new payments into the SL DC scheme. This worked out very well.

I transferred about 90% to II, which also got me a nice chunk of cashback at the time. I hit 55 shortly after and took tax-free cash to maximise two year's ISAs, pay off most of the mortgage and buy some Premium bonds (which will end up in ISAs). This was partly due to the risk at the time that changes in the budget could severely limit the tax-free cash available in future.

My tax rate for the sacrifice would have been 40% and I do not intend to pay more than basic rate in retirement. My company also added the employers NI to the pot, which not all companies do.

[Urbandreamer]

1. Given my contributions above 5% are not matched by the company (my 5% results in them contributing 9% and any increases on my part don't result in the company increasing their 9%), would people consider it wise to simply max my company pension contributions at 5%?

2. If I were to do that, I'd likely set-up a SIPP to keep my total pension contributions flat - so all that would change is part of my contributions would be to company pension and part would be to SIPP? My brief review of the charges from my company pension (Aviva) and those from a SIPP would suggest a SIPP is likely more favourable if I chose appropriately.

This is pretty much what I did.

HOWEVER, it isn't the best financial option.

In simple terms the salary sacrifice aspect is worth so much that you need a very good reason to not take full advantage of your company scheme.

Why did I sacrifice that financial advantage? Quite simply I enjoyed managing my SIPP rather than using index trackers.

[mike]

If considering ISAs, don't overlook the fact that their tax free status is not recognised outside the UK. If you are retiring to Spain full-time, then income and gains would come under the Spanish tax system. Considering you have paid UK tax on contributions, then there would be an effective double taxation, whereas pension contributions were from untaxed income, so taxed just the once on the income.

[Lootman]

If considering ISAs, don't overlook the fact that their tax free status is not recognised outside the UK. If you are retiring to Spain full-time, then income and gains would come under the Spanish tax system.

I do not know anything about Spain in particular but I am not sure that a UK ISA would be taxable everywhere else.

For instance some nations may only tax you on income sourced in that country, in much the same way as the UK currently gives a favourable tax treatment to non-doms.

Some nations may give you a few years of residency before taxing your worldwide income. Portugal used to give you 10 years although I think that may have changed.

Some nations may view an ISA as being like a pension plan and only tax withdrawals from it.

And so on. Moreover would not SIPP or DC payouts by subject to foreign tax? Especially the 25% tax-free payout?

[Urbandreamer]

If considering ISAs, don't overlook the fact that their tax free status is not recognised outside the UK. If you are retiring to Spain full-time, then income and gains would come under the Spanish tax system.

I do not know anything about Spain in particular but I am not sure that a UK ISA would be taxable everywhere else.

For instance some nations may only tax you on income sourced in that country, in much the same way as the UK currently gives a favourable tax treatment to non-doms.

Some nations may give you a few years of residency before taxing your worldwide income. Portugal used to give you 10 years although I think that may have changed.

Some nations may view an ISA as being like a pension plan and only tax withdrawals from it.

And so on. Moreover would not SIPP or DC payouts by subject to foreign tax? Especially the 25% tax-free payout?

Your post caused me to do a quick web search, which we might have assumed that others might do as well.
It seems that Spain has a double taxation treaty that specifically applies to pensions.
https://www.google.com/search?q=spain+d ... s-wiz-serp

[the0ni0nking]

Many thanks for the swift replies - plenty of food for thought.

I'll be honest and say my retirement planning has never really considered the tax situation at the point in time that I will likely take the benefits - that's been for a number of reasons:

(i) mainly because I've genuinely not bothered to think that far ahead

(ii) I'd mainly expect my UK property portfolio would provide my retirement income - probably around £40k/year (owned directly rather than Ltd).

(iii) I'd have a significant gap between my retirement date and when either my work pensions or state pension would kick in - prob min 10-15 years.

(iv) Who knows what tax regime may be in place in the UK at the point in time of looking to crystallise any pension/SIPP - and indeed the same in respect of Spain were I to end up tax resident there.

I appreciate the ISA/SIPP debate - from my reading, ISAs are not recognised by Spain so gains/income generated within there would be subject to Spanish tax if I were to be resident which is why I've not really got anything in an ISA - what's the point in sheltering it as if when I move to Spain the income (and capital gains) it generates is not sheltered.

I've read through my pensions documentation and there is no reference to whether partial out are allowed - but actually, working on the assumption I've got <3 years left before planned retirement that's not a big thing. I could simply wait until I cease employment and then move it if I wanted to get cheaper charges - as I'm not hugely bothered about managing my own investments (I'd just invest them into some form of [global based] tracker and leave them be.

I think my main goal should be to try and up the contributions to my pension to minimise the tax take the government gets each year from me.

This is my sort of fag packet annual calc with rounded numbers to keep things simple:

Employment Income     80k
Rental Profit         30k
Total Income         110k (all taxable)

Pension Contributions 25k 

Net Income for SA     85k

What I think I really need to do is get that net income down from 85k to 50k to drop out of the higher rate tax bracket - which if via contributions to a SIPP or company pension would get me the most bang for each £ invested. The simplest route while employed would be presumably to increase the 25% contributions (as there are NI savings as well as income tax) but if that weren't feasible then by lump sums from outside the payroll deduction.

[bots33]

The recent increase in annual personal pension contributions to £60k matches nicely with your circumstances. The main impact is that you will receive £20k less in cash per year (£58k v £38k) - may not be an issue if you do not lead a lavish lifestyle but it would be helpful to have a "rainy day" pot in case of emergencies requiring a large cash injection.
You may want to check with your employer if they have any cap on additional voluntary contributions - you're in no danger from breaching living / minimum wage requirements, but some companies have their own rules.
I'd have a look at the property board here on costs / benefits of incorporation - the government has, and will likely continue to target, BTL investors. And consider how you'll manage your portfolio from Spain. Identify any pinch points or problems that you can resolve in the 3 years you're still in the UK.

Good luck