Reply to: Top up your pension...

[DimPrawn]

Or BTL.

You earn £200. You spend that on drink on a night out. Next day you obtain a 100% loan to value, interest free mortgage (soon to arrive), to buy a £2m bedsit in Tower Hamlets, sponsored and supported by the next Tory govt who are backing BTL.

A year later, you sell it to a Russian arms dealer for £4m, instantly retiring on a £2m tax free profit.

How does that compare?

[Contreras]

Income tax.

A more realistic example would be to be a higher rate tax payer now and a basic rate in the future on your pension, but in the same way that expat assumed the same rates of tax, so did I.

What is this income tax that you speak of?

Seriously though, I agree that SIPP can be more efficient vs. ISA, just not for the reason stated. For one thing there's the tax-free lump sum.

expat has it right in the most simplistic terms, which is why pensions are often described as being "tax deferred" rather than "tax efficient". But it's not that simple once you try to factor in everything even just on the numbers, and then there's various intangibles: access to capital, pension rule changes, IR35, ...

[TheFaQQer]

What is this £16 tax that you speak of?

Income tax.

A more realistic example would be to be a higher rate tax payer now and a basic rate in the future on your pension, but in the same way that expat assumed the same rates of tax, so did I.

[Contreras]

A) You have £100 in your company. Company pays 20% corporation tax, so you take out £80 and pay £16 tax. You invest the £64 wisely and it soon doubles. You now have £128 and no more tax to pay.

B) I have £100 in my company. I put it all straight into a SIPP, but pay no corporation tax, so I'm already 20% up on the ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, 25% more than the ISA.

What is this £16 tax that you speak of?

[TheFaQQer]

I take that back, I was right first time: the return on investment is 6 and half-a-dozen as far as choosing pension or ISA is concerned.

Practical example, assuming basic rate tax:
A) You have £100 in your company. You take it out and pay £20 tax. You invest the £80 wisely and it soon doubles. You now have £160 and no more tax to pay.
B) I have £100 in my company. I put it all straight into a SIPP, in the same investment as your ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, same as you.

That assumes that you'll pay the same tax percentage now as in the future - you may be on a higher or lower rate when the pension comes out, whereas you know what it is going to be by taking it out now.

But where the difference comes is in the reduction in corporation tax that you get by having the company contribute to your pension:

A) You have £100 in your company. Company pays 20% corporation tax, so you take out £80 and pay £16 tax. You invest the £64 wisely and it soon doubles. You now have £128 and no more tax to pay.

B) I have £100 in my company. I put it all straight into a SIPP, but pay no corporation tax, so I'm already 20% up on the ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, 25% more than the ISA.

[mudskipper]

I take that back, I was right first time: the return on investment is 6 and half-a-dozen as far as choosing pension or ISA is concerned.

Practical example, assuming basic rate tax:
A) You have £100 in your company. You take it out and pay £20 tax. You invest the £80 wisely and it soon doubles. You now have £160 and no more tax to pay.
B) I have £100 in my company. I put it all straight into a SIPP, in the same investment as your ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, same as you.

Is the advantage in that you're probably a higher rate tax payer now, but when you retire won't be.

[expat]

Yes, you are right, if you make a real killing then the ISA is better. However you have to make enough of a killing to outweigh the killing already built into the pension option:
1. 25% withdrawal tax-free
2. Putative drop from 40% tax now to 20% tax on retirement
3. Avoidance of NICs for those paying them.

Personally I reckoned that someone old enough to start drawdown soon would have a short horizon so that was unlikely. But indeed YMMV.

I take that back, I was right first time: the return on investment is 6 and half-a-dozen as far as choosing pension or ISA is concerned.

Practical example, assuming basic rate tax:
A) You have £100 in your company. You take it out and pay £20 tax. You invest the £80 wisely and it soon doubles. You now have £160 and no more tax to pay.
B) I have £100 in my company. I put it all straight into a SIPP, in the same investment as your ISA. It soon doubles and I have £200 in my SIPP. When I take it out I have to pay £40 tax, leaving me with £160 in my pocket, same as you.

[lukemg]

Some good advice here, as ever depends on individual circs, attitude etc.
For me:
Furiously stashing money so when I've had enough and I have enough I can sack this sh*t and play golf.
Which means:
Max out ISA using monthly for PCA and to take decision out of my hands/remove timing the market into global tracker.
PLUS - use SIPP to suck cash out of the company again invested into low cost trackers (ish)
It's working so far and as the snowball rolls down hill it's starting to feed itself, compound interest style - in short work is pretty much optional now - that's what I call a plan B.

[Contreras]

I think I covered that in my question.

a)your company puts 10k in to a pension each year
b)your company pays out 10k (after you already reached your personal allowance) and you put what is left after personal tax into an ISA.

Clearly less goes into the ISA each year but then in 30 years it is tax-free to take it out... so what is a proper calculation, taking into account company tax liability, personal tax, tax relief, etc, etc.

In the above scenario you would be better paying the £10k as a personal contribution (assuming <= 100% salary). Tax relief means your personal allowance increases by £12,500, and company can pay an additional dividend of £11,250 before high rate tax is reached. See - there's an extra £1,250 in pocket for you at basic rate.

As for the question ISA vs. SIPP, I think purely on the maths and based on current rules the SIPP easily wins out in most cases. However there are intangibles - access to capital, future changes to pension rules. For me currently this means maxing out the ISA annual subscription before considering SIPP contributions.

[expat]

That's why I think the performance of your investment IS relevant to the sums. The better your shares perform, the more tax you pay in a pension scenario. So ironically if you make a killing, an ISA could work out better... though you'd probably be happy anyway if that happened!

Yes, you are right, if you make a real killing then the ISA is better. However you have to make enough of a killing to outweigh the killing already built into the pension option:
1. 25% withdrawal tax-free
2. Putative drop from 40% tax now to 20% tax on retirement
3. Avoidance of NICs for those paying them.

Personally I reckoned that someone old enough to start drawdown soon would have a short horizon so that was unlikely. But indeed YMMV.

[mudskipper]

They already are, from 2028 the lower age will be 57

.... counts on fingers...

[d000hg]

That's why I think the performance of your investment IS relevant to the sums. The better your shares perform, the more tax you pay in a pension scenario. So ironically if you make a killing, an ISA could work out better... though you'd probably be happy anyway if that happened!

[Basil Fawlty]

A pension is trapped until you are 55 and subject to rules which might change between now and then.
An ISA can be accessed at any time.
Because of this, I put money into my ISA, as I wanted to be free to change direction before 55, perhaps to buy a business or invest in one.
Or to pay off the mortgage, be unemployed for a bit, buy a yacht...
As I get nearer to retirement, tying up money in a pension does not seem so bad.

If I'm not in the 40% tax bracket, the ISA comes first.
In my case I think that approach has enabled me to make more, because if my savings were all tied up in a pension, I'd have struggled to have the current house.

There is a lot of psychology in it, but there is a cash value in having control of your dosh, sometimes.

Another consideration with regards to ISAs is once your money is in the ISA then there'll be no more tax to pay on any income you make from it. Assuming you bought an annuity with a pension pot and start receiving income from it then that income is subject to taxation. How much of an advantage/disadvantage this would be would depend upon how long you eventually live for and the size of the pot.

Also what would happen it you were to die within a few years of buying the annuity ? Presumably it's gone, whereas at least with ISAs the money would still form part of your estate.

[Lightwave]

They already are, from 2028 the lower age will be 57

I will be more than 57 by then.
I might be wrong, but wasn't the lower limit 50 when I started my first personal pension in 1989 or so?

[SimonMac]

A pension is trapped until you are 55 and subject to rules which might change between now and then.

They already are, from 2028 the lower age will be 57