Seems daft not to

[mc2fool]

Still you've got to have a lot of spare cash to fill both allowances.

I suspect that for a lot of folks here it's not so much "spare" cash but moving unsheltered investments that's used to fill the allowances, i.e. people bed'n'ISAing and bed'n'SIPPing. If you've got a reasonably sizable portfolio it can take quite a long time to get it sheltered, esp. if you're limited to £20,000+£3,600pa (and the current £20k is a lot in the historical context of ISA contribution limits).

I suspect also that many folks didn't "choose" a SIPP so much as get one from other existing pension provisions, i.e. a transfer from a DB/DC/etc scheme.

[Mike4]

In a 'rising tax' environment (as seems inevitable and mentioned in the OP), future tax applied when withdrawing may well be more than 20% in Scott's example calcs, tipping the balance in favour of a SIPP.

So 20% tax on the way in could be way preferable to 'who-knows-what-but-probably-more' tax on the way out? Thereby further favouring the ISA?

TR

Yes you've got it exactly.

One further thought though. Like you I have a bit of a lump sum gathering dust in a current account simply because I don't know and can't decide what to do with it for the best, so your thread is most interesting.

I don't trust myself to invest it wisely and not see it go down in value faster than inflation is already eroding it. However I'm rather worried that that nice Mr Sunak will come along with his spade in a year or so and help himself to a shovelful of your and my 'sitting duck' bank balances so my thoughts too are what to do with it to shelter it from his kind attention. I'm reluctant to buy a house as I think landlords will also be treated as sitting ducks. SIPPS and ISAs never crossed my mind as I'd still have the same problem selecting growing (rather than shrinking) assets to buy.

I'm almost tempted to draw it out of the bank and keep it under the mattress until this coming wealth tax (a one-off tax raid on assets, I imagine it will be) has been and gone.

Maybe my thinking is naïve.

[Lootman]

I'm almost tempted to draw it out of the bank and keep it under the mattress until this coming wealth tax (a one-off tax raid on assets, I imagine it will be) has been and gone

So evasion then? Thanks for the confession.

What are the banking rules on withdrawing large cash sums btw. Are the banks obliged to notify 'the authorities'?

I think that in the face of an abusive, tyrannical, confiscatory government (think Corbyn as might have been) then evading taxes could become a moral imperative.

But in respect of this mythical wealth tax, which I doubt would ever happen under a Tory government, then it would not matter what form that wealth was in (property, ISA, SIPP, whatever). You would just want to move yourself and your wealth elsewhere, and a SIPP is not remotely mobile in that sense.

To your question, I believe that transfers over 10K are reported but there are of course ways of avoiding that.

[stevensfo]

I'm almost tempted to draw it out of the bank and keep it under the mattress until this coming wealth tax (a one-off tax raid on assets, I imagine it will be) has been and gone

So evasion then? Thanks for the confession.

What are the banking rules on withdrawing large cash sums btw. Are the banks obliged to notify 'the authorities'?

Wow! The day that keeping your own -already processed and taxed - money in your own house becomes 'tax evasion', then we may as well throw in the towel and declare Orwellian politics well and truly here to stay. As far as I know, withdrawing above 4000 in cash triggers a warning that may result in you being investigated. However, I've never heard of this happening without a bloody good reason. People simply withdraw cash in smaller amounts over time and keep it well hidden.

Naturally, the government can always flush this cash out by introducing 'new and improved' banknotes every 10 years if they so wish.

Steve

[Lootman]

If the government decides to tax 'wealth' then you may be obliged to disclose all your wealth. If, as is suggested, you withdraw it and conceal it 'under the mattress', then that's evasion.

Don't you agree?

It is getting away from this board's topic but I think if the government suddenly overthrew centuries of tradition and precedent, and tried to seize peoples' wealth based on something other than transactions, then it could reasonably expect and anticipate a massive adverse response including civil disobedience on a scale that would cause most people to rethink their definition of "evasion".

Was Robin Hood guilty of evasion?

[GoSeigen]

If the government decides to tax 'wealth' then you may be obliged to disclose all your wealth. If, as is suggested, you withdraw it and conceal it 'under the mattress', then that's evasion.

Don't you agree?

No, because cash isn't included.

If one poster can whine about people "evading tax" in a hypothetical non-existing scenario, then I think the rest of us can have whatever hypothetical exclusions we want...

GS

[TUK020]

I use both SIPPs and ISAs.
My perspective is that SIPPs come into their own when you can 'arbitrage' the tax rates between now when you are earning and later when you withdraw from a pension.
This is as much about managing your taxable income versus the thresholds as anything else.

If you are paying basic rate tax now, then you want to put as much into a SIPP now to enable you to e.g. withdraw £12.5k taxable income as pension from when you stop earning (55?) until you then start getting State pension (67?).
Save on basic rate tax going in, pay no tax going out.
Everything else into an ISA.

Above oversimplified picture is complicated by:
a) 25% tax free lump sum (don't know when this is going to be capped)
b) IHT treatment if you are likely to have any left over for heirs

Game is the same if you are a higher rate tax payer now, and will be a basic rate when drawing pension.
Gets even more interesting if you earn enough to be in the personal allowances clawback territory

[tonyreptiles]

Is there any way to drive earnings into the 40% bracket for one of you each year and then contribute to the SIPP to avoid paying 40% in tax?

If you are going to be in the position of not paying income tax at all, then a SIPP will let you pay in £2880 per year and HMG will still give you a tax rebate of £720, so having a SIPP set up and ready to take advantage of that might also be worth pondering.

VRD

Hi VR

That sounds interesting and has not been on my radar to consider - largely because I don't think I understand how that might work.

Can you explain it?
TIA
TR

[tonyreptiles]

I could liquidate my ISA tomorrow, pay no tax on it, wire that money overseas and then take myself with it. I might remove all future UK tax liability in such a way, at a stroke, and that would be impossible with a SIPP due to its captive nature.

I cannot put a monetary value on that freedom, but for me it is significant.

Now that's a biggie!
Being in the UK less/never is certainly on the radar in our near future.

Is getting your money out of a SIPP such a hassle? I can't see us needing it for at least 5 years, making us 55 and able to withdraw - unless there's something I have missed?

Cheers
TR

[MickR]

SIPP account do attract additional charges though, and there's normally a charge to drawdown. For me, it depends on my earnings/tax status when I retire. I aim to retire at 60, with 7 years of no income, so have enough in a SIPP to drawdown for those 7 years and maximise my tax allowance. after that, I'm all ISA's as they feel more flexible

[vrdiver]

Is there any way to drive earnings into the 40% bracket for one of you each year and then contribute to the SIPP to avoid paying 40% in tax?

If you are going to be in the position of not paying income tax at all, then a SIPP will let you pay in £2880 per year and HMG will still give you a tax rebate of £720, so having a SIPP set up and ready to take advantage of that might also be worth pondering.

VRD

Hi VR

That sounds interesting and has not been on my radar to consider - largely because I don't think I understand how that might work.

Can you explain it?
TIA
TR

Two different points. The second, HMRC giving you £720pa is straightforward. If you paid £2880 into a SIPP, your SIPP provider will reclaim £720 tax back and credit it to your SIPP account. Even if you don't actually pay tax, you still get the £720. There was a similar discussion on this here

The first point, re pushing annual income to over the 40% threshold is a bit more "creative". If you are able to control when earnings come in, you could, for example, push Jan/Feb/Mar earnings into April, thus having the current year a very "poor" year, but next year a very good year, or if you work with your partner and normally divide income from joint projects, but could instead allocate all or most to just one, again with the objective of pushing the annual earnings into the HRT bracket, you would then contribute to the SIPP all net earnings in excess of the BRT limit (e.g. earn £1,000 over the limit, pay in £800. Your SIPP provider will reclaim £200 and you would reclaim the other £200 via your self assessment. Result, £1,000 in your SIPP for £600 loss of net income. When you come to withdraw, 25% is (currently) tax-free, so £250 tax-free and £750 at 20% tax yielding £600 taxed as a BRT payer; result is £800 from your SIPP on the way out, from £600 on the way in, assuming you had used your personal allowance elsewhere, otherwise you'd obviously not pay some or all of the £200 tax on the withdrawal. (I've ignored investment outcomes, as I assume they would be the same inside or outsode of a SIPP, but if you are paying less tax via the SIPP method, then you would also benefit from growth on your investments.

The above example assumes you are able to control the flow of earnings, which is usually hard for employees, but possible for those working for themselves. It's something you might want to talk to your accountant about if it looks like it might be of interest. The other thing to note is the tax benefits would need to offset any SIPP fees, so probably not worth the hassle for a £1,000 annual payment, but it gets interesting if you can pay larger lump sums in...

VRD

[Midsmartin]

My gut feeling is that an ISA may be more vulnerable to future tax changes, though a lower contribution limit would be the only painless way of doing it. People regard a pension as a "right" while an ISA is perk. I may well be wrong but I would probably use both a sipp and ISA. Also remember other (minor?) differences such as the ability to bequeath pension income on death from a sipp.

On wealth taxes, it seems much fairer to tax wealth , unearned income, and the recently deceased, than earned income of those slogging away at tedious jobs. I'd suffer under such a regime, but the extreme wealth inequalities we see are bad for the stability of society. And we survive as a society not as isolated individuals.

[Urbandreamer]

FWIW I entirely agree with TUK020 and for that matter most other posters.

I have an ISA that I have been paying into for years. In my 50's I stopped and started paying into a SIPP instead. The ISA had no age restriction upon when you could draw from it. The SIPP does, but how long I needed to wait before I could access it was reducing.

Assuming that I retire at 60, I will able to manipulate my income* so that I am not required to pay income tax for 7 1/2 years, though SIPP contributions gain a 20% uplift (for me). At 67 the combination of a DB company pension and the state pension means that income tax will be due regardless of anything else that I do.

My fortunate position is because I was able to start investing decades ago, but the tax situation is not dependant upon that.

*Income and taxable income are not the same. If you draw from an ISA it's not taxable, currently. Hence DC pension drawdown can be limited to the personal allowance and topped up with ISA funds allowing a comfortable standard of living yet not being subject to income tax.

[swill453]

Assuming that I retire at 60, I will able to manipulate my income* so that I am not required to pay income tax for 7 1/2 years, though SIPP contributions gain a 20% uplift (for me). At 67 the combination of a DB company pension and the state pension means that income tax will be due regardless of anything else that I do.

Yes, I started dipping into my SIPP 4 years ago at 55 (having stopped working at 53). Currently I'm taking annual UFPLS payments of £16,666 entirely free of income tax (£12.500 personal allowance plus 25% tax free).

My wife does similar, giving us enough to live on.

We hope to continue this way until state pensions kick in at 66/67 years old.

Scott.

[UncleEbenezer]

Perhaps my thinking is a little too simple and I advocate using both ISA and SIPP tax breaks as best one can but - For a medium to long term saver, comparing 80p invested in an ISA versus 100p invested in a SIPP for a basic rate tax payer, having 100p compounding tax free has to be a better outcome in capital terms than having 80p compounding tax free for the same duration?

Um, no. Basic arithmetic here, you can do it for any multiplier. Let's say for the sake of argument your portfolio ten-bags (in cash terms) over that long term. Your 80p becomes 800p, or your 100p becomes 1000p. But the latter is still taxable, so when you come to extract it, 200p goes to HMRC, leaving 800p either way.

The differences are at the edges. The lump sum, the personal allowance (which at £12.5k is not to be sneezed at). But also the Big Unknown: rule (and rate) changes between when you invest and when you draw the money.

The big - and sensible - thing they could do to penalise well-off older people is abolish that mendacious distinction between "income tax" and "national insurance", making a unified tax rate for the whole (I've been predicting for some time that'll happen just-about exactly when I hit state pension age). I suspect the only thing holding them back has been the loss of an empire of bureaucracy for Sir Humphrey, which could in principle mean that a far bigger mountain of red tape - as presented by brexit - might offer a means to attack it.

[swill453]

No it doesn't because of compound growth. I said medium to long term and the compounding effect over time is massively important. And a SIPP marginal income tax rate is 15% not 20% due to the 25% tax free lump sum.

The 25% tax free is the only benefit here, and was pointed out in the post you're responding to.

The compounding doesn't help if the tax rate out is the same as the tax rate in (and yes, we know it isn't the same).

Scott.

[UncleEbenezer]

No it doesn't because of compound growth.

What on Earth are you thinking? There's nothing about "compound growth" that magically affects the multiplier - my 10x was purely illustrative. Same arithmetic applies to any other multiplier.

I said medium to long term and the compounding effect over time is massively important.

That's how you reach the 10x. Or - whatever it becomes.

And a SIPP marginal income tax rate is 15% not 20% due to the 25% tax free lump sum.

RVF.

Up to a point. But if you actually take the 25% lump sum (as I did - to buy a house), then you miss out on long-term growth on that 25%. Of course that's just one scenario: if you take an annuity at the same time (as I didn't) then you draw a line under any further growth on the whole.

[swill453]

I'm sorry you simply don't understand compound growth over time. Clearly it's no good knocking.

Compounding is well understood. It's your assertion that tax relief helps it that is wrong (if the compounded total is taxed at the same rate).

Do an example sum without the 25% tax free lump sum and see your error.

Scott.

[dealtn]

I'm sorry you simply don't understand compound growth over time.

Please enlighten us with a worked example.

[GoSeigen]

I'm sorry you simply don't understand compound growth over time. Clearly it's no good knocking.

Thank you.

RVF.

Nor do I then.


Did you go to the Rob Davies School of Maths?


GS