SIPP vs ISA - 40pc tax but no beneficiaries (ie kids)

[413x]

Wondering if anyone is in this position.
Must be a fair few.

With end of tax year coming up, and being in the 40pc band now I'm reviewing and thinking of a sipp for the first time.
I don't need explaining about tax implications of both. I know what to do, how relief works and having to do a self assessment etc.
Obviously I already make use of my work place pension.

One thing I don't understand about pensions is how much is left over when you die.
Ie, how does the pot dwindle over your retirement?

This usually isn't important when you have beneficiaries/kids to pass stuff on. But what happens if you don't?

I'm assuming SIPP still wins out as 40pc is a lot of saving vs an ISA.


Is there any reason at all to contribute to an ISA vs a SIPP in this situation?

 

[Brando]

You need to speak to an IFA to dig into this further.

The delta between the two is accessibility and point of tax.

SIPP = Pay in money, get 20% relief and claim the rest back in a self-assessment, tax-free growth, but the money is locked until retirement or face stiff penalties to access it early. Then you can take up to 25% cash-free and either draw down or purchase an annuity. If you draw down you can leave what's left in your will (under certain circumstances)
ISA = Pay in money, no tax relief, but tax-free growth and you can access the money whenever you like.

It's not like for like, a or b, it's more what are you trying to achieve.

 

[413x]

You need to speak to an IFA to dig into this further.

The delta between the two is accessibility and point of tax.

SIPP = Pay in money, get 20% relief and claim the rest back in a self-assessment, tax-free growth, but the money is locked until retirement or face stiff penalties to access it early. Then you can take up to 25% cash-free and either draw down or purchase an annuity. If you draw down you can leave what's left in your will (under certain circumstances)
ISA = Pay in money, no tax relief, but tax-free growth and you can access the money whenever you like.

It's not like for like, a or b, it's more what are you trying to achieve.

Yeah I know all that.

What I don't know is how pensions work whilst drawing down.

Here's an extreme.. if you know you're gonna pop it, but get warning.. You can literally take everything out of an isa and blow it all.

I have no idea how pension drawdown works.
Do you have 75pc left (after tax free lump sum)
Then it's drops over time? For example are you left with 50pc of your pot at 80? I have no idea on this.

I believe (from a bit of reading) if you have a terminal disease you can only get your money from pension 6 months left to live? That's grim.

 

[slinxy]

If you can, use your work place pension rather than a SIPP. For the simple reason of less paper for for yourself and when you die for the people inheritancing.

SIPPs are basically the same as pensions are only advantages are more control in who you go with and how it’s invested in… and if you have any other regular income that is not from your employer.

The only offer case scenarios I would use a SIPP is if your self employed, plan to move regularly from job to job, if you have an old pension that is doing rubbish or working aboard.

Personally I going to drain savings accounts and put the maximum into pensions when closer to retirement, something you could do if you know your going to be made redundant and no where near the retirement age to help with benefits claims.

For the draw down tax free.. it’s 25% of all your pots combined, if you plan to take it in one go, then it’s taxed at the rate of your income for the rest. This is only advantageous to take it in one go if you plan to buy an annuity after you move all your pension pots into one and it basically means 25% off the annuity.

With draw down, I believe most people will take the 25% tax free each time… depending on the pension scheme, and your money still being invested, as why wouldn’t it be? It ends up being a bigger discount.. as your money is still growing and therefore the 25% tax free is getting still growing.

For what happens when you die, it’s the same as most pensions.

What happens to my SIPP when I die?

www.hl.co.uk

 

[Tefal]

Here's an extreme.. if you know you're gonna pop it, but get warning.. You can literally take everything out of an isa and blow it all.

Yes withdrawals from your isa aren't taxed, dividenda in an isa aren't taxed either but they are in a pension iirc since brown changed it

But what happens if you don't?

State takes it all

 

[danlightbulb]

I have no idea how pension drawdown works.
Do you have 75pc left (after tax free lump sum)
Then it's drops over time? For example are you left with 50pc of your pot at 80? I have no idea on this.

If you keep invested in your pension scheme, for example in stocks and shares, then the pot of money continues to grow even as you draw it down. How much you draw it down by each month/year is up to you, it's completely flexible.

If you take a big sum out and have already used up your 25% tax free then that lump sum is taxed.

If you keep the money invested it just continues to grow (or could fall) depending on what your funds do.

When you die whatever is left goes to your nominated beneficiaries, or to the state if you haven't nominated anyone. Don't think beneficiaries have to be kids, can be anyone.

 

[EddScott]

Yeah I know all that.

What I don't know is how pensions work whilst drawing down.

Here's an extreme.. if you know you're gonna pop it, but get warning.. You can literally take everything out of an isa and blow it all.

I have no idea how pension drawdown works.
Do you have 75pc left (after tax free lump sum)
Then it's drops over time? For example are you left with 50pc of your pot at 80? I have no idea on this.

I believe (from a bit of reading) if you have a terminal disease you can only get your money from pension 6 months left to live? That's grim.

I'm not 100% on terminal. I thought it was all of it if officially given less than 12 months. Life assurance will pay if terminal with less than 12 months (Have had to use it sadly)

If you choose flexi access drawdown, you can take up to 25% as pension commencement lump sum. The remainng 75% is there for you to access in the manner you choose.

You don't have to take all the lump sum at once. This is flexible. You can even make smaller drawdowns each month with each monthly payment having the same 25/75 split. This can help reduce income tax liabilty if you have no real need for a big lump of money.

If you die before the age of 75, the pension - irrespective of whether you've accessed some or all of it, will go to whomever you have nominated as beneficiary (it's worth checking this has been done as not all pensions have this nomination)

Your beneficiary can have all the money, take drawdown themselves or buy an annuity (I'm not 100% on whether the beneficiary under pension age can buy an annuity or continue with drawdown)

After age 75, the beneficiary can only receive the pension as taxable income. Beneficiary can be anyone.

 

[ddoubleep]

After age 75, the beneficiary can only receive the pension as taxable income.

Does the pot stop growing in the funds or can this still go up and down depending on the fund type the person had invested? Can it be changed?

 

[Narj]

If possible, use work salary sacrifice before a SIPP to make things far less complicated. Also review default workplace pension choices as they are usually rubbish. I moved my workplace pension fund choices to the closest thing on offer to a global tracker.

In drawdown the money is still there - I think you're thinking of annuity. The drawdown strategy in your case (and mine too) should be to backtest/plan to ensure that you don't run out of money by say 90, but also that you don't have too much left over! There are calculators/tools online for this where you can tweak parameters easily. My running assumption is the classic 4% per year drawdown.

The other thing to think about with pensions is government interference with the minimum pensionable age. I'm currently building a bridge within my ISAs, cash savings and GIA from my target retirement age (50) to what I think will be my pensionable age (assuming 58 right now).

EDIT: If you really have no beneficiaries then you can do one final "screw you" to the government by leaving it to a charity of your choice.