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Transfer into ISA vs Pension?

Practical Issues
Gilgongo
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Transfer into ISA vs Pension?

#271030

Postby Gilgongo » December 14th, 2019, 8:45 am

My wife (58, non tax payer) has a dealing account with AJ Bell in which she has some investment trusts. They aren't in an ISA or a pension wrapper though so I was thinking she should move them to avoid CGT at some point. They are currently worth a bit less than double the current ISA allowance in total so we'd need to move them in two phases either side of April.

But am I right in thinking that with pension freedom rules she might be better off putting them into a pension rather than an ISA? Their eventual fate would be sold down to provide some income in retirement.

Thanks.

PS: What's the general tax term for an account that's not an ISA or a pension (that is "The money is in a ...?")

pochisoldi
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Re: Transfer into ISA vs Pension?

#271056

Postby pochisoldi » December 14th, 2019, 10:54 am

Gilgongo wrote:My wife (58, non tax payer) has a dealing account with AJ Bell in which she has some investment trusts. They aren't in an ISA or a pension wrapper though so I was thinking she should move them to avoid CGT at some point. They are currently worth a bit less than double the current ISA allowance in total so we'd need to move them in two phases either side of April.

But am I right in thinking that with pension freedom rules she might be better off putting them into a pension rather than an ISA? Their eventual fate would be sold down to provide some income in retirement.

Thanks.


I would look at it from two perspectives:
1 - The return on investment

What you get from an ISA as a non-tax payer
A * G

What you get from a pension (assuming income is taken/capital is transferred without any kind of "penalty tax charge")
A * 1.25 * G * ( 1-T)

A=Net Amount invested
G=% Growth (adjusted down to account for charges)
1.25=The increase in amount invested due to tax relief at source (1.25 * 80% = 1)
T= Marginal tax rate when income is drawn

Assuming that T will still be zero, this makes the pension look attractive (because of the tax relief at source adding 25% to the fund value).
It should be noted that T may not necessarily be 20% - it could be lower (e.g. the pension may be covered by the personal allowance, but it might push other income into a higher bracket)
However the limits for a pension are £2880pa (net of tax relief) in the absence of any earned income, compared to £20k pa for the ISA.

Any calculation of T depends on what happens in the future - if a future government has a spending squeeze, the personal allowance may be frozen, and more income may end up being taxed.

2 - Flexibility
To me a pension is still less flexible than an ISA.
This relative lack of flexibility makes it an easy target for governments to tax or restrict.
If I wanted to pull £10000 cash out of a S&S ISA into my bank account, I could do it within a week, and I would have the whole £10k.
If I was old enough, I doubt that pulling cash out of a DC pension would be as quick, and I would be certain that if I wanted to pull out £10000, I would only see £8000 at best because the pension provider would apply an emergency tax code, and I would either have to make a second small drawdown once the tax code was setup (to get the deducted tax refunded), or ask HMRC for a tax refund).

On top of this there is no certainty on how taxable income will be taxed in the future. At least with an ISA you have some form of "well taxpayers have never had to pay income tax or CGT on ISA investments", the same doesn't apply to pension income - it's taxed at whatever rate and whatever order applies when its paid.

Also remember that while there is no capital gains tax within a pension or ISA, there are no capital gains losses to claim either.
This means that if you are forced to sell investments within a pension or ISA at a loss for any reason, those losses cannot be used against future gains.

Gilgongo wrote:PS: What's the general tax term for an account that's not an ISA or a pension (that is "The money is in a ...?")

AFAIK There isn't such a term.
IMHO:
"Tax advantaged account" - Could be a pension, an ISA, some kind of foreign equivalent (e.g. 401(k)) (I wouldn't use this term in a UK context)
"non Tax advantaged account" - Neither a pension or an ISA (I wouldn't use this in a UK context either)
"Pension" - Its a pension
"ISA" - its an ISA
"non-ISA" - its not an ISA nor is it a pension (because if it were a pension, you would have said "pension".
"Normal sharedealing account - neither an ISA nor a pension (because if it were you would have said so)

Alaric
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Re: Transfer into ISA vs Pension?

#271057

Postby Alaric » December 14th, 2019, 10:58 am

Gilgongo wrote:
But am I right in thinking that with pension freedom rules she might be better off putting them into a pension rather than an ISA?


A non tax payer cannot put more than £ 2880 a year net into a Pension Fund. You can do both, so the maximum yearly transfer is £ 22880, but don't forget that you also have to stay within the annual tax exempt amount for CGT when you sell before the transfer.

Assets outside of SIPPS or ISAs might be referred to as being in a Dealing Account

Gilgongo
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Re: Transfer into ISA vs Pension?

#271059

Postby Gilgongo » December 14th, 2019, 11:17 am

Thanks for the considered replies! The ISA seems the better choice, not least as I didn't realise she couldn't transfer more than £2,880 p/a!

PS: These replies have finally persuaded me to donate to TLF. Happy Christmas one and all!

vrdiver
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Re: Transfer into ISA vs Pension?

#271062

Postby vrdiver » December 14th, 2019, 11:28 am

Re the relative merits of putting funds into either the ISA or a SIPP.

If the cash being transferred to the SIPP isn't from taxed income then the maximum tax relief will be on the first £2880, anything that goes in above this won't get tax relief, but will count as earned income on the way out, so will either consume part of the nil-rate band, or be taxed. If she will be eligible for the state pension, there won't be a lot of nil-rate band left, and of course the funds are hostage to any future changes to the tax rules and rate changes.

However, there is a small advantage to transferring some of the funds into a SIPP; as a non taxpayer, she could generate £60pcm of free income, courtesy of HMRC. Pay in £2880 in the current tax year. This will be topped up with £720 tax relief (doesn't matter whether she's paid tax or not, just so long as she hasn't contributed to another pension) to a total of £3600. I'd suggest putting it into something she is happy to keep until ready to close the SIPP (I think the minimum to keep a Youinvest SIPP open is £1,000 so you could put in less and start the next step immediately.)

At the start of the new tax year, contribute £240 per month. As soon as the tax relief is credited (one month later?) initiate monthly drawdown at £300 per month. Essentially this is pulling the £60pcm tax relief out of the SIPP whilst recycling the £240, leaving the original lump sum invested in whatever you chose. Ensure there is cash for the quarterly (£25?) holding charge and the annual drawdown fee (£120?).

If you want to recover the overpaid tax (first payment will be on an emergency code) without waiting for the end of the tax year, then a P55 from the HMRC website should suffice.

The rest of the money in the dealing account I'd transfer to the ISA - call them to Bed & ISA so as to save half the sell and buy fees (assuming you are keeping the current investments, otherwise just liquidate and transfer the cash). If any part of the fund is to be used for income imminently than you may want to check if the cost of transferring to the ISA is worth it for that portion (transaction charge plus 0.5% tax on (re)purchasing stocks).

VRD

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Re: Transfer into ISA vs Pension?

#271069

Postby PinkDalek » December 14th, 2019, 12:20 pm

Gilgongo wrote:My wife (58, non tax payer) has a dealing account with AJ Bell in which she has some investment trusts. They aren't in an ISA or a pension wrapper though so I was thinking she should move them to avoid CGT at some point. They are currently worth a bit less than double the current ISA allowance in total so we'd need to move them in two phases either side of April. ...


I know you've had answers but, at present, what is the likelihood or her ever paying CGT on those holdings, under present legislation?

If she needs to realise a chunk of capital, the present CGT annual exempt amount (2019-20) would let her realise £12,000 per annum without even looking at her CGT cost of those holdings.

What we don't know is if she has other capital that needs investing, maybe even from gifts available from you dependent on your own position. That element, if available, could be used to commence an ISA/contribute to a SIPP, without needing to disturb the existing investments.

Gilgongo
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Re: Transfer into ISA vs Pension?

#271154

Postby Gilgongo » December 14th, 2019, 7:26 pm

PinkDalek wrote:I know you've had answers but, at present, what is the likelihood or her ever paying CGT on those holdings, under present legislation?


Good point. I think it's probable that I may need to gift her something, in which case I suppose that capital is a consideration instead.

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Re: Transfer into ISA vs Pension?

#271169

Postby ursaminortaur » December 14th, 2019, 10:49 pm

vrdiver wrote:Re the relative merits of putting funds into either the ISA or a SIPP.

If the cash being transferred to the SIPP isn't from taxed income then the maximum tax relief will be on the first £2880, anything that goes in above this won't get tax relief, but will count as earned income on the way out, so will either consume part of the nil-rate band, or be taxed. If she will be eligible for the state pension, there won't be a lot of nil-rate band left, and of course the funds are hostage to any future changes to the tax rules and rate changes.

However, there is a small advantage to transferring some of the funds into a SIPP; as a non taxpayer, she could generate £60pcm of free income, courtesy of HMRC. Pay in £2880 in the current tax year. This will be topped up with £720 tax relief (doesn't matter whether she's paid tax or not, just so long as she hasn't contributed to another pension) to a total of £3600. I'd suggest putting it into something she is happy to keep until ready to close the SIPP (I think the minimum to keep a Youinvest SIPP open is £1,000 so you could put in less and start the next step immediately.)

At the start of the new tax year, contribute £240 per month. As soon as the tax relief is credited (one month later?) initiate monthly drawdown at £300 per month. Essentially this is pulling the £60pcm tax relief out of the SIPP whilst recycling the £240, leaving the original lump sum invested in whatever you chose. Ensure there is cash for the quarterly (£25?) holding charge and the annual drawdown fee (£120?).


Watch out for the gotcha with Youinvest. There is a charge of £295 + VAT if your SIPP is closed within 12 months of it being opened and the account will be automatically closed if it falls below £1000 which will trigger that charge.

https://www.youinvest.co.uk/sipp/charges-and-rates

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Re: Transfer into ISA vs Pension?

#271187

Postby JohnB » December 15th, 2019, 6:20 am

The £2880 limit is based on not having earned income. Its not based on investment or savings income, or whether income was taxed, under the personal allowance etc. People writing about it often think from a position of having a job where income=salary and tax is being paid, and so describe it wrong

You can put up to £40k of earned income into a SIPP, or £3600 if you don't earn enough. Both numbers are after tax relief is applied, hence the £2880. They assume 20% tax relief, which you get even if you pay no tax. (You can earn £8k and get tax relief of £2k even though its under the personal allowance)

I use "unsheltered" as my term

For the OP £40k of investments might return 4% dividends, 3% capital growth, so £1600 and £1200, both under the dividends and capital gains tax allowances, so you'd get no benefit, or harm, from an ISA. Others have quoted the tax advantages of a pension, but omitted that it is excluded from inheritance tax, which may be important to you. ISAs are not excluded.

Bottom line, no reason not to put unsheltered in ISA, and best to do it now before a windfall like an inheritance occurs . Pensions give extra benefits, but are more complicated

fca2019
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Re: Transfer into ISA vs Pension?

#271198

Postby fca2019 » December 15th, 2019, 8:37 am

The capital gains tax allowance in 2019-20 is £12,000. This is the amount of profit you can make from an asset this tax year before any tax is payable.

So you can sell £20k as long as profit is below 12k and put in an ISA. And can do the same next tax year.

For non tax payers you're restricted in a SIPP on what you can put in to 3.6k, £2,880 before tax relief.

So Bed and ISA is what most do.

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Re: Transfer into ISA vs Pension?

#271210

Postby Chrysalis » December 15th, 2019, 10:02 am

Fca you have just repeated the slightly imprecise information about ‘non tax payers’ vs ‘non earners’ that JohnB explained in the previous post.

The limit on tax relief on pension contributions is £3600 for those without any pensionable earnings (from employment or self employment). For those with earnings, the limit on tax relief is 100% of relevant earnings or £40,000, whichever is the lower.

Therefore a non taxpayer earning say £10,000 can obtain tax relief on up to £10,000 of pension contributions.

We don’t know, but I think it’s been assumed, that the OPs wife is a non earner as well as a non taxpayer.

Also, to be super pedantic, contributions can be paid in excess of this, but an excess tax charge will be payable (which effectively claws back the tax relief). It’s not illegal or anything, just pointless.

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Re: Transfer into ISA vs Pension?

#271211

Postby swill453 » December 15th, 2019, 10:05 am

Chrysalis wrote:Also, to be super pedantic, contributions can be paid in excess of this, but an excess tax charge will be payable (which effectively claws back the tax relief). It’s not illegal or anything, just pointless.

Unless your aim is to shelter money from inheritance tax. Which makes the issue more complex.

Scott.

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Re: Transfer into ISA vs Pension?

#271212

Postby Chrysalis » December 15th, 2019, 10:06 am

Ah yes Scott, agreed.

Also, I think you have to declare on your tax form disposal of assets above a certain value, even if the gain is within the allowance (I think it’s about £35k, but I can’t remember exactly).

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Re: Transfer into ISA vs Pension?

#271235

Postby Gersemi » December 15th, 2019, 11:13 am

Chrysalis wrote:Ah yes Scott, agreed.

Also, I think you have to declare on your tax form disposal of assets above a certain value, even if the gain is within the allowance (I think it’s about £35k, but I can’t remember exactly).


The limit above which you have to fill in the Capital Gains Summary is always 4 x the allowance for the year. So for 18-19 for example it is £46,800 (allowance £11,700) - and only applies if you have to fill in a return for other reasons.

https://assets.publishing.service.gov.u ... s_2019.pdf

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Re: Transfer into ISA vs Pension?

#271244

Postby DrBunsenHoneydew » December 15th, 2019, 11:50 am

swill453 wrote:
Chrysalis wrote:Also, to be super pedantic, contributions can be paid in excess of this, but an excess tax charge will be payable (which effectively claws back the tax relief). It’s not illegal or anything, just pointless.

Unless your aim is to shelter money from inheritance tax. Which makes the issue more complex.
Scott.

Another reason for paying in SIPP contributions above the £40k Annual Allowance is that doing so reduces your taxable income.
This reduces your Pension Annual Allowance Threshold Income.
If that reduces you to the £110k 'threshold', you can avoid having your £40k pension allowance tapered away, which can reduce the excess Annual Allowance tax charge that would otherwise be payable on your pension contributions.

e.g. Total Gross Income £150k. Personal pension contribution £15k. Tax relief 45% of £15k = £6750. Employer pension contribution £25k. Total Pension Input £40k. Threshold Income £150k - £15k = £135k. Adjusted Income £135k + £40k =£175k. Annual Allowance reduced by (£175k-£150k)/2 from £40k to £27500. Assuming no remaining carry-forward allowance, Pension Input Tax is 45% of (£65k-£27500) = £16875, which is £10125 more tax taken than the £6750 relief given.

Now pay an extra £25k personal pension contribution. Personal pension contribution £15k+£25k = £40k. Tax relief 45% of £40k = £18k. Total Pension Input £15k+£25k+£25k=£65k. Threshold Income reduces to £150k - £40k = £110k. Full £40k Annual Allowance maintained. Pension Input Tax 45% of (£65k - £40k) = £11250, which is £6750 less than the £18k tax relief given.

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Re: Transfer into ISA vs Pension?

#271462

Postby hiriskpaul » December 16th, 2019, 2:07 pm

pochisoldi wrote:
Gilgongo wrote:My wife (58, non tax payer) has a dealing account with AJ Bell in which she has some investment trusts. They aren't in an ISA or a pension wrapper though so I was thinking she should move them to avoid CGT at some point. They are currently worth a bit less than double the current ISA allowance in total so we'd need to move them in two phases either side of April.

But am I right in thinking that with pension freedom rules she might be better off putting them into a pension rather than an ISA? Their eventual fate would be sold down to provide some income in retirement.

Thanks.


I would look at it from two perspectives:
1 - The return on investment

What you get from an ISA as a non-tax payer
A * G

What you get from a pension (assuming income is taken/capital is transferred without any kind of "penalty tax charge")
A * 1.25 * G * ( 1-T)

A=Net Amount invested
G=% Growth (adjusted down to account for charges)
1.25=The increase in amount invested due to tax relief at source (1.25 * 80% = 1)
T= Marginal tax rate when income is drawn

Assuming that T will still be zero, this makes the pension look attractive (because of the tax relief at source adding 25% to the fund value).
It should be noted that T may not necessarily be 20% - it could be lower (e.g. the pension may be covered by the personal allowance, but it might push other income into a higher bracket)
However the limits for a pension are £2880pa (net of tax relief) in the absence of any earned income, compared to £20k pa for the ISA.

Any calculation of T depends on what happens in the future - if a future government has a spending squeeze, the personal allowance may be frozen, and more income may end up being taxed.

2 - Flexibility
To me a pension is still less flexible than an ISA.
This relative lack of flexibility makes it an easy target for governments to tax or restrict.
If I wanted to pull £10000 cash out of a S&S ISA into my bank account, I could do it within a week, and I would have the whole £10k.
If I was old enough, I doubt that pulling cash out of a DC pension would be as quick, and I would be certain that if I wanted to pull out £10000, I would only see £8000 at best because the pension provider would apply an emergency tax code, and I would either have to make a second small drawdown once the tax code was setup (to get the deducted tax refunded), or ask HMRC for a tax refund).

On top of this there is no certainty on how taxable income will be taxed in the future. At least with an ISA you have some form of "well taxpayers have never had to pay income tax or CGT on ISA investments", the same doesn't apply to pension income - it's taxed at whatever rate and whatever order applies when its paid.

Also remember that while there is no capital gains tax within a pension or ISA, there are no capital gains losses to claim either.
This means that if you are forced to sell investments within a pension or ISA at a loss for any reason, those losses cannot be used against future gains.

Gilgongo wrote:PS: What's the general tax term for an account that's not an ISA or a pension (that is "The money is in a ...?")

AFAIK There isn't such a term.
IMHO:
"Tax advantaged account" - Could be a pension, an ISA, some kind of foreign equivalent (e.g. 401(k)) (I wouldn't use this term in a UK context)
"non Tax advantaged account" - Neither a pension or an ISA (I wouldn't use this in a UK context either)
"Pension" - Its a pension
"ISA" - its an ISA
"non-ISA" - its not an ISA nor is it a pension (because if it were a pension, you would have said "pension".
"Normal sharedealing account - neither an ISA nor a pension (because if it were you would have said so)

You have left out the 25% tax free PCLS from your equation. Incorporating that gives
A * 1.25 * G * [0.25 + 0.75 * ( 1-T)]

The PCLS tips the calculation in favour of pensions. eg for T=20%,
A * G * 1.0625.

ie 6.25% more for the pension than the ISA.

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Re: Transfer into ISA vs Pension?

#271467

Postby hiriskpaul » December 16th, 2019, 2:21 pm

Gilgongo wrote:Thanks for the considered replies! The ISA seems the better choice, not least as I didn't realise she couldn't transfer more than £2,880 p/a!

PS: These replies have finally persuaded me to donate to TLF. Happy Christmas one and all!

I would seriously reconsider in this situation. Your wife is able to pay £2880 a year into a SIPP which will be boosted by 25%. I don't know your wife's financial situation, but if not a taxpayer, it seems highly likely to me that she could obtain most if not all of that bonus without paying any tax. In a likely worse case, where 20% tax is paid on all withdrawals, the total return is still boosted by 6.25%.


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