SIPP's for Old Guys

[bruncher]

Is there a general rule about the age at which it would be a bit too late to open a SIPP?

[pje16]

You can make payments into your pension after you have reached 75, but you won’t get tax relief on your contributions.
source:
https://retiready.co.uk/retirement-inco ... -m-75.html
also see
https://techzone.abrdn.com/public/pensi ... s-pitfalls
apologies if you are not yet that age

[bruncher]

The issue is more whether I would be recycling money and paying tax again. If I have cash in my bank, then I invest it in a SIPP I'll have to pay tax on the same money when I take it out. Is it worth the admin?

[pje16]

Your current tax position (lower or higher rate or whatever) need to be taken into account

[ursaminortaur]

If you are currently between 55* and 75 then one advantage of investing in a SIPP over doing so at a lower age is that the money is no longer trapped- If necessary you can withdraw it. And investing in the SIPP means that you get tax relief on your full contribution going in but 25% of the pot can be taken out tax free. Even though it involves a bit of effort some see that as a good enough reason to invest £3600 gross each year even when they are not working so as to get some "free cash" from the government. There are of course downsides to withdrawing more than the tax free lump sum from a SIPP if you are still working and contributing to a DC works pension as it reduces your annual allowance for contributions to such a pension to the MPAA (currently £4000 per year) so that needs to be taken into account.


* The minimum age is rising to 57 in 2028.

[Urbandreamer]

Tax position and intent make a huge difference.

Mr A may invest in a SIPP as a means of moving money out of his estate, reducing IHT.
Mr B may have little to no taxable income, but plenty of capital. They would could see the full tax rebate.
Mr C may earn enough that their effective tax rate is huge. Pension contributions can reduce that tax rate.

While each of the three see an advantage others would increase their tax bill, because they are subject to the life time allowance.

I doubt that anyone here can guess the OP's tax position or intent, given how little we know.

[Lootman]

Assuming someone is fairly well off then I don't see that subscribing such a modest sum each year is going to make a material difference to one's income later in life.

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

And if you are not fully utilising your annual CGT-free allowance every year then why not just instead put the money in a taxable account and pay very little tax on the profits anyway?

[pje16]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite
Prefer the juicy tax relief on my SIPP, a much better return than any ISA

[Lootman]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA

That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.

As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".

[ursaminortaur]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA

That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.

As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".

Although your spouse or civil partner can inherit your ISA that is as far as it can be inherited. Hence once you are both dead the ISA(s) will be subject to IHT when passed to other beneficiaries whereas anything in a SIPP will be passed along in accordance with your "expression of wishes" and bypass IHT (and also bypass income tax on the beneficiaries subsequent withdrawals if you died before age 75). Thus if you want to pass it onto beneficiaries other than your spouse then it may make sense to put it into a SIPP rather than an ISA if you are otherwise close to the IHT limit.

[Lootman]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA

That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.

As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".

Although your spouse or civil partner can inherit your ISA that is as far as it can be inherited. Hence once you are both dead the ISA(s) will be subject to IHT when passed to other beneficiaries whereas anything in a SIPP will be passed along in accordance with your "expression of wishes" and bypass IHT (and also bypass income tax on the beneficiaries subsequent withdrawals if you died before age 75). Thus if you want to pass it onto beneficiaries other than your spouse then it may make sense to put it into a SIPP rather than an ISA if you are otherwise close to the IHT limit.

Yes, there are pros and cons to both. I was merely demonstrating that pje's statement that SIPPs give "a much better return than any ISA" is an exaggeration. The correct answer to the question "which is best?" is "it depends".

For my circumstances, ISAs have always been a better decision, but I can see how for others it might not be.

[pje16]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA

That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.

As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".

That is a very impressive ISA - well done
What I meant was on the way into a SIPP
as a higher rate tax payer I pay in 60, UKGOV effectively adds 40
40/60 is a 66.67% return even if the investment doesn't grow

[Urbandreamer]

What I meant was on the way into a SIPP
as a higher rate tax payer I pay in 60, UKGOV effectively adds 40
40/60 is a 66.67% return even if the investment doesn't grow

As you already said, tax situation matters. I am not a higher rate tax payer, but can spend at least 5 years as a zero rate tax payer when I retire.
While my return* is not as great as yours, it's still significant.

I think that we should all re-read the original post.

NO there is no age when personal tax circumstances are not an issue. It's NOT as simple as age!

*Actually my situation is not that simple. I would be a higher rate tax payer if I didn't pay some of my pension through salary sacrifice. I benefit from the return of both employee and employer national insurance contributions. But what has that got to do with age, as asked in the OP?

[pje16]

I think your return is the same
I use, and have done for a number of years, salary sacrifice
and that is the most efficient way of boosting your pension
Agreed re the OP, but as with a lot of posts here they do diverge
I was in fact the first resposne with what I thought might be helpful links

[ursaminortaur]

The issue is more whether I would be recycling money and paying tax again. If I have cash in my bank, then I invest it in a SIPP I'll have to pay tax on the same money when I take it out. Is it worth the admin?

You will get 20% tax relief added to the amount you contribute into the pension (and if a higher rate tax payer can reclaim the difference between any higher rate tax paid on your contribution and that 20%). You will have to pay tax when you take it out but may well be able to arrange things so that you are paying a lower tax rate when drawing the money out. Even in the situation where you pay tax on withdrawals at the same rate you did when contributing to the SIPP you will still be better off since 25% can be withdrawn tax free.

[bruncher]

Thanks for all the input, I like the fact that everything taken out of the ISA is tax free, but I'll kick off a SIPP as well. Do all the SIPP managers add the 20% tax rebate for all contributions automatically, or do I have to contact HMRC?

[ursaminortaur]

Thanks for all the input, I like the fact that everything taken out of the ISA is tax free, but I'll kick off a SIPP as well. Do all the SIPP managers add the 20% tax rebate for all contributions automatically, or do I have to contact HMRC?

It is added automatically but can take a month or two to appear in your pension pot since the payment is from HMRC. If you are a higher rate tax payer though you will need to claim the extra back via your self assessment tax return. Note. Only the 20% goes into your SIPP the higher rate tax rebate is paid to you (or used to reduce your tax bill).

[paulnumbers]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA

That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.

As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".

It's quite mechanical isn't it? as a higher rate tax payer utilising salary sacrifice and getting the employer NI contributions too, if you gave up £600k of earnings, the SIPP would have been topped upto £1.177m. If you're a lower rate tax payer in retirement, you'd pay 15% tax, so that would be reduced to £1,000,655. after tax. So yes, quite juicy!

If even you were a higher rate taxpayer in retirement for all of the income from the SIPP, you'd get £824,068 out

[Lootman]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA

That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.

As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".

It's quite mechanical isn't it? as a higher rate tax payer utilising salary sacrifice and getting the employer NI contributions too, if you gave up £600k of earnings, the SIPP would have been topped up to £1.177m. If you're a lower rate tax payer in retirement, you'd pay 15% tax, so that would be reduced to £1,000,655. after tax. So yes, quite juicy!

If even you were a higher rate taxpayer in retirement for all of the income from the SIPP, you'd get £824,068 out

Yes but you are not comparing like with like. A true comparison would, for convenience sake, show the difference between putting 20K a year into an ISA and 20K (before any tax adjustment) into a SIPP. Assume the same RoR on each, and of course the same number of years. Then look at the drawdown and the effect of taxes on that (in the case of a SIPP).

I am certainly not going to assert that an ISA wins in all scenarios. But I do challenge the idea that a SIPP wins in all scenarios. Either could be "juicier" depending on the individual situation.

But then I would add another factor, and that is risk. The risk that future tax rates will be higher, which will favour an ISA. And the fact that the pension money is a hostage to fortune, in that governments love to meddle with the captive money locked into pensions, whereas an ISA can be liquidated at any time tax-free.

[ursaminortaur]

I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.

I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA

That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.

As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".

It's quite mechanical isn't it? as a higher rate tax payer utilising salary sacrifice and getting the employer NI contributions too, if you gave up £600k of earnings, the SIPP would have been topped up to £1.177m. If you're a lower rate tax payer in retirement, you'd pay 15% tax, so that would be reduced to £1,000,655. after tax. So yes, quite juicy!

If even you were a higher rate taxpayer in retirement for all of the income from the SIPP, you'd get £824,068 out

Yes but you are not comparing like with like. A true comparison would, for convenience sake, show the difference between putting 20K a year into an ISA and 20K (before any tax adjustment) into a SIPP. Assume the same RoR on each, and of course the same number of years. Then look at the drawdown and the effect of taxes on that (in the case of a SIPP).

The SIPP will win unless you are paying more tax when you withdraw the money than when you invest it because 25% of the withdrawal is tax free but has been boosted by tax relief. The increase purely from that effect for a 20% contribution and withdrawal rate will be (0.25 * 100/80 + 0.75 - 1) = 0.0625 ie 6.25%. Thus if you were withdrawing at the same 20% tax rate as you contributed you would be 6.25% better off with a SIPP rather than an ISA if you achieved the same growth rate in both.