It is that time of the year when here (in the UK) we get a new ISA allowance. Amazingly (given some of the wider taxation rules) we still get to be able to put £20,000 in each financial year per adult. This is irrespective of working, retirement or indeed anything else.
So for my wife and I, we get to be able to put away from future taxation a total of £40k (assuming we have it around of course !).
Now we have until the beginning of April 2022 to use it so no need to panic. I may do some bed & ISA transfers from some nicely performing trading account funds, but I just have a niggle in the back of my head to hold off on that for a while. I have a year …. no need to panic anything right now.
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Some time ago I took a look at ISA’s and SIPP’s as I was at a point of wanting to decide what ultimately may be of better long term benefit and start our long term divestment and draw-down planning.
To say I was a bit surprised would be an understatement – after all, always been told the tax uplift of putting money into a SIPP was far in away the best because of ‘compounding’. Whilst sometimes true until drawdown, we are now retired so have different choices.
It seems counter-intuitive, but if you:
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- follow the same investment strategy
- have the same platform costs
- basically same everything – – just one is a taxable platform, one is not
Then I show (at least to myself) that if you remain in the same tax bracket, the net amount on withdrawal from a SIPP or ISA is pretty much the same.There is no great discernable difference in the net amount you end up with.
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Whilst there will doubtless be situations this does not apply, broadly, the numbers are all there.
Where using a SIPP is more advantageous is when you are a High Rate Taxpayer and become a Low Rate (or zero rate) tax payer.
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But what surprised me even more was looking at the case of over-withdrawal from my SIPP to put into an ISA.
I don’t really need to take a large amount from my SIPP and no-where near the High Tax Band Rate, but what if I did take out more, pay the tax and put the net proceeds into my ISA.
Again, this seems counter-intuitive. On an equal strategy surely a SIPP must be better (as you have not lost the tax-compound effect). But there is one critical and material difference:
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- If you are withdrawing from a SIPP, then essentially you will be withdrawing any yield proceeds (+ capital)
- In an ISA you are re-investing yield proceed. These compound exponentially with respect to the SIPP over time
With identical investment strategies and costs, along with a good time horizon (I used 10 years), I found that the future yield in the ISA was substantially larger. This is especially true for a Low Rate Taxpayer
so in summary (and read the articles for some detail):
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- Investing in a SIPP over an ISA (if you are not in drawdown) broadly gives you the same NET cash at a future point in time
- Over-withdrawal from a SIPP and investing the net after tax into an ISA generates substantially higher future income streams
For us personally, higher future tax free income streams are rather more attractive than a slightly uncertain tax position in 10-15 years time. After all, given the oceans of debt we are swimming in, it is hard not to see overall taxation rates creep up.
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Broadly speaking, if you are a high rate taxpayer and expect at retirement to be a Low Rate taxpayer then extra transfers into ISA have a substantial future dividend income possibility, but there is still a material tax advantage to remaining in a SIPP.
If you are a Low Rate Taxpayer and expect to remain so, then there is little material difference to possible direct income (capital), but there is a material difference to future income streams out of an ISA due to re-investment (rather than removal as in a SIPP).
Note that if you are a high rate taxpayer and expect to be close to the High Rate threshold (or over it a bit) in the future, then taking the small hit early and transferring to ISA can have a solid material benefit.
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The other advantage of this is liquidity. Taking a sudden large sum out of a SIPP can incur a very high cost, but you can have ISA as though it was a pile of cash if you want.
Worth having a deep think about what you want to achieve in the future – the investment choices now can both tie up your money and also limit your future options whilst fixing your tax status. It is all a balance and well worth some time to consider your own circumstance and future needs.
What is wrong though is the simplistic view that the tax uplift of putting money into a SIPP outweighs other options. This depends on both circumstance, future circumstance and time !
…. Just a few thoughts …..!