UK Personal Allowance predictions?

[esprit-de-lescalier]

The current UK personal allowance is £10600 which is significantly higher than it used to be at £6475 before the current coalition government got in!

Does anyone have any predictions as to what the UK Personal Allowance will be in the coming years? I ask as this number dictates the balance of stash between SIPP and ISA I have. Currently I aim to have £265k in my SIPP which will give me exactly £10600 tax free per year, with all other cash being in an ISA.

My understanding is that this is the most tax efficient way of splitting things, although I'm the first to admit i'm no exert on these things so am happy to be put right.

[former player]

The sensible thing would be for the taxable allowance to keep pace with 40 hours of minimum wage.  But what does sensible have to do with it, and what will the minimum wage be anyway?

The benefit of putting in a SIPP is greater if you are putting in money which would otherwise be taxed at the 40% higher rate, so you need to factor your potential for higher rate income into your calculations - the benefits of investing that much extra money which would otherwise go to the taxman outweigh the downside of paying tax on the income taken out.

ISAs don't have to be cash, of course, and shouldn't be for long-term investing.

[esprit-de-lescalier]

The funds I have in my ISA are virtually identical to the funds I have in my SIPP so only the wrapper is different. I'm only in the 20% tax bracket currently, although that might change in the future as I'm close (£40k atm)

[mveill1]

"Currently I aim to have £265k in my SIPP which will give me exactly £10600 tax free, with all other cash being in an ISA"

I don't understand. Surely you don't mean a £265,000 balance as that would make no sense?

[esprit-de-lescalier]

mveill1, a balance of £265,000 with a 4% withdrawal rate is £10,600 / year which will be 100% tax free.

The idea is to minimize the tax paid

[esprit-de-lescalier]

Just a note (mostly to myself), the current conservative government has pledged to increase the personal allowance to £12,500 by 2020 if they win the next general election. Good news for pensioners.

They have also pledged to increase the 40% tax bracket to £50,000 which isn't ideal for savers (who get tax relief on their pension contributions)

[mveill1]

mveill1, a balance of £265,000 with a 4% withdrawal rate is £10,600 / year which will be 100% tax free.

The idea is to minimize the tax paid

Sorry if I'm being thick, but if you want to minimise taxes, it seems to me that all cash you want to invest for retirement would go in a SIPP. Sure, if you withdraw more than the allowance you'll have to pay income tax, but that goes for the income you'd take from your ISA as well, with the difference that you can't postpone the income tax payable on your ISA contributions. Being able to withdraw before age 60 (or whichever it will be by the time we retire) is a good reason to use ISAs, but from a pure tax efficiency perspective SIPPs always win, no?

I am facing the same questions so it's quite useful to me to have these discussions, I'm not sure I "get it" sometimes.

[auntie_betty]

I've just done a very quick & dirty calc (which I'd be grateful if someone would check independently!).
Based on 20 years, 5% growth a year, assuming no uplift in savings rate or tax allowance - obviously both unlikely but don't think it affects the direction of the outcome.

ISA - 10k of your salary = 8k to invest (ignoring NI)
Pension - 10k of your salary = 8k to invest, plus tax rebate (claimed by SIPP provider) = total investment of 10k per annum.

ISA - end of 20 years pot has grown to 277.8k. Withdraw at 4% = 11.1k. Minimal tax on 0.5k so 11k after tax.

Pension - end of 20 years pot has grown 347.2k. Withdraw at 4% = 13.9k. Tax allowance of 10.6k, taxable amount 3.3k, tax payable @20% £0.7k = 13.2k after tax

Difference = 2.2k.
Also, you can take 25% of your pension tax free and then withdraw your full tax allowance tax free. That gives you a tax free sum of 86.8k, a remaining pot of 260.4k and withdraw at 4% = 10.4k tax free.

Like I said, quick and dirty. But on the very rough sums above, you can end up with good lump sum of 86.8k and only forfeit 11.0k-10.4k = 0.6k per annum. The drawback being it can't be accessed to 55 of course.

[mveill1]

I've just done a very quick & dirty calc (which I'd be grateful if someone would check independently!).
Based on 20 years, 5% growth a year, assuming no uplift in savings rate or tax allowance - obviously both unlikely but don't think it affects the direction of the outcome.

ISA - 10k of your salary = 8k to invest (ignoring NI)
Pension - 10k of your salary = 8k to invest, plus tax rebate (claimed by SIPP provider) = total investment of 10k per annum.

ISA - end of 20 years pot has grown to 277.8k. Withdraw at 4% = 11.1k. Minimal tax on 0.5k so 11k after tax.

Pension - end of 20 years pot has grown 347.2k. Withdraw at 4% = 13.9k. Tax allowance of 10.6k, taxable amount 3.3k, tax payable @20% £0.7k = 13.2k after tax

Difference = 2.2k.
Also, you can take 25% of your pension tax free and then withdraw your full tax allowance tax free. That gives you a tax free sum of 86.8k, a remaining pot of 260.4k and withdraw at 4% = 10.4k tax free.

Like I said, quick and dirty. But on the very rough sums above, you can end up with good lump sum of 86.8k and only forfeit 11.0k-10.4k = 0.6k per annum. The drawback being it can't be accessed to 55 of course.

The answer has to be right, regardless of the calculations I suppose. I'm not aware of a difference between SIPPs and ISAs that have a bearing on returns, except for the income tax postponement. But I'm happy to be corrected if I'm wrong.

[esprit-de-lescalier]

The biggest difference comes if you put into a pension at 40% tax relief and then draw out at 20% tax.

[auntie_betty]

The answer has to be right, regardless of the calculations I suppose. I'm not aware of a difference between SIPPs and ISAs that have a bearing on returns, except for the income tax postponement. But I'm happy to be corrected if I'm wrong.

The difference lies in the 25% added in tax relief on contributions, meaning you only contribute only 80% of the total invested, or 60% if a higher tax payer. Not a bad immediate return :)

[mveill1]

The answer has to be right, regardless of the calculations I suppose. I'm not aware of a difference between SIPPs and ISAs that have a bearing on returns, except for the income tax postponement. But I'm happy to be corrected if I'm wrong.

The difference lies in the 25% added in tax relief on contributions, meaning you only contribute only 80% of the total invested, or 60% if a higher tax payer. Not a bad immediate return :)

Yes; that's the tax postponement I was talking about. "postponement" because you will pay some income tax on the money you put in, down the line, when you withdraw.