SIPP's for Old Guys
Posted: May 5th, 2022, 3:03 pm
Is there a general rule about the age at which it would be a bit too late to open a SIPP?
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I do the oppositeLootman wrote: I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.
That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.pje16 wrote:I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISALootman wrote:I would certainly want to ensure that I was subscribing the full £20,000 a year to an ISA (and another £20,000 to my wife's ISA) annually before I would consider a SIPP.
Although your spouse or civil partner can inherit your ISA that is as far as it can be inherited. Hence once you are both dead the ISA(s) will be subject to IHT when passed to other beneficiaries whereas anything in a SIPP will be passed along in accordance with your "expression of wishes" and bypass IHT (and also bypass income tax on the beneficiaries subsequent withdrawals if you died before age 75). Thus if you want to pass it onto beneficiaries other than your spouse then it may make sense to put it into a SIPP rather than an ISA if you are otherwise close to the IHT limit.Lootman wrote:That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.pje16 wrote: I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA
As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".
Yes, there are pros and cons to both. I was merely demonstrating that pje's statement that SIPPs give "a much better return than any ISA" is an exaggeration. The correct answer to the question "which is best?" is "it depends".ursaminortaur wrote:Although your spouse or civil partner can inherit your ISA that is as far as it can be inherited. Hence once you are both dead the ISA(s) will be subject to IHT when passed to other beneficiaries whereas anything in a SIPP will be passed along in accordance with your "expression of wishes" and bypass IHT (and also bypass income tax on the beneficiaries subsequent withdrawals if you died before age 75). Thus if you want to pass it onto beneficiaries other than your spouse then it may make sense to put it into a SIPP rather than an ISA if you are otherwise close to the IHT limit.Lootman wrote: That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.
As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".
That is a very impressive ISA - well doneLootman wrote:That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.pje16 wrote: I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA
As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".
As you already said, tax situation matters. I am not a higher rate tax payer, but can spend at least 5 years as a zero rate tax payer when I retire.pje16 wrote:What I meant was on the way into a SIPP
as a higher rate tax payer I pay in 60, UKGOV effectively adds 40
40/60 is a 66.67% return even if the investment doesn't grow
You will get 20% tax relief added to the amount you contribute into the pension (and if a higher rate tax payer can reclaim the difference between any higher rate tax paid on your contribution and that 20%). You will have to pay tax when you take it out but may well be able to arrange things so that you are paying a lower tax rate when drawing the money out. Even in the situation where you pay tax on withdrawals at the same rate you did when contributing to the SIPP you will still be better off since 25% can be withdrawn tax free.bruncher wrote:The issue is more whether I would be recycling money and paying tax again. If I have cash in my bank, then I invest it in a SIPP I'll have to pay tax on the same money when I take it out. Is it worth the admin?
It is added automatically but can take a month or two to appear in your pension pot since the payment is from HMRC. If you are a higher rate tax payer though you will need to claim the extra back via your self assessment tax return. Note. Only the 20% goes into your SIPP the higher rate tax rebate is paid to you (or used to reduce your tax bill).bruncher wrote:Thanks for all the input, I like the fact that everything taken out of the ISA is tax free, but I'll kick off a SIPP as well. Do all the SIPP managers add the 20% tax rebate for all contributions automatically, or do I have to contact HMRC?
It's quite mechanical isn't it? as a higher rate tax payer utilising salary sacrifice and getting the employer NI contributions too, if you gave up £600k of earnings, the SIPP would have been topped upto £1.177m. If you're a lower rate tax payer in retirement, you'd pay 15% tax, so that would be reduced to £1,000,655. after tax. So yes, quite juicy!Lootman wrote:That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.pje16 wrote: I do the opposite. Prefer the juicy tax relief on my SIPP, a much better return than any ISA
As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".
Yes but you are not comparing like with like. A true comparison would, for convenience sake, show the difference between putting 20K a year into an ISA and 20K (before any tax adjustment) into a SIPP. Assume the same RoR on each, and of course the same number of years. Then look at the drawdown and the effect of taxes on that (in the case of a SIPP).paulnumbers wrote:It's quite mechanical isn't it? as a higher rate tax payer utilising salary sacrifice and getting the employer NI contributions too, if you gave up £600k of earnings, the SIPP would have been topped up to £1.177m. If you're a lower rate tax payer in retirement, you'd pay 15% tax, so that would be reduced to £1,000,655. after tax. So yes, quite juicy!Lootman wrote: That very much depends on how you compute it. Especially taking into account that withdrawals are free of all tax for an ISA whereas most of what you take out of a SIPP is subject to your marginal income tax rate.
As an example my ISA has £600K's worth of profits within it. I will pay zero tax on any of it when withdrawn. How much tax would you pay on 600K withdrawn profits within a SIPP? That difference alone can make the tax relief upfront on a SIPP look far from "juicy".
If even you were a higher rate taxpayer in retirement for all of the income from the SIPP, you'd get £824,068 out
The SIPP will win unless you are paying more tax when you withdraw the money than when you invest it because 25% of the withdrawal is tax free but has been boosted by tax relief. The increase purely from that effect for a 20% contribution and withdrawal rate will be (0.25 * 100/80 + 0.75 - 1) = 0.0625 ie 6.25%. Thus if you were withdrawing at the same 20% tax rate as you contributed you would be 6.25% better off with a SIPP rather than an ISA if you achieved the same growth rate in both.Lootman wrote:Yes but you are not comparing like with like. A true comparison would, for convenience sake, show the difference between putting 20K a year into an ISA and 20K (before any tax adjustment) into a SIPP. Assume the same RoR on each, and of course the same number of years. Then look at the drawdown and the effect of taxes on that (in the case of a SIPP).paulnumbers wrote: It's quite mechanical isn't it? as a higher rate tax payer utilising salary sacrifice and getting the employer NI contributions too, if you gave up £600k of earnings, the SIPP would have been topped up to £1.177m. If you're a lower rate tax payer in retirement, you'd pay 15% tax, so that would be reduced to £1,000,655. after tax. So yes, quite juicy!
If even you were a higher rate taxpayer in retirement for all of the income from the SIPP, you'd get £824,068 out