The Lemon Fool

Hello

Hoping for some advice on whether I should continue to contribute to my SIPP or should stop and direct funds to ISAs etc instead.

Current situation:

39 years old
Earliest can take SIPP: aged 58 (i.e. 19 years time, 2040)
Current SIPP value: £360k

On the assumption that the SIPP benefits from an average compound growth of 7% per annum this will give it a value of approx £1,300,000 in 19 years' time.

Given the recent announcement on the LTA being frozen until 2026 I estimate that the LTA by 2040 will be £1,516,000 (assuming 2.5% increase compounded for 14 years).

If these assumptions hold it would give me headroom of c.£200k before breaching the LTA on the basis of my current SIPP pot. This would imply I could continue to contribute roughly another £50-60k to my SIPP in the near term to make use of that headroom.

I'd like to 'max out' my LTA given tax efficiencies, inheritance status etc but am obviously wary of going over the LTA and the risk of further political meddling with pensions.

So would be very grateful for input on the validity of the assumptions and views on whether you would continue contributing to the SIPP or would put the funds elsewhere. Thanks.

Present marginal tax rate is 45%.

Yes, expect to be a 20% tax payer when retire.

Thanks

A lot depends on how your employment will change over 20 years. Are you likely to move into a higher tax bracket, become a contractor, change employer who might have different contribution rules. What else would you do with your contributions, and wouldn't it be a shame to forgo your employer's ones.

As the LTA changes are only about 5 years old, who knows that what changes might come in over 2 decades.

I think you are so far off the LTA you should continue contributing

I think you should do both (pay something into your pension and also pay into an ISA). Who knows what will happen. At present you get a full deduction for pension payments at your highest rate, that may not last. Similarly the ISA limit is used or lost and as a 45% tax payer it is worth sheltering as much as you can. The ISA allowance may also not go on for ever.

I remember in 2006 when the Lifetime allowance was introduced, I decided to take enhanced protection even though my pension fund was less than half the LTA and most of it was in Equitable (ugh). Enhanced Protection meant you could never pay anything more into your pension but the LTA would never apply. That was a very fortunate decision as my fund has grown to well beyond the LTA, way beyond expectations.

As pensions are ‘a good thing’ they are probably politically fairly safe (though I’m not sure the IHT bonus will go on indefinitely) but there seems continuing pressure to limit relief. Similarly building up an ISA becomes progressively more advantageous as it grows, particularly to a higher rate taxpayer.

There is no correct answer here; its a gamble on future tax rates and tax reliefs. Who knows if the LTA will ever increase again? George Osborne gave SIPPs more favourable IHT treatment - but the next chancellor could easily sweep that away. Assuming that the LTA increases in future is certainly counting tax reliefs before they fall due, but perhaps is the most reasonable assumption to make in the absence of any better pointers.

If you are paying 45% tax then you need to contribute about 27-30k (net) in order to fully utilise your projected LTA. Given that 45% tax relief on pensions probably has a very short shelf life, I would say it is worth the gamble to grab the tax relief using contributions over the next two or three years whilst 45% relief looks available and then sit and hope that the LTA and investment growth pan out how you expect. This looks like a low regrets move, even if we don't know what will happen to the LTA in future. So yes, it seems sensible to fill up your SIPP and then turn attention elsewhere.

You don't say what your position is re other saving vehicles such as ISAs. I am 10 years away from accessing my SIPP and wish I had put more in ISAs and less in SIPPs, but you are much younger than me so there's plenty of time to build up a diverse range of savings pots for your retirement savings.

LISA for £4k (leaves only £16k for ISA though) of it perhaps. only 20% tax relief on the way in but also tax free on the way out at 60. and if that 60 stays the same it may well be the same age folks can get at pension anyway by then. we're already up to 57.

ReallyVeryFoolish wrote:

xgt82 wrote:Present marginal tax rate is 45%.

Yes, expect to be a 20% tax payer when retire.

Thanks

Then all things considered, in my opinion, the benefit of pension investing for you is bordering on too good to be true. It's unlikely to remain so attractive long term. I would carry on accruing pension whilst the tax man magically turns 55p into 100p for you.

RVF

If a 25% LTA charge is paid, that becomes 75p. Drawing that at basic rate it becomes 60p, so 5p up or ~9% more than paid in. Drawing at higher rate 40%, the 75p becomes 45p, so there would be a loss involved in that case. Drawing at 40% would be within the control of the OP though. An alternative would be to leave any excess pension to beneficiaries who might then be able to draw at 20%, or lower.

My instinct would be to keep paying in - make hay while the sun shines.

ps, agree with the LISA suggestion.

Thanks all. Some really good and considered advice here.

I agree that foregoing 45% tax relief seems a hard choice to make and so will probably continue for the next couple of years at least and take a punt on the LTA and then switch focus to ISAs/VCTs. Also like the LISA idea as a partial replacement for SIPP contributions (and had actually forgotten they exist but 39 is not a bad age to remember!).

Another tip
If you have any bonds in your portfolio-put them in the SIPP as they grow slower helping to cope with LTA limits
xxd09

My view

Your Sipp is already on target to reach LTA.

I at 60 have 900k plus Sipp and not drawing down and unless unlucky it is going to breach LTA.


I would concentrate on other investments before adding to your SIPP.

xgt82 wrote:Thanks all. Some really good and considered advice here.

I agree that foregoing 45% tax relief seems a hard choice to make and so will probably continue for the next couple of years at least and take a punt on the LTA and then switch focus to ISAs/VCTs. Also like the LISA idea as a partial replacement for SIPP contributions (and had actually forgotten they exist but 39 is not a bad age to remember!).

Do you have children?

You can put £9K pa into a JISA. You can also open up SIPPS for them too. Not perfect but more perfect than breaching your LTA?

AiY