The Lemon Fool

I'm sure this has been covered before, but my search skills on TLF are failing me...

What are the considerations that determine which you should draw down first between ISA, non-sheltered and SIPP accounts in retirement?

I think most people suggest drawing down from ISA first so that you can leave the non-ISA investments to grow for a long as possible tax free, but is that always the case (assume you are a lower rate tax payer)?

G

Gilgongo wrote:I think most people suggest drawing down from ISA first so that you can leave the non-ISA investments to grow for a long as possible tax free, but is that always the case (assume you are a lower rate tax payer)?

The other way round surely? Aim to reduce taxable investments to zero to avoid tax on interest, dividends and capital gains. As far as SIPPs are concerned, withdraw at least as much to utilise the personal allowance.

The IHT exemption on funds in a SIPP might be a consideration, if it lasts,

I think possible IHT planning might play a part. Which is more the priority, reduce tax or IHT.

Pensions are excluded from estate. If retirement is early, you can use your personal allowance to reduce tax until state pension kicks in.

A tax free lump sum can be taken and moved into tax free isas etc if IHT is not a primary concern.

I'd say that IHT planning is certainly an issue.

Consider a 75 year old, who's child pays the highest rate of income tax.

IHT is 40%
Inherited pensions from people over 75 suffer the marginal rate of tax, so 45%

Everything is situation dependent.

As it happens I'm not in that situation, so will be taking Income from my ISA first.

Urbandreamer wrote:Everything is situation dependent.

I thought so.

In my own situation, I have all my non-cash investments distributed roughly 50/50 between SIPP and ISA. However, any selling will be topping up dividend income from those (which selling I assume will be tax free, while income from the SIPP might not).

And if a SIPP is not counted as part of the estate on death, I would do well to preserve the assets in that at the expense of the ISA? I would like to pass something on if I can.

G

Another factor is that the ISA can pass on to your spouse on death preserving the tax benefits.

So IMO it makes sense to spend from non sheltered investments (selling if necessary) rather than withdrawing from the ISA, (or the SIPP).

I would not worry too much about income/capital split, just minimise tax payable and keep assets in tax shelters as long as possible.

scrumpyjack wrote:Another factor is that the ISA can pass on to your spouse on death preserving the tax benefits.

So IMO it makes sense to spend from non sheltered investments (selling if necessary) rather than withdrawing from the ISA, (or the SIPP).

I would not worry too much about income/capital split, just minimise tax payable and keep assets in tax shelters as long as possible.

That is surely correct, although I have not always followed my own advice, partly because I do not have a spouse to consider. I nowadays tend to leave the SIPP alone mainly because it can be passed on IHT free (but not entirely tax free for the beneficiary, I expect)

Whether IHT is likely to be an issue depends obviously on the size of the estate but there are a lot of allowances as well as the basic NRB such that unless you have a very large estate the IHT charge can be quite modest. As well as the deceased’s own NRB, if there is a deceased spouse there is likely to be a transferable NRB from there thus doubling the basic NRB. Then there is usually a housing NRB or at least there could be, and maybe even one from a deceased spouse.

As for taking income, the real question, I just take it as it arises whether from an ISA or directly held investments. I have few directly held investments nowadays, having spent the
last 30 years or so transferring assets in to ISAs but obviously run down directly held assets first then use income from the ISA. As I said, I leave the SIPP alone because of course you are charged at your marginal rate of tax for SIPP withdrawals whether these are income or capital.

Mostly I see it all just as common sense.

Dod

As the other contributors have said, it isn't a simple "this is the answer" as there are unknown variables.

How much is ISA'd, SIPP'd, and unsheltered, do you have family, how old are you, are you still working, how much tax are you paying, etc.

However, the basic sensible option with the current tax rules is to spend the unsheltered stuff first, but the first action if you still can is to shelter as much as possible.

So, top up a SIPP, top up the ISAs, and then, when you have retired, either sell down unsheltered assets to live on, and/or take a TFLS from the SIPP. Note that doing that takes money from the SIPP that can grow tax free.

I'm in a similar situation, retired except with quite a lot of unsheltered assets. I'm maxing SIPP and ISA contributions, and have quite a bit of BRKB and low dividend ETFs in the unsheltered account to try an minimise taxable divis and which I can sell down should we need to. MrsF is working part time with a DB pension in payment, and putting a lot into a SIPP and SSAVCs.

Paul

Worth ten minutes of your time:- https://www.youtube.com/watch?v=y-4s1wqwQ7k

He has lots of other short videos you might want to explore.

One thing I am trying to achieve as a secondary policy is to pay no or as little inheritance tax as possible
So as Pension/SIPPs falls outside the inheritance tax regime-want to keep ISA pot below £650000 ie a combination of assets allowance as one partner will die first inheriting the others £325000 allowance
Sensible?
xxd09

I wonder whether there are people wasting ISA capacity on cash who could use it for sheltering equities while using Premium Bonds as a tax-free shelter for cash.

xxd09 wrote:One thing I am trying to achieve as a secondary policy is to pay no or as little inheritance tax as possible
So as Pension/SIPPs falls outside the inheritance tax regime-want to keep ISA pot below £650000 ie a combination of assets allowance as one partner will die first inheriting the others £325000 allowance
Sensible?
xxd09

Err, no. While the IHT allowances could be combined on the final death, you are ignoring any and all other assets than ISA's. My house is not worth £1m, but if yours is worth more there would be IHT on that. I do however have an insurance bond that would need considering. Others have mentioned premium bonds.

Re IHT
Someone needs to work out the value of your estate.
If you are dead they pay the tax.
If not (ie IHT planning) then it needs doing next year and each year until you are.
You may need to change your will depending upon current laws and taxes. I did so when residence relief on IHT was introduced.

Sensible? Well while I believe that I share your opinions I would describe my own as ideological rather than sensible. There is after all an argument about the sense of the degree of effort involved in mitigation. For example it could be cheaper to take out an insurance policy to pay the tax rather than mitigate it. It's an argument that I do not subscribe to.

Kantwebefriends wrote:I wonder whether there are people wasting ISA capacity on cash who could use it for sheltering equities while using Premium Bonds as a tax-free shelter for cash.

Me.

Although I wouldn't call it 'wasting'. It is just coming to the end of a 5 year 3% deal so has beat PBs, and PBs have a maximum, and I don't want all my assets in Equities

Take your point Urbandreamer-luckily living in a small cottage out in the sticks my house is not worth much by urban standards and I have concentrated all my monies into ISAs and SIPPs
Big houses never appealed to me -I would and have spent money on other to me more important things
xxd09

personally I plan to drawdown as follows:

1. unsheltered
2. Pension 25% tax free
3. ISA
4. Pension balance

Adamski wrote:personally I plan to drawdown as follows:

1. unsheltered
2. Pension 25% tax free
3. ISA
4. Pension balance

Depends on your tax position. Agree 1 & 2.
You should be drawing your tax free allowance per year from SIPP. If this gives you more funds that you wish to spend, then you might still contribute to your ISA before drawing it down later

Of practical interest to retirees from. 77 year old -23 years rtd retiree -what I did and am doing
Used up my tax free allowance from SIPP initially
Then drew from ISAs and/or SIPP as required
Someone on this board did remind me to take ALl my tax free allowance from SIPP each year if only using ISA withdrawals in one particular year
I had missed 2 or 3 of these-thanks for that!
Now as mentioned above withdrawals have a secondary consideration to keep inheritance tax down by not allowing ISA portfolio to get too big
That’s it
xxd09

xxd09 wrote:Take your point Urbandreamer-luckily living in a small cottage out in the sticks my house is not worth much by urban standards and I have concentrated all my monies into ISAs and SIPPs
Big houses never appealed to me -I would and have spent money on other to me more important things
xxd09

Selling to buy a <1M property would have that being passed on (couples combined) IHT free to direct family/children. Doesn't need to be big, for instance £1.2M for the smallest house in Chelsea if you prefer 'compact'
https://www.housebeautiful.com/uk/lifes ... -for-sale/


Keep the cottage as a second holiday home, the £1M home being your primary home.

TUK020 wrote:

Adamski wrote:personally I plan to drawdown as follows:

1. unsheltered
2. Pension 25% tax free
3. ISA
4. Pension balance

Depends on your tax position. Agree 1 & 2.
You should be drawing your tax free allowance per year from SIPP. If this gives you more funds that you wish to spend, then you might still contribute to your ISA before drawing it down later

With a falling CGT annual allowance, living solely off unsheltered investments may become increasingly tricky for some if they want to delay paying CGT and keep topping up the ISAs. It is not clear to me the best way to handle this. On one hand the more assets in an ISA the better as this reduces income tax. On the other, there is a CGT cost to be borne in not touching ISAs. Giving away non-pension assets to mitigate IHT is also tricky as giving away unsheltered investments counts as a disposal that is subject to CGT (unless to charity). That can be avoided by giving away money drawn from ISAs. I have not thought it through, but paying CGT may be the least worst option compared to depleting ISAs.