SIPP vs ISA? - advice needed

[Jade]

Hello,

I haven't been here for a while, but I  hope you're all doing ok.

I'm needing some input on whether it's worth adding a Vanguard SIPP to our portfolio (instead or as well as our current ISAs).

INCOME

I'm 45 & work at a University on a good zero hour contract. I earn around £18-19k net currently. My husband is 50 and has just retired from nursing. He may work in a different field or volunteer in the future but everything is on hold as we are currently shielding.

OUTGOINGS
We live on about £10k a year & this has been the case for many years.

ASSETS

We are (child &) mortgage free & our  house is worth around £220k.

We have about £67k in Vanguard Life Strategy 60 in my husband's name & £7k in my name in ISA's) which we're currently adding about 50% of our income to (keeping the pots below 75k for security). We also have around £10k in cash accounts (gaining some interest) for emergencies & as I'm not on a contract.

My husband has an NHS pension which he isn't withdrawing yet (so it will increase) that would give us £2k a year plus £8k lump sum if taken now for e.g.

I've had a USS pension for about 4 years so far which I contribute 9.6% of my salary, whilst the uni gives 21.4%. I can access it at 55. I'm not sure how much it would give us if I take it then (its also dependant on how many hours I do per yr till then. I'm aiming at least carrying on roughly as I am till 50), I'm thinking maybe it will yield £1-2k a year.. We're sort of just thinking of it as a bonus as its hard to predict (though obviously it will be a good percentage due to our low living costs).

PLANS

We're putting around £9k a year into Vanguard LS 60. Our rough plan was to get to around £120k in five years time & assess things then.. likely I'll keep working in some capacity & we could access the nhs pension & live off the interest on the £120k (£4-5k approx a yr) if necessary (if I'm earning below our £10k living costs).

Releasing some equity by moving to a cheaper property is an option too.

SIPP?

My husband has been reading about Vanguards new SIPP & we started wondering if the extra 20% tax relief would be worth going for instead of continuing with the ISA's (or a combo). That's the pro as well as diversifying. The con's are obviously tying up any of these contributions till 55 or higher due to the likelihood of government changes & interference & also reduced flexibility and access to the money if needed.

We wanted to pick your brains and see your thoughts. The other thought I had was for us to keep going with the ISA as planned till I'm 50 and then start SIPP(S).. (I read about pension recycling on Monevator). I understand my husband could also put £3600 gross a yr in if unemployed/retired.

Ultimately, I guess it's about how we specifically construct the ladder to state pension (which will be fine for us to live on.. All being well & its available) to maximize savings.. But also not end up with too much in old age as we don't have dependants.

Thanks in advance.

[vand]

Personally I think by switching to a SIPP you'd come out slightly ahead vs continuing with the ISA.  Normally the drawback of a SIPP as you have said is that you can't access the money until 55, but given your age and the fact that you have already amassed a very decent inside your ISAs (7years' of living costs!) I really can't envisage a scenario where you would spend all the ISA and need the SIPP funds before you could access them.

As you have such a low living costs its quite possible that you would be able to stay under the personal threshold whilst drawing income from your pensions, so effectively pay zero taxes on it, whilst going the ISA route you've already had 30% skimmed off the top in direct taxation.

[Jade]

Thanks for your input vand, that helps.

I think one question I've been struggling to get clear myself, which your post helped me process some more, is also our need to clarify which route is best for our situation... a) drawdown or b) living off the interest from our ISA and / or SIPP.

Although the SIPP is better financially, if we decided to save to that from now, we'd be pushing ourselves down the drawdown path for the ISA if I did decide to stop work from 50 (as the ISA pot would stay at around £74k plus interest as we now start saving to the SIPP). This would be enough for 7 years onwards as you said, but then would run out, though we would then move onto the SIPP.

If we managed to get to £120k in the ISA by the time I'm 50, we could live off the interest and not touch the capital (possibly with a little work to top up our living costs).

As I mentioned, we don't want to end up with too big a pot in the very long run but I'm wondering now that I'm untangling it, if the benefit of continuing with the ISA is that it leaves our options open with regards to drawdown and living off the interest... Especially considering not being sure about how long I'll work, hours I'll get etc.

Does that make sense? :)

[sea_saw]

But in that scenario, the money in the SIPP would be growing no? You'd end up with exactly the same balance, aside from tax relief differences.

[vand]

The aim is to maximize overall wealth given the tax wrappper options available to you, not to maximize wealth in any particular wrapper.  You always have the option to topping off the ISA in your last year or so being retirement if you think you need more outside of pension wrappers.

I don't quite understand your aversion to drawing down capital from the ISA while still unable to access the SIPP money - that's what the ISA is there for!
A perfectly planned RE runs the ISA pot down to zero on the day the SIPP money becomes accessible.. (not that I recommend you aim for this).

[never give up]

Hi Jade (waves). The link below is one of the best series of articles I’ve read on the tricky ISA & Pension balancing act.

https://monevator.com/tag/ISA-pension-split-series/

There’s a lot of info here but if you work through them in order it may help. Tax efficiency is obviously very important but it is ok to sacrifice a bit of this if it gives you more flexibility prior to pension access age.

[Jade]

Thanks see_saw. I think we would, just wondering about the bit before we get to the SIPP.

Hi again vand,

if we keep it all in the ISA we have the option of being able to either: Get by indefinitely on just the interest (with a little required topping up from earnings from a few hrs per week work),
Or drawdown to bridge us to the state pension.

If we split between the ISA and sipps, the interest we can access from the smaller ISA pot (for the years before we can access the sipps) would be much smaller and require having to generate more work earnings to compensate than I would ideally want to do, leaving drawdown as the only viable option.

I guess in my mind it comes down to choosing between greater choice and flexibility or, benefiting from the sipps 20% uplift.

Still keeping in mind that we neither want to leave large amounts of money unspent when we die, or run out of money too early.

But I'm thinking, is there something significant I'm missing within this summary? I've often found in the past the peeps in this site are great at pointing out aspects I hadn't thought of.

Hi never give up! (waves back).. thanks v much for your input & for those links, that looks very useful. I hope life's ok with you?

[vand]

Hi again Jade,

Realistically even a 125k ISA pot isn't going to generate the income you need to live on without selling significant amounts of principle. The dividend yield on the MSCI Dev world index is currently about 1.8%, and bonds don't even pay that much, so a 125k ISA pot is only going to generate about 3k - max - in income. You could specifically try a high income strategy, but that isn't a free lunch and has its own risks and even then the income stream wouldn't reach 10k/pa.

I understand that you may have an aversion to selling principle (its true that you are selling down the asset base), but that'll be compensated for by the asset base in your SIPP growing as the asset base in your ISA is being depleted.

At the end of the day I think you should remain indifferent to which wrappers your wealth is is divided up between, so long as it maximizes your overall pot while allowing you access to the money when you need it.


Personally (and this is only my preference), I would prioritize my pension savings and take the 20-30% uplift. Even running out of ISA money a year or two before the SIPP comes online isn't a disaster if you can just take out a eg a personal loan for a years' worth of spending at 3 or 4% interest or whatever, it's still a massive win vs losing the pension uplift. I appreciate though that others might not think it such a good idea.

[never give up]

Hi never give up! (waves back).. thanks v much for your input & for those links, that looks very useful. I hope life's ok with you?

Yes I’m ok thanks Jade. Just trying to navigate these difficult times. Good luck with your plans.

[Jade]

Hi again Jade,

Realistically even a 125k ISA pot isn't going to generate the income you need to live on without selling significant amounts of principle. The dividend yield on the MSCI Dev world index is currently about 1.8%, and bonds don't even pay that much, so a 125k ISA pot is only going to generate about 3k - max - in income. You could specifically try a high income strategy, but that isn't a free lunch and has its own risks and even then the income stream wouldn't reach 10k/pa.

I understand that you may have an aversion to selling principle (its true that you are selling down the asset base), but that'll be compensated for by the asset base in your SIPP growing as the asset base in your ISA is being depleted.

At the end of the day I think you should remain indifferent to which wrappers your wealth is is divided up between, so long as it maximizes your overall pot while allowing you access to the money when you need it.


Personally (and this is only my preference), I would prioritize my pension savings and take the 20-30% uplift. Even running out of ISA money a year or two before the SIPP comes online isn't a disaster if you can just take out a eg a personal loan for a years' worth of spending at 3 or 4% interest or whatever, it's still a massive win vs losing the pension uplift. I appreciate though that others might not think it such a good idea.

Hi vand,

Yeh, I think we're also prepared that some combo of work would still need to happen too regardless though I also think we need to look at our calculations again from what you're saying too .

Thanks for the further detail, its helpful to hear & I think I understand your points more now and the overall  benefits of the pension uplift. We're going to have a read of the series never give up shared too.

Thanks for taking the time to talk it through for us.

Take care.

[Jade]

Hi never give up! (waves back).. thanks v much for your input & for those links, that looks very useful. I hope life's ok with you?

Yes I’m ok thanks Jade. Just trying to navigate these difficult times. Good luck with your plans.

Glad you're ok overall never give up, i always appreciate seeing you here & your take on things . Take care :)

[Playing with Fire UK]

PLANS

We're putting around £9k a year into Vanguard LS 60. Our rough plan was to get to around £120k in five years time & assess things then.. likely I'll keep working in some capacity & we could access the nhs pension & live off the interest on the £120k (£4-5k approx a yr) if necessary (if I'm earning below our £10k living costs).

Releasing some equity by moving to a cheaper property is an option too.

At the moment you have over seven years' expenses in the ISA and five years until MrJade could access his SIPP and ten years until you can access your SIPP.

So, given that you are going to do work in some capacity for the next three years, you have enough in the ISA to bring you to the point you can access your SIPP if you are willing to draw it down (noted that you said you don't want to do this). I'm ignoring both inflation and growth here.

The tricky bit with timelines of around a decade is that they are too short to ignore inflation altogether, but too long to guarantee that if there is a market crash early on you have enough time for the pot to recover before you take too much from it. LS60 seems a reasonable approach to me for this.

I'd look at prioritising your SIPP as you are still working so not limited to how much you can put in, even though it will be later when you can access it (also, it will balance out the spread of assets between you and MrJade). If you are planning to work until at least 50, there will be plenty in the ISA to see you through to 55.

Getting a cash out mortgage on the paid off home while you are working would give you a big buffer until you can access the pensions and any SIPPs, and would mean you could pay it off with money that has been uplifted by the 20% tax. This really isn't for everyone, but useful if it suits your temperament.

Good to hear from you!

[Jade]

Hi Playing With Fire UK,

We appreciate your response and ideas on this too.

Would there be any benefit to putting in the £3600 gross pa for Mr Jade too, do you think? Or should we just start a SIPP for me for now for the yearly savings?

I don't think we'd probably go down the cash out mortgage route but its good to know it could be an option.

[never give up]

Hi never give up! (waves back).. thanks v much for your input & for those links, that looks very useful. I hope life's ok with you?

Yes I’m ok thanks Jade. Just trying to navigate these difficult times. Good luck with your plans.

Glad you're ok overall never give up, i always appreciate seeing you here & your take on things . Take care :)

Thanks jade, you take care too.

[Playing with Fire UK]

Hi Playing With Fire UK,

We appreciate your response and ideas on this too.

Would there be any benefit to putting in the £3600 gross pa for Mr Jade too, do you think? Or should we just start a SIPP for me for now for the yearly savings?

I don't think we'd probably go down the cash out mortgage route but its good to know it could be an option.

I'd look at how much pension you'll both be bringing in (including the State Pension) and compare that to tax free allowance. There's less benefit if you end up paying tax when you draw it out of the SIPP, especially as your costs are low enough that you should be able to cover them well before you need to pay tax.

[Jade]

That makes sense, we'll figure that in. Thanks again :)

[Jade]

Hi Jade (waves). The link below is one of the best series of articles I’ve read on the tricky ISA & Pension balancing act.

https://monevator.com/tag/ISA-pension-split-series/

There’s a lot of info here but if you work through them in order it may help. Tax efficiency is obviously very important but it is ok to sacrifice a bit of this if it gives you more flexibility prior to pension access age.

I've been reading these posts today, never give up - exactly what we need! Much appreciated.

[never give up]

That’s great jade. There’s a lot there but effort to read it all is rewarded.