Author Topic: SIPP vs ISA  (Read 2843 times)

Playing with Fire UK

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SIPP vs ISA
« on: July 30, 2017, 09:31:32 AM »
I'm interested in how other people here have found a balance between SIPP and ISA (and taxable) investing.

It seems pretty clear cut for people who will be FIREing very young (ISAs win) and people who will retire after the Personal Pension Access Age (PPAA currently 55, likely to be rising to 10 years below the State Pension Age (SPA), or something else), where pensions win.

My decision making:

I'm mid-30s, hoping to FIRE by 40. I've funded my SIPP to the point where, if I get average growth, by the time I'm 55 there will be 25x my current expenses (adjusted for inflation). Now everything else is going into an ISA or taxable account. If I decide that my expenses have increased, or growth is lower than I thought, or it looks like the tax-favourability of contributions is about to get worse I'll top up the SIPP.

For my ISA and tax money, instead of 25x expenses, I'll need a lower value because my SIPP will continue to grow and I'm happy to spend down my taxed-money after FIRE and before PPAA. My concern is that I don't know what the markets will do and how much I'll need to cover those years of spending. My other concern is that if I pull the FIRE cord in a couple of years, I could find out that the PPAA has gone up again and now I don't have the stache to cover until that age and I'm a few years out of the workplace.

I'd like to arrange an interest only mortgage so that I can put more money in my SIPP and then pay off the mortgage after the PPAA. I'm not finding this straightforward at the moment.

I don't rate Lifetime ISAs for higher rate taxpayers who own a home.

What do you think?

Playing with Fire UK

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Re: SIPP vs ISA
« Reply #1 on: July 30, 2017, 09:47:54 AM »
I like these Bridge to FI and Bridge Stability posts from the Finance Zombie.

And this and this from Monevator.

londonstache

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Re: SIPP vs ISA
« Reply #2 on: July 31, 2017, 07:16:51 AM »
I'm mid-30s, hoping to FIRE by 40.

Firstly congratulations on the strong work - FIRE by 40 is very impressive as I'm a long way short of that target.

The ISA route seems reasonable but I'm working on the assumption that the PPAA will be at least 3 years higher than it is currently although I'd like to pull the ripcord at this age when I hit 55. If it's not an option I'd backstop with ISAs for 3 years.

I've got a different perspective on LISA - I own a property but salary sacrifice into pension to take me out of the higher rate bracket, so 25% seems like a decent kicker, particularly compared to a standard Stocks & Shares ISA. When I reach the point where I'm hitting/close to hitting the lifetime cap in the SIPP I'm going to have to look at saving more in ISA than currently.

Could you run a simulation of the current PPA +3? I'm likely a similar age and it's what I'm working to.

dreams_and_discoveries

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Re: SIPP vs ISA
« Reply #3 on: August 01, 2017, 12:00:30 AM »
I've got a good old excel model, I'm maxing my ISA and pension for the next year or so, then I'll switch to taxable when my pension reaches the number.

Playing with Fire UK

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Re: SIPP vs ISA
« Reply #4 on: August 06, 2017, 01:36:56 AM »
I've got a different perspective on LISA - I own a property but salary sacrifice into pension to take me out of the higher rate bracket, so 25% seems like a decent kicker, particularly compared to a standard Stocks & Shares ISA. When I reach the point where I'm hitting/close to hitting the lifetime cap in the SIPP I'm going to have to look at saving more in ISA than currently.

Could you run a simulation of the current PPA +3? I'm likely a similar age and it's what I'm working to.

Remember that if you can salary sacrifice into a pension you'll get 32% for your basic pay (20% tax plus 12% NI), and more if your employers will cough up their NI savings.

For my spreadsheet, if the PPAA magically stayed at 55 I'd have 100% of what I need, at 58 I'll have 111%, 59 is 116% and 61 would be a massive 125%. Way too much money!

MmatoO

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Re: SIPP vs ISA
« Reply #5 on: August 07, 2017, 03:17:12 PM »
I'm a bit fuzzy on the distinction between SIPP and Salary Sacrifice/Employer top-up schemes.

I did find that whatever our corporate scheme is, it has a very limited offer of funds and their annual charges are ridiculous, but it's still the best vehicle for sacrificing bonuses and normally monthly percentage of my gross salary that gets doubled by your employer.
For anything above that though ...
(1) Are SIPPs worth the additional admin charge? (the question should probably be more like 'when are they worth the additional admin charge')
(2) Do they give you flexibility on a weekly/monthly basis to amend how much you put in?

My strategy is essentially to put everything above the basic tax rate into currently Employer's scheme (but am obviously considering replacing part of it with a SIPP instead). And my income is not so high that I'd need to worry about exceeding the annual limit, far from it I'm afraid.
Re (2), I have to forecast at the start of the year what % of my salary I want to put into the scheme. While that is fairly simple to calculate if you have a single income/fixed income, I have multiple income streams and I sometimes do overtime and I'd like the flexibility to reduce my tax burden on ideally weekly basis (to avoid not only income tax, but ideally the higher rate of NI as well), but as a minimum on a monthly basis.

Am I being silly or do you have any advice (ideally because you've tackled this before)? Thank you in advance.
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dreams_and_discoveries

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Re: SIPP vs ISA
« Reply #6 on: August 09, 2017, 11:54:52 PM »
I'd say fees/charges are the main difference between SIPPs and employer schemes, I believe employer schemes can also have different age restrictions on when you can access the funds, it's worth checking how flexible yours is.

cerat0n1a

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Re: SIPP vs ISA
« Reply #7 on: August 10, 2017, 01:44:44 AM »
Re (2), I have to forecast at the start of the year what % of my salary I want to put into the scheme. While that is fairly simple to calculate if you have a single income/fixed income, I have multiple income streams and I sometimes do overtime

Painful, isn't it? I have to take a guess at the start of the year as to what my bonus is going to be in 11 months time.

On the employer scheme fees/lack of fund choices, I would look into the possibility of transferring the pot into a SIPP. Plan to do this when I finish work, but a couple of colleagues periodically (every year or two) sweep all the money from our work pension into their SIPPs (looks like no exit charges on our work pension and reasonably helpful/efficient admin.)

I expect to see more changes to pension tax relief and/or contribution limits in the next year or two, so I think for higher rate taxpayers, there's an argument for using it while it's still there. (Equally, the increase in the ISA allowance seems amazingly helpful for well paid FI seekers.)

MmatoO

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Re: SIPP vs ISA
« Reply #8 on: August 10, 2017, 01:54:26 AM »
On the employer scheme fees/lack of fund choices, I would look into the possibility of transferring the pot into a SIPP. Plan to do this when I finish work, but a couple of colleagues periodically (every year or two) sweep all the money from our work pension into their SIPPs (looks like no exit charges on our work pension and reasonably helpful/efficient admin.)
Oh my, I wasn't even aware that's possible, thanks!
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Playing with Fire UK

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Re: SIPP vs ISA
« Reply #9 on: August 10, 2017, 02:06:29 AM »
Salary Sacrifice allows you to save on National Insurance as well. For 40% pay then it is an extra 2% unless employers kick in some of their NI contributions.

For me, this isn't worth it as I don't like the admin or charges of our workplace pension. If I was using basic rate pay I'd be all over it.

My SIPP is incredibly flexible, I can add to it whenever I want (up to the annual limit etc), I think this is typical, but may not be universal. The only thing I'd check on is whether your provider will chip in the tax rebate immediately (meaning you can buy in one transaction) or if they wait until they get it from HMRC (meaning two transactions, but not the end of the world).

Another thing is to think about how quickly your SIPP might grow. I chose a % based fee structure because it made sense for the first couple of years, but (knowing how quickly I added contributions) I'd have been better off going for a fixed fee straight away.

I'd look into putting the majority into your workplace pension initially, but aiming to slightly undershoot your target, and then put the difference into the SIPP in mid-March when you know all the variables from your workplace pension. Would that work with your set up?

MmatoO

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Re: SIPP vs ISA
« Reply #10 on: August 10, 2017, 04:26:17 AM »
It was fun looking at this :) Doesn't make a dent to the bottom line, but I just love this sort of 'investigating' :D
Salary Sacrifice allows you to save on National Insurance as well. For 40% pay then it is an extra 2% unless employers kick in some of their NI contributions.

For me, this isn't worth it as I don't like the admin or charges of our workplace pension. If I was using basic rate pay I'd be all over it.
Sorry, I was a bit daft. If you're a higher rate taxpayer, your NI weekly contributions are normally already above the upper earnings limit and are @2% (obviously there might be weeks that they aren't if you're self-employed/not permanent or similar - NI is calculated on a weekly basis, right?).
And your're right, if it's only the 2% that we're talking about, it's probably an easy decision, unless the employer is offering to double your state mandated (is it?) contribution which rises as you get older (and therefore this contribution will be higher to what you would get back from NI and tax alone).

I know it's pennies worth, but now I'm really interested what would happen if I were saving part of my basic rate salary (with NI @12%) :D Now I really want to know how the system works haha

My SIPP is incredibly flexible, I can add to it whenever I want (up to the annual limit etc), I think this is typical, but may not be universal. The only thing I'd check on is whether your provider will chip in the tax rebate immediately (meaning you can buy in one transaction) or if they wait until they get it from HMRC (meaning two transactions, but not the end of the world).
While the records of our administrator are very poor, I think* it's all in one go. Basically they separate my own contribution into the 1st number, and the NI saving + employers contribution is part of the 2nd number.
Looking back when I only did the 2% salary sacrifice at basic rate (and my employer did 4%), I can see
(1) that it's more than double and
(2) that it rose in the same month when I got my raise (which would also suggest higher 'rebate' in NI & tax).
As soon as I started forecasting % of salary above the basic rate (and the employer only doubled that 2% while the rest was NI & tax saving on the rest), this becomes even further muddled, but I might just find time to investigate this at some point :)

I'd look into putting the majority into your workplace pension initially, but aiming to slightly undershoot your target, and then put the difference into the SIPP in mid-March when you know all the variables from your workplace pension. Would that work with your set up?
That is great advice (glad to hear SIPPs are more flexible!). Coupled with @cerat0n1a's suggestion to take it out of the workplace pension once or twice a year would give best of both worlds (obviously need to read up on the details as you all suggested).

I feel like this has definitely answered all the intrigues of SIPPs v employer pensions for me. Thank you all!


On another note, any ideas what might happen with Brexit v how it will be now?
(1) Did people get to keep their SIPP/ISA pots if they were tax residents in another EU state or did they have to cash out? What about if they were permanent residents?
(2) Were they able to keep contributing to these pots?
(3) What about pensions? You are able to work in different EU countries and get a pension from each one of them if you fulfill the minimum requirements. In the UK this is 10 years (to get a part of the state pension, I assume 10/45 or so of the weekly rate).
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AnswerIs42

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Re: SIPP vs ISA
« Reply #11 on: August 10, 2017, 05:36:43 AM »
There's apparently a hacky workaround you can do if you have salary sacrifice, where if you make *really* large contributions for a few months of the year, and small contributions for the others; then you can effectively get 40% tax relief and 12% NI relief on most of your contributions, because NI is calculated on a monthly basis, and income tax is calculated on an annual basis. I haven't tried this though, because we don't have salary sacrifice :(

Playing with Fire UK

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Re: SIPP vs ISA
« Reply #12 on: August 10, 2017, 06:29:44 AM »
There's apparently a hacky workaround you can do if you have salary sacrifice, where if you make *really* large contributions for a few months of the year, and small contributions for the others; then you can effectively get 40% tax relief and 12% NI relief on most of your contributions, because NI is calculated on a monthly basis, and income tax is calculated on an annual basis. I haven't tried this though, because we don't have salary sacrifice :(

I have salary sacrifice but they don't allow this. You also need to be mindful of the minimum wage.

cerat0n1a

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Re: SIPP vs ISA
« Reply #13 on: August 10, 2017, 09:53:54 AM »
Yes, you can't salary sacrifice so much that you go below minimum wage. Many of my colleagues went to minimum wage by this mechanism for the second half of the last tax year.

The Inland Revenue generally also takes a dim view of employer salary sacrifice pension arrangements changing too often. If you choose say 10%, they expect it to stay at that - and for there to only be an annual window to change it, unless there is a "lifestyle event" (child being born, divorce etc.) or some other good reason for it to change outside of the window.

MmatoO

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Re: SIPP vs ISA
« Reply #14 on: August 10, 2017, 10:11:26 AM »
The Inland Revenue generally also takes a dim view of employer salary sacrifice pension arrangements changing too often. If you choose say 10%, they expect it to stay at that - and for there to only be an annual window to change it, unless there is a "lifestyle event" (child being born, divorce etc.) or some other good reason for it to change outside of the window.
Yes, that's exactly why I had to forecast it at the start of each year.
Thanks to @Playing with Fire UK, I now know it would be beneficial to do the exact value into the SIPP before the end of the year instead ;)
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dreams_and_discoveries

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Re: SIPP vs ISA
« Reply #15 on: August 12, 2017, 10:32:06 AM »
I agree SIPP's are much more flexible, and easier to make last minute contributions to.

Playing with Fire UK

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Re: SIPP vs ISA
« Reply #16 on: August 12, 2017, 11:25:49 AM »
I agree SIPP's are much more flexible, and easier to make last minute contributions to.

I had a panicky moment when my debit card had a security alert on it on April 5th in the afternoon topping up my SIPP. I'd suggest not leaving it quite that late...

MmatoO

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Re: SIPP vs ISA
« Reply #17 on: September 01, 2017, 02:46:49 PM »
Thank you all for your help - and I finally got the answers from all relevant stakeholders.

1) It looks like there are no tax implications when moving money from one pension to another, as long as you follow the rules here: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm100000
2) It also doesn't matter what type pension it is for above to apply. For example, I was very surprised that this still applies to salary sacrifice schemes as well (I was under the impression Osborne hit those a bit).

In my case all my OTT queries turned out to be pointless.
Since my current scheme is set up for automatic tax relief and my employer gives me 13.8% NI saving on anything I put in the same month and my employer doubles a set % of my contribution ... it's really a no-brainer.
Now I just have to find a cheap SIPP platform to buy my fav funds to transfer everything there on a monthly/quarterly/once in a blue moon basis :)
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Playing with Fire UK

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Re: SIPP vs ISA
« Reply #18 on: September 02, 2017, 12:09:34 AM »
That is an excellent work scheme! Are you familiar with Monevator's comparison table?

MmatoO

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Re: SIPP vs ISA
« Reply #19 on: September 02, 2017, 01:43:44 AM »
I am, thank you. I believe I was looking at Cavendish for a start, and transferring it to a fixed fee platform as soon as I hit that magic number, but need to spend an hour or two on that :)

I guess I also need to think a bit about my strategy as well, perhaps I'll go to the case study section of the forum at one point :)

Too bad my numbers don't look anything close like the ones MMM keeps operating with :'(
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Playing with Fire UK

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Re: SIPP vs ISA
« Reply #20 on: September 02, 2017, 02:01:54 AM »
I am, thank you. I believe I was looking at Cavendish for a start, and transferring it to a fixed fee platform as soon as I hit that magic number, but need to spend an hour or two on that :)

I guess I also need to think a bit about my strategy as well, perhaps I'll go to the case study section of the forum at one point :)

Too bad my numbers don't look anything close like the ones MMM keeps operating with :'(

Cool, look at the exit fees and exit hassle before deciding against a fixed fee platform from the outset. Figure out how many years it will take you to get to the point where a fixed fee is better (I saved more aggressively than I thought I would, so should have gone straight to fixed fee, YMMV).

UK numbers look very different to US numbers. We pay more tax and we have the NHS. Remember only 14% of people in the UK pay higher rate tax, and our national saving rate is less than 2%, so you are already doing so much better than most. Post that case study.