ISA and/or SIPP

[YeeWo]

All my Investment Portfolio is in an ISA, run on an HYPish basis. Last Year circa £11.5k in dividends received and reinvested.

I do have a DB Pension and make AVCs of £5k pa. This still however leaves me with sufficient pensionable allowance to be putting roughly £19k pa into a Hargreaves Lansdown SIPP getting the immediate 20% uplift and claiming the Higher Rate rebate from HMRC. On the basis I can still stock-pick via a SIPP would it make sense (I'm mid 40s) to start holding stocks via both Vehicles? Indeed I could conceivably stop compounding the Tax Free Dividends back into the ISA, start drawing the dividends from the ISA and recycle the proceeds (plus HMRCs contribution) through the SIPP!

Also in the event of my untimely demise am I right in thinking SWMBO would be less likely to have Death Taxes to pay as AIUI an ISA counts towards the estate and a SIPP doesn't?

Opinions gratefully received!!

[Alaric]

Indeed I could conceivably stop compounding the Tax Free Dividends back into the ISA, start drawing the dividends from the ISA and recycle the proceeds (plus HMRCs contribution) through the SIPP!

The money in an ISA can be taken out without tax, whenever you want it. That's not nearly as possible once it's in a SIPP as the downside of receiving the tax relief is that withdrawal is disallowed until you are 55 / 10 years from State Pensions Age and is partly taxable.

[Dod101]

I think it does make sense to have both an ISA and a SIPP if you have spare funds over and above the £20,000 per year that you can subscribe to an ISA. I would fill the ISA allowance first though as a SIPP has much more restrictive rules and they keep changing. I have both but not really through choice and when/if I want to extract the dividends from the SIPP I need to pay tax on the withdrawal, having long since extracted the 25% tax free part.

Dod

[TUK020]

How much a SIPP makes sense to prioritize depends not only on your current tax rate, but also your tax rate when you start drawing pension from it.
If you might be in danger of hitting the LifeTime Allowance, or might be in danger of getting into higher rate tax as a pensioner, the one option worth thinking through is to put the money in your wife's SIPP directly

[Mentallurgist]

I concur with Dod and Alaric.

I'm also in a similar situation to yourself and the age and sums are fairly similar.

Keeping my money out of the hands of the tax man (legally of course) has always been a no brainer (something a lot of my colleagues don't always grasp).

I have ~6 months worth of living expenses in cash, make largish AVCs to the DC part of my pension and max out my S&S ISA each year.

Whilst the tax benefits of the AVCs into the pension are better, I sleep a little easier in my bed knowing that if I really, really needed it - I could get my hands on my S&S ISA funds before I'm 55 (not that I have any intention to of course).

M.

[YeeWo]

I think it does make sense to have both an ISA and a SIPP if you have spare funds over and above the £20,000 per year that you can subscribe to an ISA.

The ISA is already the value of a small house, in an IHT situation I'm mindful of my legacy being a large Tax Bill!

I would fill the ISA allowance first though as a SIPP has much more restrictive rules and they keep changing. I have both but not really through choice and when/if I want to extract the dividends from the SIPP I need to pay tax on the withdrawal, having long since extracted the 25% tax free part. Dod

After £20k to an ISA and already circa £20k to my existing pension (DB & AVCs) I wouldn't really have funds to do the SIPP with much financial vigour! Perhaps I could forget the SIPP and just massively up my AVCs to my existing scheme?, as it's company linked though I'm invested in Opaque Funds and I really love the interest of stock picking myself!

The money in an ISA can be taken out without tax, whenever you want it. That's not nearly as possible once it's in a SIPP as the downside of receiving the tax relief is that withdrawal is disallowed until you are 55 / 10 years from State Pensions Age and is partly taxable.

See above - the ISA is already a robust amount. I'm only a short decade away from being able to access a SIPP conceivably while still contributing to the company scheme. I have yet to do much thinking about costs upon exiting cash from a SIPP, thanks for pushing me in this direction. Thanks Both!

[Dod101]

I am quite out of touch with the rules concerning AVCs and pension contributions nowadays. All I can say is that I now look upon my SIPP as an extension to my invested funds in an ISA and whilst it is very helpful to be able to invest in a tax free environment, there are snags to withdrawing funds from a SIPP such as paying tax after the first 25% which is of course tax free. An advantage of a SIPP is that it is usually outside of your estate for IHT and immediate descendants can carry it on after the holder has died.

In all therefore I would always fill the ISA first and then a SIPP if there are spare fund. There are tax advantages (pro tem anyway) when paying into a SIPP.

Dod

[Urbandreamer]

And here I was thinking that I couldn't add anything after all the excelent answers!

You need to very carefully look at your AVC's. With a carefull look you may decide that's your best choice, however I have other options for you.

Pensions are subject to the Life time allowence, ISA's to IHT (unless you are VERY carefull about what you invest in and paperwork).

Your level of contributions to both indicate that "you", "may" wind up with problems with both. If you are willing to accept the IHT issue, then can I sugest VCT's. If not then a portfolio of shares that qualify for business property relief may be an option (though you will pay tax upon any dividends).

Finally, if you don't need the money, or the capital, and wish to either deny the tax man or target your social contributions, why not gift aid to a charity or charities of your choice?

My situation is quite different. I am older and have less surplus income. Hence what I do is different from my sugestions.

[hiriskpaul]

All my Investment Portfolio is in an ISA, run on an HYPish basis. Last Year circa £11.5k in dividends received and reinvested.

I do have a DB Pension and make AVCs of £5k pa. This still however leaves me with sufficient pensionable allowance to be putting roughly £19k pa into a Hargreaves Lansdown SIPP getting the immediate 20% uplift and claiming the Higher Rate rebate from HMRC. On the basis I can still stock-pick via a SIPP would it make sense (I'm mid 40s) to start holding stocks via both Vehicles? Indeed I could conceivably stop compounding the Tax Free Dividends back into the ISA, start drawing the dividends from the ISA and recycle the proceeds (plus HMRCs contribution) through the SIPP!

Also in the event of my untimely demise am I right in thinking SWMBO would be less likely to have Death Taxes to pay as AIUI an ISA counts towards the estate and a SIPP doesn't?

Opinions gratefully received!!

In your situation as a higher rate taxpayer, I think you would be better off building up a SIPP in preference to putting more into the ISA. The income tax savings from passing cash through a SIPP make this the better way to go, irrespective of the IHT benefit. My only caveat would be to check how close you are likely to be to the Lifetime Allowance. Index linked £1m sounds a lot, but could mount up very quickly for someone in your position, especially so if you want to work until state retirement age or longer. As you are a higher rate taxpayer you should not lose out by exceeding the LTA and paying the charge, but you may end up not fully benefiting from the tax relief.

Impossible to make a definitive judgement as we don’t know what the future will bring and what changes will be made to the tax system and pensions, but if nothing changes, the SIPP looks like it will be a good choice for you.

[Eboli]

Perhaps without planning it to be so I have ended up with an ISA and SIPP (post 25% tax free withdrawal) of roughly the same amount. I'm rather glad to have both. Some points that strike me:
1. The 25% tax free amount is not to be sniffed at. For a 40% taxpayer during contributions and an LTA of £1m that's a £100K potential bonus. Of course either the LTA or the 25% could be tweaked at any point.
2. The SIPP allows me to adjust my withdrawals to fully utilise my 20% tax band in retirement as often adjustments to the higher-rate threshold can be uneven (the changes coming in on 6 April this year is a case in point). In addition you can normally take the whole year's income on 6th April and earn interest on it before it is consumed
3. The ISA has meanwhile by default become a useful source of capital for difficult to plan for medical expenses.
4. Using the SIPP has allowed the possibility of a large tax free amount passing on death (I have LTA protection for a higher amount). I intend to try and 'consume' the ISA over my retirement (though a lifetime of parsimony is difficult to put into full reverse and I've not been very successful so far).
But the main point is I am happy with the above because it seems to suit my situation. There are too many variables in retirement to suggest that one-size fits all.

Eb.

[Dod101]

Can I respond to Eboli without seeking an argument?

1. You have 100% tax free capital by using ISAs

2. Agreed. I usually take funds from my SIPP but always keep these to a level within the 20% tax band.

3. Agreed, but of course you can use the tax free capital in an ISA for anything you want. personally I use the NHS when required but that is a separate issue.

4. Re IHT. Funds held in a SIPP are usually free of IHT (depends if the trustees have discretion on death; most trustees do) ISA funds are subject to IHT but there are so many allowances these days, and transfers of tax free allowances from a spouse, an allowance for the family home in most circumstances and so on that IHT can be reduced significantly.

Dod

[Eboli]

Dod,

My first point was rather badly expressed.

If we ignore any fluctuations in investment growth - in fact let's assume 0% to keep it simple - to accumulate £1m in an ISA cost £1m. To accumulate £1m in a SIPP for a 40% taxpayer cost £600,000 in effect. On withdrawal ignoring the tax free amount the ISA yields £1m but the SIPP after 40% tax, say, would yield £600,000. We ignore that tax rates after retirement are likely to be lower. So I was making the simple point that the tax free amount allows the SIPP holder to withdraw £250,000 of which the Gov't has contributed £100,000. That is, of course, vastly simplified.

I hope that serves to clarify the point I was attempting to make.

Eb.

[Howard]

All my Investment Portfolio is in an ISA, run on an HYPish basis. Last Year circa £11.5k in dividends received and reinvested.

I do have a DB Pension and make AVCs of £5k pa. This still however leaves me with sufficient pensionable allowance to be putting roughly £19k pa into a Hargreaves Lansdown SIPP getting the immediate 20% uplift and claiming the Higher Rate rebate from HMRC. On the basis I can still stock-pick via a SIPP would it make sense (I'm mid 40s) to start holding stocks via both Vehicles? Indeed I could conceivably stop compounding the Tax Free Dividends back into the ISA, start drawing the dividends from the ISA and recycle the proceeds (plus HMRCs contribution) through the SIPP!

Also in the event of my untimely demise am I right in thinking SWMBO would be less likely to have Death Taxes to pay as AIUI an ISA counts towards the estate and a SIPP doesn't?

Opinions gratefully received!!

Could I offer an opinion which is based on my experience?

Your situation is much like mine 25 years ago. I was lucky around 1993 to find a company called Personal Pension Management in Salisbury who were one of the firms who first offered SIPPs.

Like you I was living below my income and so could invest for the future. I had investments in PEPs the forerunner of ISAs and was contributing to a company pension scheme. And I owned the type of house which would be ideal for a pair of “empty nesters” 25 years later.

A SIPP seemed the ideal way of investing, given Government tax incentives, so I invested the maximum I could and got tax relief at 40% every year.
When deciding to retire, I took all the 25% tax-free sums out on the basis that I could invest them better than the “professionals”.

Now, looking back, I don’t regret investing in the SIPP. With significant sums in it and ISAs and the good fortune of a final salary pension it provides me with extra flexibility. It is now in drawdown, because I don’t want to exceed the lifetime allowance when it is reviewed at age 75. However, given current legislation, it is a superb vehicle for passing on an IHT free investment vehicle to one of my children.

Yes, one does have to pay income tax at one’s highest rate on income taken from a SIPP however as Urbandreamer has suggested above you might be the kind of individual who enjoys minimising one’s tax by giving to charity. I am lucky enough to be able, as a result of my planning 25 years ago, to give significant sums away to charities which I have personally researched. At my age it is fun to be invited to visit leading-edge research facilities and to talk to young scientists, to be invited to chat to a Nobel Prize winner about his research over dinner or to meet young people who are working on the other side of the world, making a difference. If you start early, given your current high-earning situation, over the years, you may find that you have soon given away a high six figure sum without really noticing.

This may not be your style, but, in my opinion, having the resources to engage with bright young minds when you are in your seventies, however you do it, can keep you young and your mind active! The Government help you with tax rebates and it’s safer than speeding in a Porsche!

Whatever you decide - good luck!

Howard

[BusyBumbleBee]

What a refreshing post, Howard - thank-you