Seems daft not to

[Urbandreamer]

Please enlighten us with a worked example.

This comes up so regularly that it is untrue. Yes the pension is better, in theory.

Here is an example.
https://www.ii.co.uk/analysis-commentar ... l-ii510812

HOWEVER, it's quite meaningless.
It's simply an example of the mathematical results and takes no account of circumstances.

Indeed they start by saying so.

Looking solely at the tax position, we asked financial adviser Flying Colours to crunch the numbers, comparing the outcomes from saving the same amount for 40 years into a pension, an Isa, and an ordinary savings account without any tax breaks. The calculation was based on all investments growing by 6% a year, with dividend income of 3%.

They go on to further explain why such a calculation is not relivent.

Personally, I would not assume that the situation in 40 years time would be the same. It certainly hasn't in the 35 years that I've been contributing to a pension. Indeed SIPP's didn't exist back then and neither did ISA's.

If I were to advise my children, it would be do both, with the bulk into the ISA until older.

[UncleEbenezer]

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.

To be fair, different tax treatment *within* a scheme could have an effect.

I don't believe there are any such cases with purely UK assets. But someone holding foreign investments that are subject to withholding tax in their home countries could benefit from a tax treaty that applies to pensions but necessarily to ISAs, yesno? I think I came upon this when some of my Vodafone shares converted to Verizon - fortunately those were indeed inside the SIPP.

[swill453]

To be fair, different tax treatment *within* a scheme could have an effect.

I don't believe there are any such cases with purely UK assets. But someone holding foreign investments that are subject to withholding tax in their home countries could benefit from a tax treaty that applies to pensions but necessarily to ISAs, yesno? I think I came upon this when some of my Vodafone shares converted to Verizon - fortunately those were indeed inside the SIPP.

That's adding another factor though, when the contentious point seems to be the far more simple assertion that having more money in the pot assists with compounding, when the tax relief rate in is the same as the tax rate out.

My first answer in the thread showed that to be wrong in 2 lines:
£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.

Scott.

[tonyreptiles]

Wow!

My head hurts a little, but I'm amazed by the detailed responses.
It's all been very useful and, despite the nuances of the discussion, I think I get the picture.

An ISA and a SIPP is advised to hedge the Gov's tinkering in either one or the other.
ISAs are flexible enough to access whenever and wherever you like.
SIPPs have Inheritance Tax benefits.
Use the ISA first and leave the SIPP until last.
Fly off to Nicaragua, live on the beach sipping sangria.
Job done!

Thanks all

Very much appreciated.
TR

[bungeejumper]

Fly off to Nicaragua, live on the beach sipping sangria.

Well, all except for the location of the beach, perhaps?

https://travel.state.gov/content/travel ... isory.html

I once dissuaded an American tipsheet writer from advising his readers to buy Nicaraguan beachfront properties. Two weeks later, there was an election in which one of the main parties issued a platform saying that they were going to forcibly dispossess all foreign property owners.

The party didn't win, although it was close. And the ungrateful bugger never even thanked me.

BJ

[hiriskpaul]

IMHO the tax relief on pensions makes them a no brainer for higher rate taxpayers and/or those who can get a contribution from the employer and/or those who can gain NI relief, eg by salary sacrifice. If you are not in that camp and likely to get 20% tax relief on contributions and pay about 15% tax on withdrawals, then the financial benefits are marginal. You are at risk with the government moving the goal posts, but you have government tinkering risk whatever you do with your money. My personal opinion is that small to moderate private pension schemes, such as SIPPs are probably less at risk of future confiscatory rule changes than assets outside pensions.

A few benefits that have not been mentioned that might also be of interest, Under current rules:
- If you die before 75 the entire SIPP can be withdrawn free of income tax and IHT by your beneficiaries
- If you need long term care and have assets outside pensions (including in ISAs) you would be expected to run down most of these assets before getting a penny of assistance from the government. Pensions are treated according to the income they can produce.

[JuanDB]

Paul adds a key point here. As a PAYE employee with an employer contributing via salary sacrifice, and kindly throwing in their NI contributions, can add 13.8% on top of your marginal tax rate. If you combine this with planned tax arbitrage then the difference between a pension and an isa can be heavily weighed towards the pension.

In my personal example, as an an additional rate tax payer who is fortunate to be able to make the maximum pension contribution entirely at the additional tax rate. I save 45% in tax and my employer adds on 13.8%. My plan in retirement is to pay no income tax at all until state retirement age.

Personal circumstances very much apply here.

The significant benefit of pensions to higher rate tax payers do seem fair game for government meddling. Potentially with a flat rate for all. I for one was very surprised at the change to tapering in the last budget. I can only assume a “least worse” solution to address the issue of NHS pensions and the LTA. I expect a more fine grained solution in a near future budget.

Cheers,

Juan.

[GoSeigen]

IMHO the tax relief on pensions makes them a no brainer for higher rate taxpayers and/or those who can get a contribution from the employer and/or those who can gain NI relief, eg by salary sacrifice. If you are not in that camp and likely to get 20% tax relief on contributions and pay about 15% tax on withdrawals, then the financial benefits are marginal. You are at risk with the government moving the goal posts, but you have government tinkering risk whatever you do with your money. My personal opinion is that small to moderate private pension schemes, such as SIPPs are probably less at risk of future confiscatory rule changes than assets outside pensions.

A few benefits that have not been mentioned that might also be of interest, Under current rules:
- If you die before 75 the entire SIPP can be withdrawn free of income tax and IHT by your beneficiaries
- If you need long term care and have assets outside pensions (including in ISAs) you would be expected to run down most of these assets before getting a penny of assistance from the government. Pensions are treated according to the income they can produce.

As a non-income-tax payer I am moving c£2800pa from my ISA to my SIPP, which is then topped up to c£3500 with a tax rebate. Is that not an advantage vs. just leaving it in an ISA?

GS

[UncleEbenezer]

As a non-income-tax payer I am moving c£2800pa from my ISA to my SIPP, which is then topped up to c£3500 with a tax rebate. Is that not an advantage vs. just leaving it in an ISA?

GS

If your tax-free status survives hitting state pension age then you're onto a no-brainer!

But if the state pension on top of your SIPP (and any other income) brings you above the threshold, then as usual it's just deferred.

[Joe45]

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.

The key policy driver behind personal pensions is the need to encourage workers to put money away. The primary incentive here is that tax is deferred until earnings reduce significantly and a lower tax rate applies.

The 25% tax-free element is an additional incentive which will benefit those on lower earnings who would pay tax at basic rate and hence not otherwise enjoy much of a benefit, hence reducing the policy’s effectiveness.

[swill453]

As a non-income-tax payer I am moving c£2800pa from my ISA to my SIPP, which is then topped up to c£3500 with a tax rebate. Is that not an advantage vs. just leaving it in an ISA?

If your tax-free status survives hitting state pension age then you're onto a no-brainer!

But if the state pension on top of your SIPP (and any other income) brings you above the threshold, then as usual it's just deferred.

Apart from the tax saved on the 25% tax free element - £180 per year. Not bad for a few minutes work.

Scott.

[hiriskpaul]

As a non-income-tax payer I am moving c£2800pa from my ISA to my SIPP, which is then topped up to c£3500 with a tax rebate. Is that not an advantage vs. just leaving it in an ISA?

If your tax-free status survives hitting state pension age then you're onto a no-brainer!

But if the state pension on top of your SIPP (and any other income) brings you above the threshold, then as usual it's just deferred.

Apart from the tax saved on the 25% tax free element - £180 per year. Not bad for a few minutes work.

Scott.

Purely frome a financial point of view, pension contributions are a no brainer, assuming the rules don't change.

£2880 into a SIPP by a non-taxpayer or basic rate taxpayer becomes £3600 in the SIPP. If the whole lot can be withdrawn free of income tax, that is a gain of 25% of the contribution. If 20% tax is paid on the non-tax free element, the £3600 becomes £900 (tax free PCLS) + £2160 = £3060. Gain is £180 or 6.125% of the contribution.

It gets substantially better for 40% tax payers, as they get an additional £720 in tax relief, effectively meaning the contribution is only £2160, so if the entire £3600 can be withdrawn free of tax, that is a gain of about 67% on the contribution. Or if tax is paid at 20%, the gain is about 42%.

Charges may eat into these gains though as SIPP charges are often higher than for ISAs. In addition to potentially higher costs are the risks associated with the government changing the rules, income tax rates, etc.

[andyalan10]

Very late to the party, but may just be relevant to Tonyreptiles and I don't think it's been mentioned yet. There's nothing to stop you leaving your SIPP or ISA in the UK when you move overseas. I took the 25% tax free cash whilst still in the UK. When it comes to subsequent withdrawals, as I am now tax resident in France they'll be subject to the French tax regime. Part of the reason for that is that our French agent offered us her investment funds with the offer of a full refund of the upfront charges, however the ongoing 3-4% put us off investing with her

Same applies to ISAs, you can keep them but as a non-UK resident you can't make further contributions.

Andy

[AWOL]

SIPPs are also more attractive if you wish to pass inheritance to children.

[PinkDalek]

SIPPs are also more attractive if you wish to pass inheritance to children.

IHT has been mentioned earlier in the Topic (and onwards):

viewtopic.php?p=348651#p348651

[torata]

Very late to the party, but may just be relevant to Tonyreptiles and I don't think it's been mentioned yet. There's nothing to stop you leaving your SIPP or ISA in the UK when you move overseas.
<SNIP>
Same applies to ISAs, you can keep them but as a non-UK resident you can't make further contributions.

Andy

And while overseas you can contribute the non-taxpayer amount (2,880GBP) for five years
torata