Do people uses ISAs for additional income?
Discussion
Just musing some scenarios, I don't have kids so not bothered about leaving an inheritance -
When I start drawing my pension in a few years, I will pay income tax dependent on rates at the time.
If I transfer some pension money (say once a year 20k) into my ISA, I can draw money from that as income but not pay tax?
ie I pay less tax through having a reduced pension income but making more back (quite a bit more if not paying 40% income tax) from drawing down ISAs?
Is that a reasonable plan?
When I start drawing my pension in a few years, I will pay income tax dependent on rates at the time.
If I transfer some pension money (say once a year 20k) into my ISA, I can draw money from that as income but not pay tax?
ie I pay less tax through having a reduced pension income but making more back (quite a bit more if not paying 40% income tax) from drawing down ISAs?
Is that a reasonable plan?
TownIdiot said:
You will pay the same amount of tax on the money withdrawn from your pension whether you put it into your ISA or not
My guess is that the OP is thinking any investment gains in the SIPP will be taxed when he draws down whereas any investment gains in the ISA will be tax free.for example he has £100k in the SIPP and it makes 10% profit pa. When he takes it out he will have to pay income tax on the 10% profit.
If he transfers the money into an ISA and then makes 10% profit there's no tax to pay on the gains
Countdown said:
My guess is that the OP is thinking any investment gains in the SIPP will be taxed when he draws down whereas any investment gains in the ISA will be tax free.
for example he has £100k in the SIPP and it makes 10% profit pa. When he takes it out he will have to pay income tax on the 10% profit.
If he transfers the money into an ISA and then makes 10% profit there's no tax to pay on the gains
To transfer money into the ISA he has to first pay the tax.for example he has £100k in the SIPP and it makes 10% profit pa. When he takes it out he will have to pay income tax on the 10% profit.
If he transfers the money into an ISA and then makes 10% profit there's no tax to pay on the gains
So he starts with an investment that is smaller. The outcome is the same.
TownIdiot said:
To transfer money into the ISA he has to first pay the tax.
So he starts with an investment that is smaller. The outcome is the same.
AIUI It's not the principal he's worried about, it's the profits generated by the principal.So he starts with an investment that is smaller. The outcome is the same.
Whenever he takes out the principal he'll have to pay tax on it. However if he has unused ISA allowances he might as well protect the profits generated by the principal.
Why pay tax on £110k if you can move £100k into an ISA and thereby protect the £10k profit from tax....
Countdown said:
AIUI It's not the principal he's worried about, it's the profits generated by the principal.
Whenever he takes out the principal he'll have to pay tax on it. However if he has unused ISA allowances he might as well protect the profits generated by the principal.
Why pay tax on £110k if you can move £100k into an ISA and thereby protect the £10k profit from tax....
I see what you mean now.Whenever he takes out the principal he'll have to pay tax on it. However if he has unused ISA allowances he might as well protect the profits generated by the principal.
Why pay tax on £110k if you can move £100k into an ISA and thereby protect the £10k profit from tax....
When he said "pension money" I presumed he meant money from his pension, not intended for his pension.
There is still the issue of tax relief on the way in. Especially if he's a 40% tax payer
Like many people, I put quite a bit into an ISA, and I now draw from it occasionally.
It's different from a pension, because you can draw from it at any time, while your SIPP is tied up until you reach 55 or whatever.
Pension scores because you save higher rate tax and possibly NI when making contributions.
OTOH if you are a standard rate taxpayer and want to draw a big wedge from a pension after your tax free lump sum, that can kick you into higher rate tax while a pensioner!
Also it used to be possible to save in an ISA, then put money into your pension late in your career and get the tax relief then.
When I was in business, it was good to have a decent stack of cash in ISA and a flexible mortgage so I could live on a low income for a while if business was slack. It was also a plan to invest in a business in my 40s, when pension money would have been inaccessible.
It's probably true that most people do better putting as much as possible into a SIPP, but not everyone.
If you're saving to take a year off at 50, buy a yot, or dozens of other plans, then an ISA is worth a look.
ISA also used to score if you maxed out your pension contributions in a year, or had unearned income or a windfall like an inheritance to invest.
It saves a lot of paperwork, having 'rainy day money' and medium term investments in ISAs,
These days, with CGT and all that, it makes sense to use an ISA as much as possible.
I've parked chunks of pension lump sum in there.
My view is probably out of date because the changes in div tax, CGT and god knows what else have been significant since I semi-retired, so DYOR.
It's different from a pension, because you can draw from it at any time, while your SIPP is tied up until you reach 55 or whatever.
Pension scores because you save higher rate tax and possibly NI when making contributions.
OTOH if you are a standard rate taxpayer and want to draw a big wedge from a pension after your tax free lump sum, that can kick you into higher rate tax while a pensioner!
Also it used to be possible to save in an ISA, then put money into your pension late in your career and get the tax relief then.
When I was in business, it was good to have a decent stack of cash in ISA and a flexible mortgage so I could live on a low income for a while if business was slack. It was also a plan to invest in a business in my 40s, when pension money would have been inaccessible.
It's probably true that most people do better putting as much as possible into a SIPP, but not everyone.
If you're saving to take a year off at 50, buy a yot, or dozens of other plans, then an ISA is worth a look.
ISA also used to score if you maxed out your pension contributions in a year, or had unearned income or a windfall like an inheritance to invest.
It saves a lot of paperwork, having 'rainy day money' and medium term investments in ISAs,
These days, with CGT and all that, it makes sense to use an ISA as much as possible.
I've parked chunks of pension lump sum in there.
My view is probably out of date because the changes in div tax, CGT and god knows what else have been significant since I semi-retired, so DYOR.
@ the OP...
yes in general terms it makes sense to take 'bits' from all avenues available to minimize tax. And assuming you have not maxed out the ISA's, then adding to them to allow them to grow makes sense; Not however if you'd just be transferring into an ISA and then withdrawing in a short timeframe ( ie/ before its had a chance to grow).
yes in general terms it makes sense to take 'bits' from all avenues available to minimize tax. And assuming you have not maxed out the ISA's, then adding to them to allow them to grow makes sense; Not however if you'd just be transferring into an ISA and then withdrawing in a short timeframe ( ie/ before its had a chance to grow).
TownIdiot said:
Countdown said:
My guess is that the OP is thinking any investment gains in the SIPP will be taxed when he draws down whereas any investment gains in the ISA will be tax free.
for example he has £100k in the SIPP and it makes 10% profit pa. When he takes it out he will have to pay income tax on the 10% profit.
If he transfers the money into an ISA and then makes 10% profit there's no tax to pay on the gains
To transfer money into the ISA he has to first pay the tax.for example he has £100k in the SIPP and it makes 10% profit pa. When he takes it out he will have to pay income tax on the 10% profit.
If he transfers the money into an ISA and then makes 10% profit there's no tax to pay on the gains
So he starts with an investment that is smaller. The outcome is the same.
But I can only do that once a year so probably pointless after year one? As any other investment made with the lump sum will have the profits taxed?
Peterpetrole said:
....if I take the maximum allowed tax free lump sum on retirement ...?
Or you just take what you need from your pension and 25% of each withdrawal is tax free, so over many years as your pot grows you'll take out vastly more tax free than if you'd taken it all at once at the start.Peterpetrole said:
Yes something like that is what I'm trying to get my head around. In particular if I take the maximum allowed tax free lump sum on retirement I could save 20k in an ISA and get 1k interest a year as tax free income.
But I can only do that once a year so probably pointless after year one? As any other investment made with the lump sum will have the profits taxed?
Depending on what the TFC total is you could obviously repeat into the ISA in year 2 though ?But I can only do that once a year so probably pointless after year one? As any other investment made with the lump sum will have the profits taxed?
But the lump sum extracted would also have presumably increased by x if left in the pension.
Once the TFC cash is extracted if subsequently invested ( and not in anything tax free ) it will indeed then attract tax.
really i'd have thought that it depends how much you have in the pot and how much you need to live on, plus what sensibly you could take out without stripping the pension pot dry AND what tax level you'd be at if you did A or B.
ie/ if you 'only' need 40k to live on, but have have the ability (without damaging the sipp) to take 65k, you could put 20k into the isa (and have paid the tax on pension to get that out) and have that grow tax free rather than having it in the pension pot and paying tax at a higher rate IF you wanted/had the ability to increase yoru withdrawls to that level in the future.
if the 20k grows more than the tax you're ahead of the game, if you'd just whack it into a standard isa then probs not so interesting a concept as the growth would be minimal unless its left for years to compound.
at a level per my calcs/thoughts, better to have 20k growing at say 15-20% a year in a 100% tax free account than having it grow at the same rate inside the sipp - IF you're taking out a low'ish% from sipp each year and are unlikely to ever use it up/run out of funds. seems (atleast in my head) no point in having a mill + in a sipp, taking say 40k and watching the mill grow each year as you'd have a bigger tax expsoure to get the higher amount out.
ie/ if you 'only' need 40k to live on, but have have the ability (without damaging the sipp) to take 65k, you could put 20k into the isa (and have paid the tax on pension to get that out) and have that grow tax free rather than having it in the pension pot and paying tax at a higher rate IF you wanted/had the ability to increase yoru withdrawls to that level in the future.
if the 20k grows more than the tax you're ahead of the game, if you'd just whack it into a standard isa then probs not so interesting a concept as the growth would be minimal unless its left for years to compound.
at a level per my calcs/thoughts, better to have 20k growing at say 15-20% a year in a 100% tax free account than having it grow at the same rate inside the sipp - IF you're taking out a low'ish% from sipp each year and are unlikely to ever use it up/run out of funds. seems (atleast in my head) no point in having a mill + in a sipp, taking say 40k and watching the mill grow each year as you'd have a bigger tax expsoure to get the higher amount out.
greengreenwood7 said:
really i'd have thought that it depends how much you have in the pot and how much you need to live on, plus what sensibly you could take out without stripping the pension pot dry AND what tax level you'd be at if you did A or B.
ie/ if you 'only' need 40k to live on, but have have the ability (without damaging the sipp) to take 65k, you could put 20k into the isa (and have paid the tax on pension to get that out) and have that grow tax free rather than having it in the pension pot and paying tax at a higher rate IF you wanted/had the ability to increase yoru withdrawls to that level in the future.
if the 20k grows more than the tax you're ahead of the game, if you'd just whack it into a standard isa then probs not so interesting a concept as the growth would be minimal unless its left for years to compound.
at a level per my calcs/thoughts, better to have 20k growing at say 15-20% a year in a 100% tax free account than having it grow at the same rate inside the sipp - IF you're taking out a low'ish% from sipp each year and are unlikely to ever use it up/run out of funds. seems (atleast in my head) no point in having a mill + in a sipp, taking say 40k and watching the mill grow each year as you'd have a bigger tax expsoure to get the higher amount out.
Yes, you've expressed it better than my OP. ie/ if you 'only' need 40k to live on, but have have the ability (without damaging the sipp) to take 65k, you could put 20k into the isa (and have paid the tax on pension to get that out) and have that grow tax free rather than having it in the pension pot and paying tax at a higher rate IF you wanted/had the ability to increase yoru withdrawls to that level in the future.
if the 20k grows more than the tax you're ahead of the game, if you'd just whack it into a standard isa then probs not so interesting a concept as the growth would be minimal unless its left for years to compound.
at a level per my calcs/thoughts, better to have 20k growing at say 15-20% a year in a 100% tax free account than having it grow at the same rate inside the sipp - IF you're taking out a low'ish% from sipp each year and are unlikely to ever use it up/run out of funds. seems (atleast in my head) no point in having a mill + in a sipp, taking say 40k and watching the mill grow each year as you'd have a bigger tax expsoure to get the higher amount out.
Not ideal to have a big enough pension pot that attracts some 40% income tax later on if you can soak up extra cash into ISAs that you can draw down from tax free.
Peterpetrole said:
Yes, you've expressed it better than my OP.
Not ideal to have a big enough pension pot that attracts some 40% income tax later on if you can soak up extra cash into ISAs that you can draw down from tax free.
Not ideal to have a big enough pension pot that attracts some 40% income tax later on if you can soak up extra cash into ISAs that you can draw down from tax free.
100% correct....but takes a bit of forward planning and a bit of sensible guesswork to have an idea where one might be. Broadly, my own intent is to strip out whatever the max is per year before attracting higher rate 40%, add in funds from isa and then top up isa's from GIA and take out any extra from GIA too. But won't know the exact ratios till that moment comes.....
Gassing Station | Finance | Top of Page | What's New | My Stuff