Some pension / SIPP questions..

[Phooey]

Asking on behalf of a family member..

Say for example someone currently aged 45 and in self-employment has an ISA with Vanguard with a current value of £100k. They have no SIPP nor Pension at all. Only this £100k ISA.

Would it be wise for them to start selling down their ISA and instead drip it into a SIPP (Vanguard in this case) to gain the 20% Tax Relief? My thinking is they can gain the additional +20% Tax Relief / top-up, then at retirement age (57?) withdraw from their SIPP up to their Personal Allowance without incurring any tax (assuming they are no longer working)?

Thanks

[boombang]

Phooey said:

Asking on behalf of a family member..

Say for example someone currently aged 45 and in self-employment has an ISA with Vanguard with a current value of £100k. They have no SIPP nor Pension at all. Only this £100k ISA.

Would it be wise for them to start selling down their ISA and instead drip it into a SIPP (Vanguard in this case) to gain the 20% Tax Relief? My thinking is they can gain the additional +20% Tax Relief / top-up, then at retirement age (57?) withdraw from their SIPP up to their Personal Allowance without incurring any tax (assuming they are no longer working)?

Thanks

A lot to consider, even if doesn't appear that way on the face of it. Just some initial thoughts:

You cannot contribute more into pensions than your income, in a given year - so any employer pension contribs need considering too.

If they are self-employed with a limited company it's worth looking at contributions from the company itself to reduce corporate tax.

If they did manage to transition all the ISA into the SIPP what happens if they need money urgently or prior to being 57?

Can they live on sub £11k until state pension kicks in and what if the SIPP performs badly and runs out prior to state pension (assuming that's the plan)?

Edited by boombang on Wednesday 1st February 11:23

[Steve H]

boombang said:

Phooey said:

Asking on behalf of a family member..

Say for example someone currently aged 45 and in self-employment has an ISA with Vanguard with a current value of £100k. They have no SIPP nor Pension at all. Only this £100k ISA.

Would it be wise for them to start selling down their ISA and instead drip it into a SIPP (Vanguard in this case) to gain the 20% Tax Relief? My thinking is they can gain the additional +20% Tax Relief / top-up, then at retirement age (57?) withdraw from their SIPP up to their Personal Allowance without incurring any tax (assuming they are no longer working)?

Thanks

You cannot contribute more into pensions than your income, in a given year - so any employer pension contribs need considering too.

If they are self-employed with a limited company it's worth looking at contributions from the company itself to reduce corporate tax.

If they did manage to transition all the ISA into the SIPP what happens if they need money urgently or prior to being 57?

You can't be Self Employed with a Ltd. Co you have to be one or the other (unless you are Self Employed in one role and a Director with another Company....if you get my drift?)

[Phooey]

boombang said:

You cannot contribute more into pensions than your income, in a given year - so any employer pension contribs need considering too.

Yes I understand that but thanks for pointing out. It would need to be dripped in *up to* their income (which i don't exactly know but would guess at approx £20k/yr).

If they are self-employed with a limited company it's worth looking at contributions from the company itself to reduce corporate tax.

No, this is non-limited S/E

If they did manage to transition all the ISA into the SIPP what happens if they need money urgently or prior to being 57?

Tough

[boombang]

Steve H said:

You can't be Self Employed with a Ltd. Co you have to be one or the other (unless you are Self Employed in one role and a Director with another Company....if you get my drift?)

Totally get it, up until the last couple of years most 'self-employed' in my industry have actually been contractors and the sole employee of their Ltd Co.

[Phooey]

I might be getting confused here but is tax-relief at 20% or 25% for a basic-rate self-employed tax payer?

[Panamax]

There are a number of restrictions around SIPP that don't exist with ISA. However, for many people those restrictions may never be a limiting factor.

ISA - The investment is made out of taxed income but once you're in, you're in, and there's never any tax again.

SIPP - You get tax relief going in BUT you get taxed on anything that comes out.

In theory, SIPP will outperform ISA because you're getting an investment return on the tax relief, which is nice.

Ultimately the question comes down to,

• When the person might need to access their money,
• The person's current tax rates, and
• The person's eventual tax rates in retirement.

And never forget the ability of governments to change the rules in future....

There's something to be said for a rudimentary investment strategy along the lines 50% ISA and 50% SIPP.

[Edible Roadkill]

Isn’t a SIPP is index linked to the maturity of the old age pension, meaning you can’t draw down on it until aged 66, soon to be 68yrs.

[anonymous-user]

Edible Roadkill said:

Isn’t a SIPP is index linked to the maturity of the old age pension, meaning you can’t draw down on it until aged 66, soon to be 68yrs.

No it is currently 55, rising to 57 in 2028.

[Panamax]

Edible Roadkill said:

Isn’t a SIPP is index linked to the maturity of the old age pension, meaning you can’t draw down on it until aged 66, soon to be 68yrs.

Not quite. It used to be age 50 to draw from a SIPP but that's now been increased to 55. It'll rise again to 57 in 2028 and, yes, there's a significant risk government may continue increasing the age.

In contrast you can draw from an ISA any time you like.

[Phooey]

Again thanks for replies. Does anyone know if tax relief is at 20% or 25% for a basic rate payer? My Google search says 25% - in other words for every £80, £20 is added - which is 25%. Just making sure my sums are correct

[av185]

Panamax said:

ISA - The investment is made out of taxed income but once you're in, you're in, and there's never any tax again.

Apart from IHT.

[Mr Pointy]

Phooey said:

Again thanks for replies. Does anyone know if tax relief is at 20% or 25% for a basic rate payer? My Google search says 25% - in other words for every £80, £20 is added - which is 25%. Just making sure my sums are correct

It's the difference between net & gross & confuses many people. In general payments into a pension are discussed as gross figures as that's generally how contributions are thought of. You pay in 80% of that & 20% gets added by a contribution from HMRC.

[Phooey]

Mr Pointy said:

You pay in 80% of that & 20% gets added by a contribution from HMRC.

So someone adds £80 and HMRC adds £16 (20%) = £96?

It's fk'ing confusing

eta - found this link https://www.legalandgeneral.com/retirement/pension...



eta - I'm just going to call it 25% in old money

Edited by Phooey on Wednesday 1st February 17:23

[supersport]

Phooey said:

So someone adds £80 and HMRC adds £16 (20%) = £96?

It's fk'ing confusing

eta - found this link https://www.legalandgeneral.com/retirement/pension...



eta - I'm just going to call it 25% in old money

Edited by Phooey on Wednesday 1st February 17:23

You get 25% of what you pay in which is 20% of the gross.

So pay in £80 and get an additional £20. £20 is 25% of what you paid in and 20% of the gross £100.

See, tax isn’t taxing

[B9]

If you’re self employed, can’t you whack all of your profits into the pension? It’ll be employer contribution so you can blow through 40k (assuming you have unused previous years allowances) and isn’t subject to “no more than you earn” or “as long as your salary isn’t below minimum wage”

You’ll also save on corp and NI

Not a financial advisor so worth checking but pretty sure salary sacrifice (if an employee) allows you to work around those stipulations as it technically counts as employer contribution.

[LeoSayer]

Edible Roadkill said:

Isn’t a SIPP is index linked to the maturity of the old age pension, meaning you can’t draw down on it until aged 66, soon to be 68yrs.

There was talk of the government linking the minimum pension age to the state pension age but it has never been put into law.