SIPP or ISA for 40% tax payer

[TonyF55]

Evening all

I'm thinking about opening my first S&S ISA with AJ Bell, no big money, just a small amount every month just because saving accounts are pretty pointless these days and gives me something to check and see how good/bad my fund/share choices have been!

I then got thinking about doing this in a SIPP as I could get tax relief on my contributions which I would not get in the ISA. I have a few questions if I may:

As I already claim tax relief as a higher rate tax payer with my employer group pension, via an adjustment to my tax code, can I claim the extra relief on the SIPP too? FYI - with both pensions my employer and personal contributions would not be anywhere near the annual 40k allowance.

Can I access the money in the SIPP at any point? and are there any penalties for doing so? I guess there are no penalties with an ISA.

Also any thoughts on AJ Bell, fee's seem reasonable and I'm also thinking about transferring 2 of my kids child trust funds into a S&S Junior ISA with them too.

Thanks
Tony

[trickywoo]

The accessibility is the major trade off you have to consider with a sipp.

Unless you get a serious life shortening illness you won’t be able to get the money until ten years before state pension age without paying a massive tax penalty.

[TonyF55]

Thanks, now you mention it, forgot about that!. Probably stick with the ISA idea as I can take the money whenever I need/want without penalties.

Already have 2 employer pensions an old DB & current DC so a 3rd is not really needed.

Tony

[Cheib]

Do both if you can, you never know what's going to happen in the future. Also it depends a bit on whether you think you'll be a higher or lower rate tax payer in retirement. If it's the former ISA's get more interesting as income is tax free....if it's the latter the up front tax benefits of pensions become more important.

You can take tax free lump sums from pensions at Age 55 I think. Up to 25% of the pot.

[p1doc]

be aware age for pension access increases in 2028 to age 58 just as I hit 55 typical

[bmwmike]

TonyF55 said:

As I already claim tax relief as a higher rate tax payer with my employer group pension, via an adjustment to my tax code, can I claim the extra relief on the SIPP too?
Tony

Err sorry to jump in but is this right? I pay into a group pension plan with my employer but have not been claiming tax relief on those payments, only on my SIPP contributions..

Edit found this link, depends on whether the voluntary contributions are paid from gross/salary sacrifice, or net.

https://www.pensionsadvisoryservice.org.uk/about-p...

Edit2 to answer OP question I would (and do) also do both SIPP and S&S ISA but once the ISA got to a level I was happy with I prioritised SIPP.

Edited by bmwmike on Friday 14th September 10:33

[bogie]

If you are a 40% tax payer it could be your employer is claiming back the default 25% tax relief for you - you need to check with them

You may need to claim back the rest via HMRC, either self assessment, or if its a fixed pension contribution each month they will build it into your tax code to give you relief that way.

Thats what I have been doing for many years with my previous employers pension schemes.

[JulianPH]

TonyF55 said:

Evening all

I'm thinking about opening my first S&S ISA with AJ Bell, no big money, just a small amount every month just because saving accounts are pretty pointless these days and gives me something to check and see how good/bad my fund/share choices have been!

I then got thinking about doing this in a SIPP as I could get tax relief on my contributions which I would not get in the ISA. I have a few questions if I may:

As I already claim tax relief as a higher rate tax payer with my employer group pension, via an adjustment to my tax code, can I claim the extra relief on the SIPP too? FYI - with both pensions my employer and personal contributions would not be anywhere near the annual 40k allowance.

Can I access the money in the SIPP at any point? and are there any penalties for doing so? I guess there are no penalties with an ISA.

Also any thoughts on AJ Bell, fee's seem reasonable and I'm also thinking about transferring 2 of my kids child trust funds into a S&S Junior ISA with them too.

Thanks
Tony

Hi Tony, your can claim the higher rate of tax relief on any pension contribution made from net relevant earnings taxed at the higher rate. So, for simplicity, lets say £10,000 of your gross earnings were taxed at the higher rate then your higher rate pension tax relief would be restricted to £10,000 of gross contributions (regardless as to the number of schemes you have in place).

This is achieved by you making a net contribution, your SIPP provider automatically collecting the basic rate of tax within your scheme and you collecting the higher rate balance through your tax return.

As has been said, you cannot access the money until ten years before state pension age.

Nothing wrong with AJ Bell whatsoever. Some people find their service and software to be a bit clunky, but that is probably a reflection of their relatively low price. They are highly regarded within the industry, if that is any help.

Cheers!

[HarryW]

Have look here http://monevator.com/compare-uk-cheapest-online-br...

[hornmeister]

Apart from the accessibility age for a pension don't forget that taking income out of a pension (other than the Tax free cash allowance, usually 25%) is taxed whereas taking a withdrawal from your ISA isn't.

If you can foresee a situation where you're still earning & paying tax but want to release cash over and above the 25% then it's therefore more tax efficient to withdraw from an ISA.

What's best is going to be down to individual circumstances and also any changes in taxation legislation and with the current financial climate who knows what will happen. A raid on savings can't be ruled out.

Personally as a lower rate tax payer I contribute the minimum to my pension until my ISA allowance for the year is maxxed out. As a higher rate taxpayer switching more focus to a SIPP makes more sense because of the tax relief.

Depending on the amounts involved it might be worth seeking tailored advice from an IFA who should assess your needs and risk attitude and recommend accordingly.

I am not a financial adviser so please dont; take this as professional advice.

[TonyF55]

Thanks for all the replies, to start with I've opened an AJ Bell S&S ISA. As already mentioned I have 2 pensions (old DB and current DC) and currently have a fair chunk in my DC pension as 22% of annual salary is paid in every year and has been for over 10 years now. Will look into a SIPP another time.

In a nutshell I was asking, as a higher rate tax payer, can I claim that extra relief on multiple pensions, and it seems I can providing I stay under 40k a year in contributions in all pensions I have.

Someone mentioned about claiming the relief back on my pension, I only claim the extra relief, the pension provider is already claiming the standard 20% then I write to HMRC every year claiming the extra and then my tax codes increases.

Tony

• edit* Just read Julian's reply again and it now makes sense, only extra tax relief on the 40% part of my salary, but if contributions exceed this amount in all pensions I wont be able to claim that extra relief.

Edited by TonyF55 on Sunday 16th September 11:51

[JulianPH]

TonyF55 said:

Thanks for all the replies, to start with I've opened an AJ Bell S&S ISA. As already mentioned I have 2 pensions (old DB and current DC) and currently have a fair chunk in my DC pension as 22% of annual salary is paid in every year and has been for over 10 years now. Will look into a SIPP another time.

In a nutshell I was asking, as a higher rate tax payer, can I claim that extra relief on multiple pensions, and it seems I can providing I stay under 40k a year in contributions in all pensions I have.

Someone mentioned about claiming the relief back on my pension, I only claim the extra relief, the pension provider is already claiming the standard 20% then I write to HMRC every year claiming the extra and then my tax codes increases.

Tony

• edit* Just read Julian's reply again and it now makes sense, only extra tax relief on the 40% part of my salary, but if contributions exceed this amount in all pensions I wont be able to claim that extra relief.

Edited by TonyF55 on Sunday 16th September 11:51

Hi Tony, yes, that's correct.

You are allowed as many pension providers as you like (though that dosn't make a lot of sense) and each one will claim back the basic rate of tax on your behalf and straight into your pension (subject to all annual contributions coming from net relevant earnings and not exceeding the £40,000 annual allowance.

Please note this annual allowance includes the basic rate tax reclaim (so is £32,000 net - not £40,000 net).

You can then reclaim the higher rate tax from multiple contributions to multiple schemes via your tax return, but only on income that was taxed at this higher rate.

As this higher rate of tax reclaimed does not go into your pension(s) as a contribution it does not count towards your £40,000 annual contribution limit.

I would suggest it is wise to max this out whilst in remains available (it is constantly being suggested that this could be remove, though it never has been to date) as £40,000 of gross earnings at the higher rate is £24,000 in your hands after income tax (and less when you factor in NI on this money) but worth double this if placed in a pension (£40,000 in your pension and £8,000 from your tax return).

[Taffy66]

Cheib said:

Do both if you can, you never know what's going to happen in the future. Also it depends a bit on whether you think you'll be a higher or lower rate tax payer in retirement. If it's the former ISA's get more interesting as income is tax free....if it's the latter the up front tax benefits of pensions become more important.

You can take tax free lump sums from pensions at Age 55 I think. Up to 25% of the pot.

I'm bored so i've been trawling through these forums and i stopped at this one..From 55 an individual can draw up to 25% from his pension pot free of income tax..It all sounds good until you realise as soon as you do this there is one important point you need to consider.If the worst should happen and the policy holder should pass away after taking a 25% tax free lump sum out, then the total remaining 75% pension pot goes to the State and not the next of kin.

[anonymous-user]

Taffy66 said:

I'm bored so i've been trawling through these forums and i stopped at this one..From 55 an individual can draw up to 25% from his pension pot free of income tax..It all sounds good until you realise as soon as you do this there is one important point you need to consider.If the worst should happen and the policy holder should pass away after taking a 25% tax free lump sum out, then the total remaining 75% pension pot goes to the State and not the next of kin.

No it doesn't.

[ellroy]

It’s worrying when you see the crap some post in this forum isn’t it?

[Taffy66]

desolate said:

No it doesn't.

Its not what i was told by my NFU financial advisor..He specifically said once you draw money out of your pension you risk losing it to the state..The only way to guarantee it goes to your loved ones is to leave if fully intact..I accept i might have been given misleading info or alternatively misunderstood him..

[anonymous-user]

Taffy66 said:

Its not what i was told by my NFU financial advisor..He specifically said once you draw money out of your pension you risk losing it to the state..The only way to guarantee it goes to your loved ones is to leave if fully intact..I accept i might have been given misleading info or alternatively misunderstood him..

Well that's not the case so I'd get a new financial advisor if I was you.

[Welshbeef]

Taffy66 said:

Its not what i was told by my NFU financial advisor..He specifically said once you draw money out of your pension you risk losing it to the state..The only way to guarantee it goes to your loved ones is to leave if fully intact..I accept i might have been given misleading info or alternatively misunderstood him..

I’d suggest you misheard or misunderstood him.

If he has given you hard or soft copy information stating that he’s going to get himself into a huge amount of st.

[ellroy]

desolate said:

Well that's not the case so I'd get a new financial advisor if I was you.

+1, +2, +3 etc

[Taffy66]

Welshbeef said:

I’d suggest you misheard or misunderstood him.

If he has given you hard or soft copy information stating that he’s going to get himself into a huge amount of st.

Thats great news as despite several years away from 55 i would now consider taking out a tax free lump sum, wheras before tonight i wouldn't have taken the risk..