Seems daft not to

[tonyreptiles]

Morning all.
I hope you're well.

Quick question...

Is there any logical reason why we should not favour using a SIPP for our investments?

Here's our thinking on why we should:

- We get 20% top-up on our investment from the Government.
- My partner and I are both 50, which means the 55-year maturity finish-line isn't particularly worrying.
- We don't intend on retiring from work any time soon - if ever. (We love our creative jobs and can continue working indefinitely, barring ill health or exceptional AI developments.)
- We can wrap pretty much any investment type (trackers in practice) within the SIPP, thereby facilitating our tracker-inclined strategy.

Our only concern pertains to what might happen to UK (worldwide?) taxes as a result of Gov spending to combat the C-19 economic crisis.

On the whole, though, it looks like using a SIPP is a no-brainer? Is that correct?

Thanks all
TR

[swill453]

- We get 20% top-up on our investment from the Government.

It's really only deferred taxation though, if you're in the same tax bracket when you come to withdraw.

Example:
£80 in SIPP, topped up to £100 by government. Say 50% growth makes it £150. Withdraw, taxed at 20%, giving net £120.
vs. £80 in ISA. 50% growth makes £120. Withdraw net £120.

Of course there is the 25% tax free PCLS (Pension Commencement Lump Sum) which is a true benefit, as long as no government takes it away.

And you may be able to arrange your affairs so that you're in a lower tax bracket at drawdown time.

Different inheritance tax treatment of pensions may be another benefit to you.

Scott.

[SalvorHardin]

Is there any logical reason why we should not favour using a SIPP for our investments?

The big deterrent to putting money into a pension is that governments have historically had a habit of changing the pension rules. Also once your money is inside a pension scheme the government's ability to control it is far greater than if it's kept outside, whilst your freedom to use it is restricted.

Here are a few thoughts. Bear in mind that previous governments have done all of these things to varying degrees.

Increase the age when you can draw upon your pension. The earliest retirement age for the purposes of taking a pension used to be 50 until April 2010. Now it's 55.

The tax-free lump sum might be reduced, or eliminated. It used to be one-third for the old style S226 policies.

The rules regarding drawdown might be changed. I wouldn't put it past a cash strapped government to force every private pension fund to be taken as an annuity because this would increase the demand for gilts. Or to mandate a minimum level of investment into gilts, or UK listed shares, or a "British Investment Bank", on the grounds of protecting investors. Some European governments have tended to use private sector pension schemes as a way of funding their deficits by enforcing minimum holdings of government bonds.

[tonyreptiles]

Very interesting.

So, mathematically speaking, putting our investments inside an ISA would deliver the same net returns?

Would I be correct in thinking that the extra (SIPP) money chipped in by the Gov now would enable us to buy MORE shares, thereby compounding and improving our (assumed) returns for the future?

And if that's true, would the chunk the taxman takes at that point in the future affect our net return for better or worse, when compared against doing it all in an ISA?



All in all, I would much prefer to negate the GOv's fiddling and so will favour an ISA if the net returns would be similar.
Thanks again
TR

[swill453]

Very interesting.

So, mathematically speaking, putting our investments inside an ISA would deliver the same net returns?

Would I be correct in thinking that the extra (SIPP) money chipped in by the Gov now would enable us to buy MORE shares, thereby compounding and improving our (assumed) returns for the future?

And if that's true, would the chunk the taxman takes at that point in the future affect our net return for better or worse, when compared against doing it all in an ISA?

It'll be the same, if the tax rate taken off as the money comes out is the same as the tax relief rate given as it went in.

As I pointed out though, that's not the only consideration.

Scott.

[Itsallaguess]

All in all, I would much prefer to negate the GOv's fiddling and so will favour an ISA if the net returns would be similar.

That's making an assumption that ISA's would always completely avoid any potential 'fiddling', of course...

As an aside - is this a binary choice Tony?

Couldn't you hedge your bets a bit, between the two options?

Cheers,

Itsallaguess

[tonyreptiles]

Roger that - thanks Scott.

I was trying to twist my brain around whether the accelerated compound growth achieved due to the increased investments made possible by the Gov's 20% would make a difference when it came to paying the tax on the way in (ISA) or on the way out (SIPP). As a writer I hope you'll excuse me for my truly awful maths ability. (It's part of our DNA, apparently!)

I'm certainly eager to avoid the vagaries of the Gov's pensions policy making so, all things being equal, if the ISA will give the same return as the SIPP, I'll go for the ISA.

Thanks!
TR

[Mike4]

Very interesting.

So, mathematically speaking, putting our investments inside an ISA would deliver the same net returns?

Would I be correct in thinking that the extra (SIPP) money chipped in by the Gov now would enable us to buy MORE shares, thereby compounding and improving our (assumed) returns for the future?

And if that's true, would the chunk the taxman takes at that point in the future affect our net return for better or worse, when compared against doing it all in an ISA?

It'll be the same, if the tax rate taken off as the money comes out is the same as the tax relief rate given as it went in.

As I pointed out though, that's not the only consideration.

Scott.

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.

Unless I misunderstood. I don't really do investments.

[tonyreptiles]

All in all, I would much prefer to negate the GOv's fiddling and so will favour an ISA if the net returns would be similar.

That's making an assumption that ISA's would always completely avoid any potential 'fiddling', of course...

As an aside - is this a binary choice Tony?

Couldn't you hedge your bets a bit, between the two options?

Cheers,

Itsallaguess

Interesting. By that, do you mean putting money into both as a means to minimise the Gov's future tinkering in either the ISA or Pension rules?

That could be an option, although I'd prefer a simpler single position option. Your reasoning makes sense though, if I have interpreted you correctly. There certainly seems every likelihood that the Gov will mess with all manner of tax-related oprions given their enormous C-19 related spend.

I suppose I get to choose between a poke in the eye now or a kick in the balls later.

TR

[tonyreptiles]

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

[Itsallaguess]

All in all, I would much prefer to negate the GOv's fiddling and so will favour an ISA if the net returns would be similar.

That's making an assumption that ISA's would always completely avoid any potential 'fiddling', of course...

As an aside - is this a binary choice Tony?

Couldn't you hedge your bets a bit, between the two options?

By that, do you mean putting money into both as a means to minimise the Gov's future tinkering in either the ISA or Pension rules?

Well it's just to help avoid an 'all your eggs in one basket' situation really, at the same time as spreading a bit of 'Government intervention' risk as well, I suppose..

One thing that's not been mentioned, I don't think, is that when it comes to long-term saving like this, then even if you considered the 'risk' side of things to be equal, I do think there's at least *some* benefit in *not* having full and open access to retirement-planning funds in a relatively 'open' type of account like an ISA, as there's always likely to be at least some sort of temptation to do 'other things with it' at a potentially much earlier stage...

Which is great as well, of course, to have that potential option, but I think one advantage of a SIPP approach for at least some of this type of retirement-planning might be that it *won't* be instantly-accessible at a potentially earlier stage like it would if it were 100% ISA-based...

You'll probably know yourself well enough to feel if that's likely to be a potential advantage or not, but I think it's worth mentioning at least, given that you're looking ahead to save over a longer term for this type of funding, and as well as the 'Government fiddling-risk' being reduced a little by potentially utilising both saving methods, there's also enough of an 'access-rights' issue as well for that to potentially be an additional benefit of taking a non-binary approach to this..

Cheers,

Itsallaguess

[vrdiver]

I'll second IAAG's suggestion to use both SIPP and ISA, if only to try to stop the government wrecking your plans if you have everything in only one type of account.

One benefit that hasn't been mentioned for the SIPP would be that it is outside your estate for Inheritance Tax purposes, so if IHT is likely to be a problem you may benefit from the SIPP wrapper this way (well, YOU won't benefit, but you know what I mean!).

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

[mc2fool]

Very interesting.

So, mathematically speaking, putting our investments inside an ISA would deliver the same net returns?

Would I be correct in thinking that the extra (SIPP) money chipped in by the Gov now would enable us to buy MORE shares, thereby compounding and improving our (assumed) returns for the future?

And if that's true, would the chunk the taxman takes at that point in the future affect our net return for better or worse, when compared against doing it all in an ISA?

It'll be the same, if the tax rate taken off as the money comes out is the same as the tax relief rate given as it went in.

But as you yourself have pointed out, it isn't. The relief on the way in is (BRT) 20% and the tax on the way out (also BRT) is at most 15%.

It's 15% 'cos of the 25% tax free PCLS, making the BRT rate actually 75% of 20%, i.e. 15%, and it's "at most 15%" 'cos of the personal allowance, which will also lower your effective rate if you haven't already used it up with other income. How much so obviously depends on individual circumstances and is left as an exercise for the reader.

And, as also noted by vrdiver, the SIPP is also free from inheritance tax, which the ISA is not.

Of course, all that may change, and I too support the suggestion of using both SIPPs and ISAs....

[Adamski]

I'm in the use a SIPP first camp. Because of the rollercoaster of markets this past year, I've made more on tax relief than on returns this year.

If you put in a sipp a year ago £80 plus £20 tax relief. In fundsmith up 20% now be worth £120. The same in an ISA would be £80 x 1.2 = £96. Not exact as Tax relief comes a month later but illustrates the point. Cheers

[kempiejon]

As other's have said a bit of both is handy. Like IHT there's a few other considerations SIPPs are outside of scope, I think bankruptcy and capital calculations for benefits like income support and care home fees. Still you've got to have a lot of spare cash to fill both allowances.

[stevensfo]

Agree about using both. Re. ISAs, I can see future governments lowering the amount you can pay into them (after all, I think we were all stunned when it went up to 20K) or setting a limit on the maximum you can hold, but I doubt very much that they'd backdate the rules or tax established ISAs. To me, that would be political suicide.

Steve

[kempiejon]

I'm in the use a SIPP first camp. Because of the rollercoaster of markets this past year, I've made more on tax relief than on returns this year.

If you put in a sipp a year ago £80 plus £20 tax relief. In fundsmith up 20% now be worth £120. The same in an ISA would be £80 x 1.2 = £96. Not exact as Tax relief comes a month later but illustrates the point. Cheers

But when you take £120 out the SIPP you have to pay £24 income tax leaving you £96 net, same as the ISA.

As noted there's the personal allowance for income and the 25% PCLS.

[Lootman]

the SIPP is also free from inheritance tax, which the ISA is not.

Of course, all that may change, and I too support the suggestion of using both SIPPs and ISAs....

I exclusively chose an ISA over a SIPP. A big part of that is the flexibility of an ISA, versus the "trapped" nature of pension money as described by SalvorHardin.

So as an example 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. Then again if you know for sure you will always be in the UK and therefore subject to UK tax, maybe that isn't worth so much. But for me the "sitting duck" nature of SIPPs has always irked me.

The IHT issue is important too, but I figure that I will be taking care of that anyway by other means.

[bungeejumper]

One thing that's been on my mind recently is the possibility that Rishi might decide to fund the exploding govt deficit by raiding assets with a wealth tax. Although any such smash and grab would presumably focus on those with a million plus of net assets (fer instance), it would be politically very difficult for the Chancellor to lay hands on savers' pension assets, but rather less hard to declare open season on their ISA holdings.

The point being that pension plans are generally funded over many, many decades as a shiningly virtuous act of providence for the 'decumulation years' of the future, and so walloping them with a wealth tax at short notice would put the skids under the govt's chances of ever persuading people to put money aside for pensions again.

Whereas your non-pension assets - your ISA funds or your venture capital trusts or your second home in the Dordogne - don't look so palpably virtuous to an onlooker. Just sayin'.

Of course, you can keep your SIPP in cash if it suits you that way - my own SIPP is currently 65% cash because I don't trust anything right now, and I can't say it's done me any harm over the last three years. (Will have to keep my eyes open after the US election, but that's another story entirely.) My cash withdrawals have been mainly from my ISA account. Each to his own preferences.

BJ

[UncleEbenezer]

SIPP is particularly tax-efficient if, like me, you have intermittent income.

Pay in at times when a year's income puts me on higher-rate tax. Withdraw £12.5k in a year with no other taxable income. Leave well alone in a year when non-pension income puts me on standard-rate tax.

If you're consistently in the same tax bracket, the advantage (if any) is much more elusive.