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How pensions will help you reach financial independence quicker than ISAs alone

How pensions will help you reach financial independence quicker than ISAs alone post image

This is part two of a series on how to maximise your ISAs and SIPPs to achieve financial independence. Part One explained why you shouldn’t just target a single Financial Independence ‘number’ when you need to make the most efficient use of multiple tax shelters.

Most people, young and old, should exploit their personal / workplace pension options, from SIPPs to Master Trusts, even if they’re aiming for rapid financial independence.

Before I explain why, a quick reminder:

  • ISA money is taxed before it goes into your account but not when it’s withdrawn.
  • Pension contributions are taxed when withdrawn, but not when they’re put in.

I’m simplifying a little, but essentially that’s the case.

The timeliness of taxation offers no advantage to either ISAs or SIPPs.

An ISA that taxes you at 20% on the way in and 0% on the way out would leave you with exactly the same amount invested as a SIPP that taxes you at 0% on the way in and 20% on the way out.

The maths makes no difference to your investment returns if the tax rates are the same, as The Investor has showed.

But SIPPs beat ISAs and LISAs because the tax rates are not the same.

The comparison below is the simplest way I can think of to illustrate.

Why SIPPs beat ISAs and LISAs for maximizing post-tax returns

In each of the following scenarios, the number in pence is what you have left from £1 gross – once tax is deducted on the way in and/or on the way out.

ISA savings – Basic Rate taxpayer

Each £1 is first taxed at 32% (20% income tax + 12% National Insurance contributions):

£1 x 0.68 (32% tax on way in, 0% tax on way out)

= 68p left

Your ISA leaves you with 68p for every £1 gross you contribute. (Remember, we can ignore investment returns because they will be the same for every account in this comparison, and the timeliness of taxation makes no difference.)

SIPP savings – Basic Rate taxpayer

Each £1 is first taxed at 32% (20% income tax + 12% National Insurance contributions):

£1 x 0.68 (32% tax) = 0.68

But there is tax relief:

0.68 x 1.25 (20% tax relief) = 0.85 (85p is left from £1 gross on way into SIPP)

£0.85 x 0.85 (15% average tax paid on SIPP income after 25% tax-free withdrawal and 20% Basic Rate tax paid on the remaining 75% of income) = 0.7225

= 72p left

So the SIPP leaves you with 72p on the £1, whereas the ISA leaves you with 68p, in a comparison I deliberately skewed against the SIPP.

How skewed?

Well, in reality some of your SIPP income will be withdrawn tax-free using your Personal Allowance (PA). I also haven’t factored in the benefit of salary sacrifice or employer contributions. (I appreciate they’re not available to everybody).

SIPP savings – Basic Rate taxpayer, including Personal Allowance

The SIPP advantage improves dramatically when you account for tax-free Personal Allowance withdrawals of income.

£1 x 0.68 (32% tax) = 0.68

0.68 x 1.25 (20% tax relief) = 0.85

£25,000 income withdrawn from SIPP:

£25,000 x 0.75 (after 25% tax-free withdrawal) = £18,750 taxable income

£18,750 – £12,500 (Personal Allowance) = £6,250 taxable income

£6,250 x 0.2 (20% tax) = £1,250 tax paid

1,250 / 25,000 x 100 = 5% average tax paid on income

£0.85 x 0.95 (0.85 is left from £1 gross on way in, 5% tax average tax paid on way out)

= 80p left

In this scenario, the 80p you get out of a SIPP is worth over 17% more than the 68p dispensed by an ISA. Mileage varies depending on how much you withdraw from your SIPP in any one tax year.

The effect of National Insurance is also interesting here. Tax relief examples generally show 80p being grossed up to £1, or £1 being grossed up to £1.25, to show you how 20% tax relief works. (Just multiply your net figure by 1.25). But much depends on how your pension contributions are deducted.

In a scenario where every £1 gross is down to 68p by the time it hits your bank account, after income tax and National Insurance, then things don’t look quite so good. Put 68p into your pension, multiply by 1.25 and you’ve got 85p. That’s much better than an ISA but salary sacrifice – which enables you to sidestep National Insurance – is a powerful benefit if your workplace offers it, and if your pension contributions would ordinarily be taxed at the Basic Rate or higher.

SIPP savings – Basic Rate taxpayer, including salary sacrifice and PA

Here’s the same scenario again boosted by salary sacrifice:

£1 x 1 (salary sacrifice = no tax on the way in)

£25,000 income taken from SIPP:

£25,000 x 0.75 (after 25% tax-free withdrawal) = £18,750 taxable income.

£18,750 – £12,500 (Personal Allowance) = £6,250 taxable income

£6,250 x 0.2 (20% tax) = £1,250 tax paid

1,250 / 25,000 x 100 = 5% average tax paid

£1 x 0.95 (£1 gross on way in, 5% tax on way out)

= 95p left

Lordy! Now your SIPP funds are worth 40% more than your ISA’s at 95p vs 68p on the £1.

And we still haven’t thrown in employer contributions – in short, just bite their hand off whenever available.

Wealth warning Salary sacrifice can leave low earners out of pocket, and it has wider ramifications for other employment benefits. Check this link for more on salary sacrifice and pension tax relief in general. Salary sacrifice can also be a quagmire for high-earners colliding with the tapered annual allowance. That’s a whole other kettle of articles.

I won’t bore you with all the permutations but here’s another couple of useful examples:

If you took a £50,000 SIPP income in the above scenario, you’d still have 90p on the £1.

Take £50,000 and you’re left at the top of the Basic Rate tax band on £37,500, after deducting your 25% tax-free withdrawal. Deduct another £12,500 for the Personal Allowance and only £25,000 remains taxable at 20%. £5,000 tax divided by £50,000 income means you pay an average tax rate of 10% – leaving you with 90p on the £1.

A Higher Rate taxpayer is left with just 58p on the £1 from an ISA.

What about a Lifetime ISA?

LISA savings – Basic Rate taxpayer

£1 x 0.68 (32% tax on way in)

0.68 x 1.25 (25% gov boost) = 0.85 (0% on way out)

= 85p

LISAs are good for saving for a house but are generally worse than SIPPs as a retirement savings account. You can’t access it until age 60 for retirement without taking a 25% penalty charge, and personal pensions also trump LISAs when you consider inheritance tax, means-testing, and bankruptcy scenarios.

If retiring before the minimum pension age (when you can access your personal pensions) means putting everything you can into your ISAs then forget about your LISA.

If you want to create more tax-free income from age 60 and you’re maxing out your pension’s Annual Allowance, or are worried about hitting your pension Lifetime Allowance then LISAs come into play.

Defined benefit (DB) pensions add another level of complexity, and now is not the time to get bogged down in it. Ultimately DB pensions take pressure off your personal pension, and hopefully the series will give you enough knowledge to see how they fit into your own plan.

There may be some people who discard personal pensions because they aim to retire extremely early, or some other unusual circumstance applies.

But most people will be better off using a personal pension to fund much of their later life from the minimum pension age on.

In the next post in the series, I’ll explain how to work out how much you need to put in your ISA versus your personal pension to hasten financial independence.

Take it steady,

The Accumulator

{ 144 comments… add one }
  • 1 P January 21, 2020, 10:19 am

    “Remember, we can ignore investment returns because they will be the same for every account in this comparison, and the timeliness of taxation makes no difference”

    Wouldn’t a pension yield better results in this case because of the investment return on the taxes?

  • 2 Finumus January 21, 2020, 10:54 am

    Great number crunching. The LISA gets interesting if you’re subject to the annual allowance taper, or the LTA, because at least it’s somewhere you can still get some ‘tax relief’

  • 3 The Rhino January 21, 2020, 11:02 am

    Salary sacrificing can also make getting a mortgage a bit trickier. You may want to stop doing it for three months prior to getting a mortgage? That said, some lenders are more flexible and open-minded than others.

    If you can wrangle the perfect storm of significant salary sacrifice plus 100% of employer NICs rebated then its possible to generate a net pay greater than your gross pay. Also worth thinking about maxing out the 3 year carry forward if possible.

  • 4 The Investor January 21, 2020, 11:43 am

    @P — Morning. 🙂 Have a read of the maths in this article, which is also linked to in the post above:


  • 5 John January 21, 2020, 11:59 am

    P: Wouldn’t a pension yield better results in this case because of the investment return on the taxes?

    I think the counter-argument to this is that you also pay tax on that additional return.

    ISA – £1m earned with 30% tax would be £700k, 10 years at 5% gives you £1.15m which you can withdraw without tax.

    Pension – £1m earned minus 10% tax would be £900k, 10 years at 5% gives you £1.47m which would be taxed on withdrawal, assuming 20% tax this gives you £1.176m. Factor in that 25% of the pot can currently be taken tax free and the pension has a clear edge.

    The above ignores various real world factors and limits for simplicity. It is worth noting that a higher rate tax payer benefits considerably more from pension tax relief as long as they keep within the lifetime allowance. It’s also worth bearing in mind likely changes to tax regimes over your investing lifetime. Is assuming you can keep a lot of money tax free in an ISA for 20/30/40 years a safer or riskier assumption than expecting limited negative changes to how pensions will function (for example further restrictions on how early you can access it, or removal or limiting of the tax free lump sum).

  • 6 Naeclue January 21, 2020, 1:17 pm

    Great article, but I think you have been somewhat dismissive when it comes to LISAs. By your own figures, once the personal allowance is used up £1 into an LISA is worth 85p on withdrawal. £1 into a SIPP is only worth 72p, 18% more. Furthermore, the age at which LISA funds can be accessed without penalty is fixed at 60, but there is uncertainty over the age from which personal pensions can be drawn. Who knows what the age will be in 30-40 years time. I have been giving my kids money to max out their LISAs since they started, based on the assumption that their natural pension contributions from employment will naturally fill their personal allowances and if not, they can make sizable contributions later on, drawing from ISAs if necessary. LISA contributions are limited and cannot be made up for later.

    Of course, everyone’s circumstances are different and for many I suspect that LISA contributions may be a luxury they cannot afford if they want or are forced to retire early. There are definitely risks with LISAs.

    Completely agree that pensions win out when it comes to salary sacrifice/employer’s additional contributions though. Many young people appear not to realise that they have an option to increase their own personal contributions to a degree and this will then increase their employer’s contribution.

  • 7 Neverland January 21, 2020, 1:23 pm

    Hmmm I can see the examples work for basic rate tax payers

    But realistically anyone aiming for financial independence any time before they can access their SIPP will be a higher rate (or additional rate) tax payer for most of the time they work – unless their financial independence plan includes a lot of scavenging in bins?

    So the lifetime allowance’s tax equalization effect looms a lot larger

    Once you breach the lifetime allowance all of the benefits to SIPPs evaporate but the drawbacks don’t

    You seem to be oversimplifying the complex realities of the tax system

  • 8 Naeclue January 21, 2020, 1:40 pm

    @Neverland, “Once you breach the lifetime allowance all of the benefits to SIPPs evaporate but the drawbacks don’t”

    Actually they don’t. I am way over my lifetime allowance due to the bull market we have had since I went into drawdown and will likely be hit with an LTA charge at age 75 unless forward returns are really poor. But that LTA charge is the equivalent of 40% tax provided I (and my beneficiaries) only make withdrawals at basic rate. I received far more than 40% tax relief on most of my contributions. For me and likely many others in my position, my SIPP carries the additional benefit of being completely free of inheritance tax, which is incredibly useful.

  • 9 Fremantle January 21, 2020, 1:48 pm

    Young people on the basic rate should contribute the minimum they need to claim the maximum employer contribution. Any savings on top of that should probably be ISA, which can be accessed. If they become higher rate earners (and assuming they don’t have the ISA balance ear marked for other things), the ISA investment can be shifted into their pension or SIPP, where it will attract higher relief. This could be done by selling assets in the ISA and transferring it into their pension (being careful to match the contribution to income being taxed at 40%), or by paying higher contributions into a company scheme and withdraw income from the ISA (if it is required). This second method has the benefit of also enabling you to reduce NIC. Admittedly, this will only work if you can stay within the 20% band rate on your pension income when you finally retire.

  • 10 Naeclue January 21, 2020, 1:56 pm

    Just to illustrate my point. I higher rate taxpayer contributes £1 to a SIPP. That becomes £1.25 due to the govs contribution and there is an additional 25p tax rebate, assume that goes into an ISA. Assume a worse case scenario where none of the £1.25 can be taken as a tax free lump sum and is hit by an LTA charge of 25%. That reduces the £1.25 to 93.75p. Draw that at basic rate tax and you get back 75p. Add the 25p tax rebate and you are back to £1. Financially that is the same as putting the original £1 into an ISA.

  • 11 Prometheus January 21, 2020, 2:05 pm

    Thanks accumulator, staggering differences with salary sacrifice!

    The other benefit is that your after tax income is not dented quite so much with salary sacrifice, so you could still contribute the same to your pension without hitting your standard of living quite so much

  • 12 Adam January 21, 2020, 2:05 pm

    I think the best is a combination of Isas and Pensions. Couple of negatives of pensions is you are at risk of legislation changes pushing back retirement age or withdrawing tax benefits. Also pensions are legally owned by the trustees which is why they are excluded from your estate for Iht. If you can afford it I say the best is workplace pension first, then Isa allowance then Sipp.

  • 13 Tony January 21, 2020, 4:03 pm

    Could you explain pls why does Monevator do this comparision using a notional £1 pre-tax salary – working off net 68p versus 72p? I just use £1 to illustrate the Pensions v ISA returns difference. 1) Because the source of contributions won’t necessarily directly be salaried income if that is what the reasoning is. Could be capital (eg bed and ISA) or inheritance. 2) I don’t grasp why notional gross income is relevant even where you pay from income. What am I missing? Your money is the actual net pay in your hands in that scenario. Assume 20k annual contribution to ISA. Pensions: with basic rate tax (where applicable) uplifts the 20k to 25k. Tax charge zero for ISA withdrawal presently. Pensions at your marginal rate and 25% lump sum tax free etc. But the same sum x years earlier in an ISA v pension assuming same charges and investments, the pensions return will be higher because it started 5k higher therefore more to benefit from compounding. Leaving aside the other differences.

  • 14 Naeclue January 21, 2020, 4:46 pm

    @Tony, I think TA included NI so that he could illustrate the effect for those who could avoid NI, eg by salary sacrifice.

  • 15 Vanguardfan January 21, 2020, 5:02 pm

    Does anyone know what proportion of employees have access to salary sacrifice? Considering the perennial policy debate as to whether higher rate relief on pension contributions is a good use of taxpayers money, I am always surprised that salary sacrifice isn’t discussed/debated in similar vein. It does seem somewhat anomalous that it is not universally available in DC schemes (my spouse has never been able to use it, 30 years in large private sector company pension schemes).

  • 16 Jan Bloomberg January 21, 2020, 6:43 pm

    Great article, really helpful in shining a light on the ISA contributions. Might be worth mentioning that if you are self employed (as a company) you can contribute direct to your SIPP and reduce corporation tax for your business. Granted you don’t get the 20% personal tax relief, but you also aren’t paying the 12% NI contribution at this point either as its direct from the business (obviously you pay the NI via other means but its much less). I only found out about this last year after contributing personally to my SIPP in the past and paying a big corporation tax bill. This year its all been different and my SIPP is looking much, much healthier for doing so and I am no longer dreading my September Corporation Tax payment!

  • 17 Naeclue January 21, 2020, 7:09 pm

    @Jan, the other advantage you have is that your company can contribute more than the amount you draw as a salary, up to the annual allowance. At least, that used to be the case. I may be a little out of date.

  • 18 ZXSpectrum48k January 21, 2020, 7:56 pm

    @Jan/Naeclue. If you are a director of a small company then, as an alternative to a SIPP, you can consider a Small Self-Administered Scheme (SSAS). If you just want to invest in simple investment products then a SIPP is marginally cheaper and easier to manage but an SSAS can provide more flexibility. In particular, an SSAS can lend money to the sponsoring employer (i.e. your own company) and also own shares in the sponsoring employer (to a limited degree) without triggering a taxable property charge. The ability to loan money back is particularly useful since it means you still has a degree of liquidity with regard to your pension.

  • 19 AVB January 21, 2020, 7:59 pm

    Paying into a pension has other benefits for 40% taxpayer who earn between 100-125k in that you can use it to reduce your taxable salary to 100k thereby retaining your personal allowance which would otherwise reduce by £1 for every £2 earned over 100k.

  • 20 Mr Optimistic January 21, 2020, 8:08 pm

    Company I worked for offered salary sacrifice. To those of us higher up the pay scale and with retirement in sight it was incredibly beneficial. From memory every (40% taxable) pound put in actually cost 58p allowing for 2% NI. The company gave us back the NI they would have paid (13.8% I think). So 58p became £1.13 in an instant ! Even at 20% taxable earnings the higher employee NI gave a 32% saving, so 68p became £ 1.13. Then you have the 25% tax free commencement lump sum and a life at 20% tax rates.
    I wouldn’t be surprised if the government introduced NI on pension income citing the burden on the NHS from us oldies ( and NI on earnings above normal retirement age), but that’s another story. If you have access to salary sacrifice use it!

  • 21 The Accumulator January 21, 2020, 9:19 pm

    Thanks all for highlighting the many different circumstances that co-exist out there. The possible combinations are staggering. Almost makes me feel sorry for HMRC.

    @ Naeclue – I think if I was running my race again, I’d use a LISA to help buy a house. If I’m going for early FI it seems much less relevant, notwithstanding the very high earner cases Finumus mentions. I tend to take a neutral stance on how future regulation will affect pensions or ISAs/LISAs. Granted though, there’s certainly a stronger track record of fiddling with pensions and greater scope to trim the benefits if the country is strapped for cash. Thank you for doing the higher rate taxpayer example. I probably should have done one, but I felt I had to stop writing at some point!

    @ Finumus – thank you for stopping by. Coincidentally, The Investor sent me a link to your blog yesterday, and I spent much of the evening reading your posts. Great stuff! Particularly enjoyed the £80,000 ISA allowance. Very clever: https://www.finumus.com/blog/how-to-get-an-80000-annual-isa-allowance

  • 22 Dan H January 21, 2020, 10:38 pm

    For the RE crowd couldn’t the LISA play a part in reducing sequence of returns risk without losing all tax incentives? An ISA is better if you know you need it, but if you have to cater for the worst possible scenarios you risk over-relying on your ISA and losing the pension advantages outlined in the article.

    Unless you underestimated the amount needed pre-pension or get an unlucky sequence of returns you won’t touch it. In either of these cases you would be glad you had it. You are ~6% worse off (after counting for the initial top-up), but at least you have money for food (or not reduce spending as much, have to try getting a job at 55, etc).

    Having ISA / LISA funds available at pension age can help further by reducing the amount you withdraw from your pension and so reducing tax paid. Assuming a pension income above the personal allowance you get 20% added to LISA + 20% saved by withdrawing less pension = 40% total.

    1. 20% taxpayer tax incentive = 20% vs pension, 40% vs ISA
    2. 40% taxpayer tax incentive = 0% vs pension, 40% vs ISA
    3. 40% pension taxpayer = additional 20% to the above

    To summarise this makes me think it could be good for:
    1. 20% taxpayers, retiring early or not, if they think they will be above the pension threshold
    2. helping early retirees mitigate sequence of returns risk while taking advantage of tax incentives on the way in and out (in most cases)
    3. people that expect to have large pensions

    Interested in thoughts on the above.

  • 23 John B January 22, 2020, 5:22 am

    Salary sacrifice was hugely important to my FIRE journey. As a contractor my umbrella company diverted all my salary, bar minimum wage, into a SIPP before the 40k limit came in, and when I got my last permanent job, I wrote them scenarios which were cost neutral for them, but allowed me to get employer and employee NI. They allowed it even though SS was not mentioned in their general pension bumf. Worth £10k to me.

    This meant I had 8 years paying virtually no tax. I’m always astonished this loophole survives each budget.

  • 24 Dan H January 22, 2020, 8:57 am

    Edit: Realised a mistake in the above comment. The 20% bonus for offsetting pension withdrawals holds for both ISA and LISA. Hence the benefits would be:

    1. 20% taxpayer tax incentive = 20% vs pension, 20% vs ISA
    2. 40% taxpayer tax incentive = 0% vs pension, 20% vs ISA
    3. 40% pension taxpayer = additional 20% vs pension

    The summary is unchanged, but if you need to access early then you would have to use less of the LISA before you would have been better off in an ISA.

  • 25 The Accumulator January 22, 2020, 9:57 am

    Hi Dan, a LISA is useful if you don’t count any employer contribution that you can get for your pension, or you can’t get salary sacrifice, or you aren’t a higher rate taxpayer (who isn’t worried about hitting LTA), or you can’t use the various self-employment wheezes, or you don’t need to max out your ISAs in order to fund RE pre minimum pension age.

    So while there definitely are scenarios in which it can usefully fund FIRE, there’s a laundry list of scenarios in which it isn’t the most efficient vehicle available.

  • 26 The Investor January 22, 2020, 10:09 am

    @The Accumulator — You’re doing God’s Work!

    @All — Thanks for the excellent comments and useful suggestions. I trust we can all see that there’s not a silver bullet / one way, so comments and suggestions are (like the articles) jumping off points for individual research really, and very helpful for that. We’re trying to hit the base case scenarios mostly in the articles. E.g. Someone on Twitter objected (or was confused, might be better) about the way we declared the ISA money as being after 20% income tax and 12% National Insurance, because they said somebody might be funding an ISA with a tax-free inheritance and had an income under the personal allowance…

    Well yes (though even non-earners can get a certain amount of pension tax relief) there are lots of very specific scenarios, and it’s worth wheedling them out in the comments and feedback. But as @TA says above the combinations are staggering. 🙂 (For instance we’ve barely mentioned married spouses and their allowances so far…)

  • 27 weenie January 22, 2020, 11:49 am

    “An ISA that taxes you at 20% on the way in and 0% on the way out would leave you with exactly the same amount invested as a SIPP that taxes you at 0% on the way in and 20% on the way out.”

    This is what I’ve clung to and favoured ISAs for their flexibility. However, I hadn’t ever considered the 68p vs 72p caused by the 25% tax-free withdrawal.

    I have been concentrating on my ISA lately over my SIPP – I’m not in a position to max out either of them so have to split my funds.

    Might just need to rejig my plans a little.

  • 28 The Rhino January 22, 2020, 12:43 pm

    Could I second TA’s recommendation to check out Finumus’ nascent blog (https://www.finumus.com)? There’s some really interesting articles over there which I think would be highly relevant to a lot of MVs readership. One to add to Feedly for sure!

  • 29 Dan H January 22, 2020, 1:02 pm

    I guess the overriding problem in retirement planning in all these scenarios is not knowing how things could change. E.g. SIPP > ISA due to 25% lump sum tax free and personal allowance. This may disappear by the time you retire though. You can only plan for what you know and adapt as things change.

    @weenie Lowering pension withdrawals by using ISA funds could lower your overall tax rate in retirement without decreasing your income. It isn’t quite as good as the tax free lump sum (20% vs 25%), although this depends on how you invest the lump sum. For higher rate taxpayers that expect to be basic rate in retirement the 20% tax incentive makes a SIPP a winner. (* my thoughts only, DYOR)

    Overall my preference is for the SIPP as much as possible, but it is hard to balance the amount needed outside of it against an early 40s retirement. Looking forward to how I can apply the later posts to my situation :).

  • 30 Simon T January 22, 2020, 1:21 pm

    Anybody found a way of subscribing to the Finumus blog?

  • 31 Naeclue January 22, 2020, 1:30 pm

    For most people concerns about being a higher rate taxpayer in retirement are misplaced following the heavy reduction in the LTA. If you hit the LTA of about a million then crystallise, that gives about £750,000 to draw down. Current income limit for basic rate taxpayers is £50,000, so 50/750 = 6.7% drawdown rate before paying higher rate tax. After taking the new state pension into account, about £10,000, the drawdown rate would be 40/750 = 5.3%. Both above what most would consider to be a safe withdrawal rate.

    Will all change of course, but that is the situation at present.

  • 32 An Admirer January 22, 2020, 1:52 pm

    On a slight tangent – another trick with (cash) ISAs that very few people seem to be aware of is that most mortgage providers allow you to offset against them (or at least did a few years back).

    This means you can save up in a Cash ISA for buying a property but not have to transfer the money out when you buy – critically, this allows you to keep accruing your annual ISA limit each year without *ever* losing it on a property purchase. Once you’ve overpaid the mortgage off early, you can transfer the Cash ISA into a SSISA (swap the assets) and unlink it from the offset – again, maximising your ISA allowance usage by never losing it.

    There are obviously other downsides to having an offset mortgage but personally I’ve found this works really well and have retained £100k+ off ISA sheltered cash that otherwise would have been lost this way.

  • 33 Jonathan January 22, 2020, 2:23 pm

    One thing not mentioned is the value of boosting your occupational pension if it is defined benefit. There are still quite a few out there, even though the benefit defined is less than it once was.

    In my case the pension pot was valued at 20x the annual pension, plus the lump sum. Since the lump sum was less than 25% of the total value (it was 3 times initial pension) I could boost it from pre-tax income and then get it back tax free. A huge gain, and worth running down other savings to do, when the contributions would have paid a 40% marginal tax rate.

  • 34 Hemanth January 22, 2020, 2:39 pm

    @Simon T: You can use this – https://www.finumus.com/blog?format=rss

  • 35 Finumus January 22, 2020, 2:58 pm

    @Simon T: You can also follow me on twitter (https://twitter.com/Finumus1) I tweet new blog posts there, but I concede I also paste nonsense. I’ll try and get email subscriptions set up sometime in the next week or so. I’m a bit new to all this.

  • 36 Neverland January 22, 2020, 4:09 pm


    I think your points aren’t really valid in general circumstances:

    “or me and likely many others in my position, my SIPP carries the additional benefit of being completely free of inheritance tax, which is incredibly useful.”

    So basically that is your kids’ Financial Independence you are talking about not yours since if you intend someone else to inherit it, the money isn’t there for your financial independence?

    ” I received far more than 40% tax relief on most of my [SIPP] contributions.”

    I assume you are talking about corporate contribution matching and getting some of the employers’ NI shoved into your pension?

    Some big companies do that but most don’t. Thats just free money like sharesave schemes or share options that varies job by job.

    People working for big companies get over-represented on FI/RE forums because: (a) they pay the big salaries; and (b) because of that they cull their workers from their late forties onwards so FI isn’t a luxury for those workers; its a necessity.

  • 37 Neverland January 22, 2020, 4:17 pm


    “There are still quite a few [private sector defined benefit schemes] out there, even though the defined benefit is less than it once was”

    Fact check: Only c. 12% of private sector employees are in a defined benefit pension scheme as at 2018 (Table 1: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/workplacepensions/bulletins/annualsurveyofhoursandearningspensiontables/2018provisionaland2017revisedresults)

    And most of those will be closed to new members or in the PPF.

  • 38 Jonathan January 22, 2020, 5:41 pm

    I am sure those numbers are correct, Neverland.

    However that could still mean a sizeable proportion of any Monevator readers currently in their fifties and fine tuning their retirement. (Private sector members of legacy DB schemes plus members of the persisting but watered down public sector schemes). But not so many in their twenties and thirties.

  • 39 SemiPassive January 22, 2020, 8:13 pm

    ISAs don’t seem to stack up so much as a 40% taxpayer if you don’t intend to hit FIRE until 55 anyway. They are just too expensive to fill when compared to SIPPs or company pension DC schemes. Unfortunately my current work pension doesn’t do salary sacrifice, but it’s still a cracking deal when you take the 25% PCLS and personal allowance into account on the way out.
    I recently upped my personal contributions significantly, but after notifying HMRC and getting a new tax code it hardly made much difference in take home pay (tip, you don’t necessarily need to fill in a Self Assessment for this, just give ’em a call and they can sort a new tax code and issue to your employer ready for the next months payroll run).

    The holy grail of legal tax avoidance for me would be drawing down £12,500 from an amalgamated SIPP pot (I already have a SIPP and will eventually transfer my work pension DC pot into it and then take the PCLS from that) and living off ISA income for the rest. Zero income tax.
    But fully aware you might be cutting off your nose to spite your face, as it would be better to pay some tax on SIPP income over £12,500 rather than take the significant up-front hit of filling a large ISA pot from 40% taxed income in order to later avoid any income tax in retirement.
    Would love to see the maths behind some scenarios like this in the next eagerly awaited instalment. I guess for 40% taxpayers SIPPs (assuming paying 20% tax on the way out) would always win out until you are on target to exceed the LTA. You could always use your PCLS to fill ISAs later on, although it would take a few years to shelter.

  • 40 Naeclue January 22, 2020, 9:00 pm

    @Neverland, I was not talking about a general case, I was talking about the case for higher rate taxpayers. My response to you was in light of your comment “Once you breach the lifetime allowance all of the benefits to SIPPs evaporate but the drawbacks don’t”. I simply pointed out that for those who obtained higher rate tax relief on their contributions and subsequently paid the 25% LTA charge on part of their pension, the financial outcome on the excess was the same as it would have been had the excess been invested in an ISA.

    But that was a worse case scenario. In my case, if I breach the LTA at the age 75 BCE test, I will be still be 12.5% better off on the excess than I would have been had I invested the excess into an ISA. This is because I received the full tax free 25% PCLS when I crystallised and I intend to continue to draw at the basic rate (or more likely stop drawing above personal allowance for a while and run down ISAs). Essentially the 25% PCLS I took out does not get re-tested for growth for the obvious reason that it is not in the pension any more. For every £1 I do not exceed the LTA by, I will be 31.25% better off than if I had put that money into an ISA. Both calcs assume I only got 40% tax relief, when in fact I also got NI relief. Not a big company by the way – small companies can be more flexible than big ones.

    Higher rate taxpayers can be mistakenly put off making contributions to pensions for fear of the so-called “punitive” charge for breaching the LTA, when in reality they are unlikely to be worse off than they would be if they switched to an ISA, and they could end up better off.

    “So basically that is your kids’ Financial Independence you are talking about not yours since if you intend someone else to inherit it, the money isn’t there for your financial independence?”

    No the SIPP is there for my financial independence and I draw down from it every year. Because the SIPP is outside my estate it will not be hit for IHT when it passes to my beneficiaries, assuming there is something left to pass on. If I die before reaching age 75 there is no BCE test and my beneficiaries are able to draw the whole residual SIPP free of income tax. These are significant benefits, but the SIPP is definitely there for my FI, not anyone else’s.

  • 41 Naeclue January 22, 2020, 9:22 pm

    @Semipassive, you are absolutely cutting off your nose to spite your face if you are a higher rate taxpayer and holding back on pension contributions. Assuming you can afford to save the money and can manage the gap before drawing down your SIPP if you intend to retire before 55 of course.

    For every £1 after 40% tax you are putting into an ISA, that £1 would become £1.25 in the pension and 25p (higher rate tax relief) in your ISA. The PCLS is then 25% of £1.25 = 31.25p, leaving 93.75p to drawdown. Take that out after 20% tax leaves 75p, total 75p (drawdown after BR tax) + 31.25p (PCLS) + 25p (ISA) = £1.3125. A 31.25% uplift for every pound you get 40% tax relief on!

  • 42 Jonathan January 22, 2020, 9:43 pm

    Semipassive, in the end if you are in a high tax bracket any savings outside the pension are fairly expensive. But one way and another someone wanting to retire early needs to accumulate savings.

    You are absolutely right that one can maximise the efficiency of paying into a pension fund from pre-tax income and then planning withdrawal with little or no tax. That is what my wife is doing. She retired last year (over 55), and after transferring her most recent work pension (DC) into a SIPP is drawing down just £12,500. Any shortfall comes from savings (primarily the 25% lump sum) although she also benefits from us planning finances between us. Her target is to do this till historical DB pensions from earlier in her working life reach the dates when they are paid without detriment, but once those, and state pension, are in place she will be in the 20% tax bracket.

    ISAs play a part, but their value is in making sure any savings for the longer term are kept away from capital gains liability, particularly since that is the money that is likely to be invested where there is greatest growth potential.

  • 43 Barn Owl January 22, 2020, 10:57 pm

    @TA. To re-iterate Rhino’s comment above. Without salary sacrifice the employer has to pay 13.8% employers NI. If you opt for a sacrifice they don’t have to pay that. A good employer should refund you the difference. This makes a lot of difference even for basic rate tax payers. I don’t know the prevalence of that type of salary sacrifice, but it really costs the employer nothing to do. Sacrifice is better than employee contributions….

    If you are paid between £100K and £125K then due to the disappearance of the personal allowance, the marginal tax rate is 60% (plus 2% for employees NI), at this level salary sacrifice is even more beneficial.

  • 44 Neverland January 23, 2020, 8:47 am


    Nowhere do you mention the big drawback of SIPPs, the elephant in the room if you will

    You can’t get the money until 55 (and rising)

    A SIPP alone does not give you ‘financial independence’ until you can actually draw on it

    You are even worse off than the pensioners living in a £ million pound house in Clapham living off Aldi catfood because at least they could sell their house if they wanted to…

  • 45 Neverland January 23, 2020, 8:54 am


    ” A good employer should refund you the difference. ….. I don’t know the prevalence of that type of salary sacrifice”

    I did a lot of work for a listed manufacturer in the north, got to know some of the management quite well.

    They had a couple of thousand UK employees … no salary sacrifice scheme.

    However they did have some kind of funky trust scheme set up in Jersey so the top management would not have to pay tax on their share options.

    Anecdotally, the first sign that a company is going to close its final salary pension scheme is when a CEO is appointed from outside the business who isn’t in its final salary pension scheme.

  • 46 Vanguardfan January 23, 2020, 9:38 am

    Anyone below 40 or so now should probably assume that access to pension age will rise to 60, same as for the LISA.

  • 47 Naeclue January 23, 2020, 11:13 am

    @Neverland, you are correct, I did not mention the age restriction problem with pensions, which is going to get worse. TA discussed this in Part 1 of his series of articles. But even if you want to retire at 21, I would not ignore pensions for at least some of your savings.

    You are allowed to put £2880 per year into a personal pension and get tax relief to gross it up to £3600 even if you have no income from employment and even if already retired and in receipt of pension payments (up to age 75). A potentially worthwhile “correction” to the balance of investments in ISA/pensions/unsheltered. There are drawbacks to this as well of course, in my case I would lose my fixed protection if I put anything into a personal pension.

  • 48 AVB January 23, 2020, 12:10 pm


    Increasing the age people can access their private pension is a double-edged sword for the government. On the one hand, they’ve alluded to keeping it 10 years lower than state pension age, but on the other hand as the article below points out, people in their 50s who are forced out of work are going to run into difficulty (especially if they can’t access their private pensions in a timely manner). Presumably, such people would then require state benefits – if I was chancellor I think I’d rather let them get their pension at 55 and not claim benefits.


  • 49 The Rhino January 23, 2020, 12:55 pm

    @AVB – that’s a very interesting article, thanks for the link. Puts a completely different spin on the reason ‘why’ you need to fill the gap! Could be largely out of your hands.

    Just getting back to salary sacrifice – if you are sacrificing down to min wage, is anyone out there claiming benefits off the back of it? i.e. tax-credits, universal credit that sort of thing? I guess the question is whether the means testing for this is based solely on income, or also takes assets into account?

    I’m not suggesting I’d want to do it, the ethics are getting a little dodgy, but I’d be interested to know if it were possible, and if anyone’s brave enough to say – maybe they’re doing it?

  • 50 AVB January 23, 2020, 1:17 pm


    Looks like you could do this for universal credit based on the text below. This would be applicable for anyone earning (gross) an amount up to £40k + threshold for Universal Credit (no idea what that is!). Presumably this would also require a very frugal mindset!


    UC is generally based on net income and therefore from the claimant’s employed earnings can be deducted:
    •Any relievable pension contributions made to a registered scheme
    •Income tax or national insurance contributions paid in the assessment period in respect of those employed earnings
    •Any sums withheld under a payroll giving scheme under Part 12, ITEPA 2003.

  • 51 Neverland January 23, 2020, 1:23 pm


    Ignore SIPPs, no.

    But all the attractive maths done in the previous 50 posts can’t evade the fact that they aren’t any actual use to you as actual money for food or light or heat until you are at least 55

    Therefore as a vehicle for financial independence they are pretty flawed on their own

  • 52 AVB January 23, 2020, 1:25 pm

    … although perhaps the requirement to be frugal, i.e. spend less as diverting more into the pension would be offset by the resulting universal credit that you would otherwise not be eligible for, such that it’s a win\win.

  • 53 Dan H January 23, 2020, 1:28 pm

    @Naeclue I agree with keeping sufficient funds outside of the pension to fill the gap to pension age.

    I’m not convinced topping up post-retirement but pre-pension is as worthwhile though. It would only be worth it if your projected pension income was below the tax threshold. Otherwise you’d probably be better off offsetting funds from your ISA to reduce pension withdrawals and subsequent tax. Same net effect with the advantage of keeping the ready access to money.

  • 54 Neverland January 23, 2020, 1:30 pm


    “Increasing the age people can access their private pension is a double-edged sword for the government. On the one hand, they’ve alluded to keeping it 10 years lower than state pension age, but on the other hand as the article below points out, people in their 50s who are forced out of work are going to run into difficulty”

    I’m sure you’ve got that the wrong way round:

    1) Unemployment rates for workers in their 50s are lower than average in fact (source: https://www.statista.com/statistics/974421/unemployment-rate-uk-by-age/)
    2) People in their 50s will be earning more on the average due to greater experience/seniority
    4) They will pay more tax and national insurance working than retired drawing their pensions (simply because there is no NI on a pension and where higher rate income tax kicks in)
    3) Working age benefits to people without kids are pretty small (and most over 50s won’t have kids)

    Therefore the government makes more money by keeping people working

  • 55 Vanguardfan January 23, 2020, 1:46 pm

    @avb, I can see your argument, but I don’t think I agree with your conclusion.
    Yes, many people will struggle between their 50s and state retirement age – they already do. If they are incapable of work due to ill health they will claim illhealth/disability benefits, and I anticipate there will be a growing pool of people in their 60s on sickness benefits having a fairly grim existence. If they can work, they will need to – Walmart greeter anyone?

    On the other hand, I’ve also seen evidence that overall, raising the state pension age is ‘successful’ in increasing labour market participation in older age groups. If I were chancellor, I’d likely want to encourage that rather than discourage it. Allowing that group to access their pension instead of claiming out of work benefits, or working, is simply likely to result in them running out of money sooner and ultimately having less for their retirement. I don’t know if you’re aware, but the level of means tested benefit payments above state pension age is more than twice that for working age people (pension credit is pegged to just below the full state pension of £168 per week, basic JSA/ESA is £73 per week).
    The most recent policy change in this area was to change the entitlement for mixed age couples (above and below state retirement age) from the more generous pension credit to working age benefit levels. So policy trends are at present geared towards promoting later exit from the workforce/working age welfare regime, rather than allowing retirement savings to be accessed during working age. I can’t see that trend changing. (Also, the way this would likely be done would be to take pension savings into account in the means test, thus forcing people to access their own retirement savings instead of working age benefits. Worth noting that this is how LISA is viewed in the benefit system).

  • 56 Vanguardfan January 23, 2020, 1:47 pm

    Neverland made the point more succinctly.
    Although I think it’s no longer at all guaranteed that older workers will be paid more. Many have to take a big pay cut following redundancy.

  • 57 AVB January 23, 2020, 1:55 pm


    In the UK there are two main measures of unemployment –
    1.The claimant count (number receiving unemployment benefits)
    2.ILO – Labour Force Survey (A survey which asks – are you unemployed and actively seeking work?)

    Part of the reason the unemployment rate may be low for older people could be because they are not looking for work, or perhaps just work one or two days a week. Or it could be because they have access to their private pension and therefore don’t need to work – take that away and perhaps the unemployment rate would shoot up.

    I’d also point out that those earning the most (i.e. the oldest) are most at risk of redundancy (or forced retirement), I see it all the time working in the city. If a younger person can do an older person’s job for half the cost, then that older person who’s salary has increased by inflation over the last 30 years is at risk. The board don’t always care about experience as much as you may think they might, also they may view older workers as more costly in terms of retraining/upskilling for new technologies etc.

    I’d also point out that the article was about people in their 50’s in early retirement, and that based on the research many of these were not retired by choice.

    I expect those that are respected and paid well during their 50’s would probably continue working after the min retirement age anyway (much like they do now).

    Final point – one way to solve the high unemployment rate for young people is to force all the older people out of work! Maybe they’d draw-down their pensions, spend the money, and boost the economy and create more work for young people.

  • 58 Vanguardfan January 23, 2020, 1:56 pm

    Regarding using pension contributions to claim universal credit. I have heard of this being done. Ethics aside (I don’t think much of it myself), it’s pretty hard to buy a house while on universal credit and raising children. Unless you were happy to rent and buy your house with your tax free cash later or something.

  • 59 AVB January 23, 2020, 2:02 pm

    Just add I’m definitely against forcing older people out of work!


    You are probably correct, though I hope I’ve at least shown it’s not completely straight-forward and there will be some economic downsides (though probably not enough to offset the upside). I also wonder that MPs often look after their own interests when making policy decisions and whether that might have an impact.

  • 60 Vanguardfan January 23, 2020, 2:24 pm

    @avb, definitely not straightforward, one of the knottiest policy issues of our time. And of course people who are ‘retired’ in their 50s, whether by choice or not, are those who can support themselves at levels comfortably above the poverty safety net. In a roundabout way, back to the subject of the post!!

  • 61 Jonny January 23, 2020, 2:46 pm

    A really, really interesting article, which has now raised me to question my situation (not of Pension vs ISA, but of SIPP vs employer pension)

    I’m a basic rate taxpayer contributing to employers defined benefit scheme (USS), and a HL Vanguard SIPP (charges HL @ 0.45%, LS80 @ 0.22%).

    My employer also allows additional (salary sacrificed) contributions into a Growth fund (“predominantly passively managed with a small amount of active management” (shares, property, bonds)), which aims to produce a better return than a ‘composite benchmark’ (fees currently subsidised by employer, so 0%)

    Assuming I currently pay £150 per month of my NET salary into my SIPP (so gross SIPP contributions of £150 x 1.25 = £187.50 per month, £2250 per year).

    Salary sacrificing £187.50 per month, and paying the amount direct into employer pension scheme would seem to offer a saving of £22.50 per month (£187.50 * 0.12), or £270 per year – which I could then either spend on lattes, or use to increase my pension contributions.

    It seems, if switching from SIPP to salary sacrifice with USS funds:

    Advantages: Increases pension contributions by 12% at no additional cost to myself, saves 0.67% per annum ongoing (no more fund charges, no platform charges)
    Disadvantages: ‘slightly’ actively managed fund following ‘combined benchmark’, more eggs in one basket (USS), less Vanguard 🙁

    I’m erring towards the extra 12% in annual contributions (and saving additional 0.67% in ongoing fees) outweighing the disadvantages. Does this seem reasonable/sane?

  • 62 Naeclue January 23, 2020, 3:27 pm

    A little off topic, but for those intending to retire early, or not have employment income if you baulk at the word “retire”, don’t forget to consider the State Pension. If short of the maximum pension, class 3 NI contributions are an absolute bargain, typically repayable in under 4 years. Better still are self-employed class 2 NI contributions, which you can swing with a trivial ebay business.

    Has their been a Monevator article on this?

  • 63 Naeclue January 23, 2020, 3:44 pm

    @Jonny, personally I would probably go for the company scheme and salary sacrifice. It might underperform a Vanguard tracker, but with the low costs and 12% boost, they would have to be pretty bad. Have you looked at the control you have over the investments?

    Some schemes allow some flexibility over funds and if so you should choose an asset allocation you are happy with rather than simply accepting the default. You may be able to get something close to how you would invest in the SIPP.

    Alternatively, if say you wanted more of your pension invested in equities, take on a higher allocation in your SIPP/ISA to compensate for the lower amount in the company scheme.

    I consider our investments as one big pot across SIPPs, my wife’s small DB pension, ISAs and unsheltered investments. The equities in our SIPPs are purely US listed (for withholding tax reasons), but this overweighting is balanced by lower allocations to US equities elsewhere.

  • 64 David January 23, 2020, 4:08 pm

    Salary sacrifice was reviewed a couple of years ago and the Government decided to ban the more questionable uses such as Techsave for purchasing electronic devices, and employers reimbursing staff car parks off-payroll. Employer pension contributions, tax free bikes under Cycle to Work, and childcare vouchers were all retained. It’s hard to imagine these three perks making it onto any Chancellor’s radar when there are far juicier pickings available from restricting higher rate tax relief on employee contributions for example.

    I used salary sacrifice to save a bit more into my pension and I think I was the only person at my company doing it. They didn’t give me the whole 13.8% on top, but I seem to remember my overall tax rate was still negative when compared to my contracted gross salary(!) If you have the flexibility then it’s better to cut your salary to a very low level for two half tax years together, e.g. Oct to Oct and alternating on and off each year, as national insurance is calculated on monthly payslips which means you save more doing it this way.

  • 65 Jonathan January 23, 2020, 4:19 pm

    Jonny, I was a member of USS and decided that AVCs were the way to go. But it depends partly on your age and thoughts of retirement. For someone envisaging retiring in the next 5-10 years then the boost to contributions probably outweighs any doubts about the in-house funds (as far as I recall they publish the comparison with relevant indices, so you can judge them against common trackers). Longer than that and you have to decide whether you are happy with the loss of flexibility compared with ISAs (true for the SIPP as well).

    Remember, with USS you can add something like twice your salary in AVCs and take it tax free at retirement. With a SIPP only 25% of the contributions come out tax free although I suppose you could defer your USS pension and use your income tax threshold.

  • 66 Neverland January 23, 2020, 5:48 pm


    Take free money from employers contribution to their rip-off pension scheme.

    Transfer chunk of money (but not all) from employers pension scheme by transfer to SIPP.

    Rinse and repeat.


  • 67 Aureus January 23, 2020, 6:03 pm

    In the discussion of SIPP v. ISA something I don’t think has been mentioned is the difference in platforms fees/charges.

    Looking at this table (https://monevator.com/compare-uk-cheapest-online-brokers) the charges for a SIPP seem to be consistently higher than a stocks and shares ISA. For some ISA providers (e.g. iWeb) there is no ongoing platform fee at all.

    The difference in charges might not seem that great in the short term, but compounded over the decades you might be paying into a pension it would add up.

    For a basic rate tax payer who’s pension will already exceed the annual tax free allowance, a SIPP comes out only slightly ahead of an ISA in terms of tax relief, due to the 25% tax free lump sum. I think the tax relief on a SIPP would be worth about an extra 4-5%, to someone in that category.

    This small tax advantage could surely be reduced significantly (or even wiped out) by the additional charges for a SIPP, compounded over, say, 30 years.

  • 68 Naeclue January 23, 2020, 6:07 pm

    @Jonny, in response to the bizarre comment from Neverland that the USS is a rip-off pension scheme (it isn’t), you should think very carefully before transferring anything out. Check to see whether you are losing any other benefits first, such as in-service death benefits or critical illness cover. A lot of modern DC schemes are run at very low cost, often for less that can be done with a SIPP and some come with additional benefits you would have to pay extra for if you transfer away.

  • 69 Mr Optimistic January 23, 2020, 8:58 pm

    @Jonny. Unless I misunderstood your post, I can’t imagine why you would contribute to the sipp. You seem a tad dismissive of an extra 12%. That is significant. Also, what are the employer’s contributions?

  • 70 The Accumulator January 23, 2020, 9:28 pm

    @ Aureus – by annual tax-free allowance are you referring to your future pension income exceeding the Personal Allowance? If your position is anything like the ‘Basic Rate taxpayer, including Personal Allowance’ SIPP scenario then you’re ahead 17% against an ISA.
    If you use a % fee broker then there’s no extra charge for holding a SIPP account. Later, if you switch to a competitive flat fee broker, then you’re paying an extra £100 per year. That’s 0.1% off a £100,000 SIPP. It’s even less as your SIPP grows. It’s not going to make anything like the difference you surmise.

  • 71 E&G January 23, 2020, 9:40 pm

    I’m in a very similar position Jonny and pay money into an AVC scheme via salary sacrifice. The fees are slightly higher and the returns might be slightly lower but the extra 12% from NI (which is really a 13.6% boost – 100/88 by my maths) makes it the compelling option. It also means no faffing about with tax returns (and in Scotland with the extra 1% on your tax rate a SIPP would be better than the LISA).

  • 72 Jonny January 23, 2020, 11:00 pm

    Thanks for the responses all

    @Naeclue There are a choice of 10 funds (listed at the bottom of this page if anyone is interested…), so I should be able to get close to my current LS80 allocation.

    @Jonathan, with regards to AVCs are you talking about the new USS Investment builder (introduced in the last 5 or so years)? If so I hadn’t realised it could potentially be tax free in retirement, which would be another advantage! I’m a while off retirement yet however…

    @Mr Optimistic No I’m certainly not dismissive – quite the opposite. To be honest I only did the sums after reading the article, and now feel a little silly having spent the last few years contributing to the SIPP, when I could have been taking advantage of this salary sacrifice bonus available to me. Re. the employer’s contributions, there aren’t any in the (DC) element I’m talking about. However there is to complement my defined benefit scheme which my employer does contribute to (offering 1/75th annual salary for employer contributions of 21.1%, and employee contributions of 9.6%).

    I still need to clarify whether the 0.3% fees (that are covered) actually include the fees of all the underlying funds, but it seems from the positive comments here, there’s no arguing with the 12% bump 🙂

  • 73 Jonathan January 24, 2020, 12:04 am

    Jonny, the change in USS has made calculations more complicated, but there is still quite a lot to gain from the tax free lump sum. Basically whatever your pension is due to be, the DB element is valued for tax purposes as 23 times your pension when you take it (pension part valued as 20x annual pension, plus lump sum of 3x). However you could have a total pension pot of 26.66x pension with the cash portion (6.66x) still being tax free because it is 25% of the total valuation.

    So you can add 3.66x the pension you will receive available as DC contributions (“investment builder”) and still get it back tax free. It has become a lot more difficult to calculate given most people will have a pension due of both old-style final salary benefit plus new-style career-averaged salary, and if your salary exceeds the DB limit under the new scheme there will be automatic contributions to the DC scheme to keep track of. While the modeller on the USS website wasn’t perfect when I used to use it, it at least allows you to roughly keep in touch with where you lie. If you have the possibility it is well worth while getting as close as you can to maximum tax free lump sum at retirement.

    Sorry to everyone else who is unlikely to be interested in the minutiae of one particular pension scheme.

  • 74 Neverland January 24, 2020, 9:18 am


    All looks great but you have to assume that the scheme:

    (a) stays the same; which it hasn’t
    (b) stays solvent, which it might not

    Imagine the sick feeling if it gets restructured because of a shortfall – eggs in one basket etc.

    I worked with the management of a big family retailer one time when there were still final salary pensions. Many of them notionally had millions in pension pots in the scheme; then their employer went bust.

  • 75 brian January 24, 2020, 9:48 am

    Thanks for the article, very helpful and confirms to me that my current strategy seems to be the best way forward. I am a reader who fits nicely into the target audience for this piece where my sole source of money to add to an ISA, LISA or Pension available to me right now comes from my income.

    Given I have access to Salary Sacrifice and my Workplace Pensions fees can be as low as 0.33% then adding to my Pension seems much more beneficial than LISA for retirement.

    Even if the goalposts were to change and there is no 25% tax free lump sum or the 40% Income Tax Threshold was to reduce to something closer to £35,000 or NI is applied to Pension Income I think I’d still be better off adding any income taxed at 40% to my pension via salary sacrifice.

    I’m getting £1.138 for every £1 earned vs 58p to add to an ISA.

    The one big downside is the uncertainty over what age I would have access to my pot but if I can come up with an alternative plan to cover from age 55 to 60 I should be fine. It’s quite possible that inheritance being directed into a LISA will help bridge the gap.

  • 76 Neverland January 24, 2020, 10:29 am


    If you use pensions as your main saving vehicle forget about the “RE” part of FIRE

    I would do some proper excel modelling about how quickly large pension contributions can get you into lifetime allowance territory if made when young

    With an outside best case of 7% net/real each contribution will double in value every decade

  • 77 Jonathan January 24, 2020, 10:54 am

    Neverland, fair comment but actually USS is a reasonably good bet.

    It is a standalone scheme, so it doesn’t suffer the risks of some company schemes of being tied up with the financial position of the company. For some reason there is a scare story every now and then about its sustainability, but the figures suggest it is pretty sound. A couple of years ago its assets were £60bn and its annual payments £2bn. In a worst case stress test of all employees stopping contributing to the scheme tomorrow, it would last 30 years if its investments simply kept pace with inflation. Or put it another way, investments earning 3.3% above inflation would be too much (there would still be money in the pot after the last pensioner died). A quick look at current annuity rates (courtesy HL) show that a 65 year old can get 2.9% RPI linked commercially – and my guess is that those companies pay themselves well over 0.4% fees.

    Whether it will change is another question. The last change, from final salary to career-averaged with a cap, was done so as to “freeze” benefits earned up to the change – which of course means that it will take decades for the resultant decrease in pension commitments to feed through in full. But I am sure it is in their powers to make bigger changes, though personally I think the bigger risk is a government change in rules.

  • 78 Finumus January 24, 2020, 11:02 am

    @Neverland You’re spot on about underestimating the LTA risk, I’d mapped it out all very carefully to not hit it. I had lots of headroom. Then, because for dull tax reasons I keep US stocks in my SIPP, the combination of a rip-roaring US equity bull market and the devaluation of sterling due the the B****t thing meant I ripped right through it in short order.

  • 79 Neverland January 24, 2020, 11:10 am


    Likewise, we have a huge LTA bill to pay eventually but it’s a nice problem to have isn’t it?

    I don’t worry too much, it will make the next bear market have a silver lining

  • 80 Neverland January 24, 2020, 11:19 am


    I know little specifically about the USS being about the polar opposite of an academic and never having been in a final salary scheme in my life

    What I can tell you however is how sick the look is on people’s faces when they realise they are both losing their jobs and having their pensions tipped into the PPF because I have seen it three times so far

    Also look at how easily the previous government largely changed defined benefit schemes in the public sector to career average from final salary and from RPI to CPI

    Another stroke of the pen in a finance bill and the multiplication factor for a DB pension gets changed from 20x to 15x….

    …. of course everyone will now pile in and say that can never happen….

  • 81 Naeclue January 24, 2020, 11:20 am

    @Neverland you appear to be persistently incapable of understanding that some (but not all) people may still be better off making pension contributions EVEN IF THEY EXCEED THE LTA.

    “I’m getting £1.138 for every £1 earned vs 58p to add to an ISA.”

    If the LTA is exceeded on crystallisation, £1.138 is reduced to 85.35p after the 25% charge. Withdrawing at 20% income tax takes it down to 68.28p. That is still comfortably above the 58p Brian would get using an ISA.

    This irrational fear of the LTA charge is similar to many people’s complaints about the tapering that goes on if you earn over 100k. Yes the tapering is punitive and a stupid tax policy, but you may still be better off taking a pay rise that puts you over 100k than turning it down.

  • 82 Jonathan January 24, 2020, 11:54 am

    Neverland, I totally agree the biggest risk is the Chancellor of the Exchequor.

    However my guess is that the most likely direction is to restore a bit more LTA (because of the unanticipated effect on critical higher paid workers like doctors) but that doesn’t rule out a change in the DB multiplier. Even more likely is a change in taxation on pensions (most likely badged as National Insurance, and justified on the basis of funding old age care) which could mess up a lot of plans.

  • 83 Naeclue January 24, 2020, 11:57 am

    @Dan H, I agree that there are not large savings to be made by making pension contributions whilst in retirement. eg a basic rate taxpayer that is under the LTA can cycle £2880 per year through a SIPP for an uplift of 6.25% before the cost of trading, etc. (1.25*25% (PCLS) + 1.25*75%*80%).

    However, SIPPs provide a very cost effective way of reducing IHT and in a way that means the money is still available should the retiree end up needing it. There are other ways of doing this, such as discounted gift trusts, but they are more expensive and less flexible.

  • 84 Vanguardfan January 24, 2020, 12:10 pm

    Regarding the LTA. I think we worry far too much about it. In finumus’ case, what does it matter? You will still get the return you anticipated/based your calculations on for the bit within the LTA, any excess is just due to more growth than you thought. And you will actually receive a proportion of that. People talk about the LTA as though it actually loses you money, but it doesn’t. Ok, if with hindsight you had put those contributions into an ISA you might have got a better rate of return, but I think it’s far better to overshoot than undershoot on your pension. (Disregarding considerations about age at access).

  • 85 Vanguardfan January 24, 2020, 12:12 pm

    sorry I see Naeclue had already answered the point about the LTA, and also shown that it still does better than an ISA (if higher rate tax relief applies to contributions)

  • 86 Vanguardfan January 24, 2020, 12:20 pm

    I totally agree that DB pension rules could very easily change. I don’t know how many people are aware that in some European countries, public sector pensions took a haircut during the financial crash. That could easily happen here. To some extent the LTA performs that function, one change (as already mentioned) could be to increase (not decrease, Neverland) the multiplier such that the LTA kicks in at a lower pension, more in line with DC limits. The NHS issue makes that less likely in the immediate future (I know the issue is more to do with taper than LTA, but it still makes it a hot potato).

    I have a large public sector DB pension (not LTA large but substantial) and high up on my list of risks is that that will be degraded in some way. It won’t disappear, I’m sure, just might not be worth quite as much as I hope.

  • 87 brian January 24, 2020, 12:20 pm


    “If you use pensions as your main saving vehicle forget about the “RE” part of FIRE”

    Yeah, I’m also not young/disciplined enough to be looking at a FIRE strategy, I’m just trying to ensure that I have enough of a pot to keep a similar standard of living to what I have now once I stop working.


    100% agree, I don’t get the fear of the LTA, especially as a blanket rule where avoidance is essential. I can understand why it may be more punitive for someone likely to be paying a higher rate of tax from their pension income but I’m not in danger of falling into this cohort unless the markets decide to rally for the next 20 years which would be a massive win for me regardless.

    And if in 15 years I am ahead of my target due to taking advantage of salary sacrifice while it’s available I will have to weigh up the pros and cons of paying some of my income into my wifes pension.

  • 88 Naeclue January 24, 2020, 12:22 pm

    @TA, I think you may have missed the point that Aureus was making

    “For a basic rate tax payer who’s pension will already exceed the annual tax free allowance, a SIPP comes out only slightly ahead of an ISA in terms of tax relief, due to the 25% tax free lump sum. I think the tax relief on a SIPP would be worth about an extra 4-5%, to someone in that category.”

    Someone in that category is actually only 6.25% better off by making additional SIPP conributions instead of ISA contributions, not 17% which is your blended rate. Furthermore, that 6.25% gain is not guaranteed as it depends on a) 25% tax free PCLS and b) tax on withdrawal of 20%. There is a risk of change in both dependencies and you could get back less than 6.25% (or more). Contrast that with the ISAs, with zero additional gain, but with instant access, or a LISA, with an up front fixed 25% gain, but (currently) longer to wait before access and I don’t think there is a clear cut advantage to making additional SIPP contributions in this situation without taking other factors into consideration.

    I agree with you about SIPP running costs though. If you already have a SIPP and are already paying the maximum fixed fee, then there is no difference in cost between putting an extra £1 into your SIPP compared with putting that £1 into your ISA.

  • 89 Vanguardfan January 24, 2020, 12:25 pm

    Regarding USS. I think it’s not unlikely that the DB section will close at some point (not go bust but just close to new members). USS is becoming so expensive that it’s almost at the point where the members might come to prefer DC. Much worse deal than comparable public sector schemes (NHS, Teachers) imo.
    At the moment I’d still pay into it if I that was on offer.

  • 90 Naeclue January 24, 2020, 12:51 pm

    @Brian, one good thing about DC pensions is having control over how much is drawn each year. I draw just enough to keep me out of higher rate tax. Due to the amount I have drawn and the sequence of returns I have experienced since I crystallised I consider it quite likely that I will exceed the LTA when it is tested on my 75th birthday. I could draw more to avoid that and pay 40% tax on it, but I don’t need the money and future returns could mean I end up being wrong about exceeding the LTA. If I do end up exceeding the LTA, I will pay the 25% charge on the excess and continue to draw as I do now. Net result, 40% tax on the excess (£1 become 75p after LTA charge, 20% tax takes it down to 60p), so I will be no worse off than if I paid the 40% now.

    Thanks to pension freedoms, if I end up dying with pension to spare, it goes to my wife or kids to continue drawing at basic rate tax, or 0% if I don’t make it to 75.

  • 91 Neverland January 24, 2020, 2:29 pm

    @Naeclue @Vanguard

    “you appear to be persistently incapable of understanding that some (but not all) people may still be better off making pension contributions EVEN IF THEY EXCEED THE LTA”

    …. and you seem to be persistently incapable of understanding the value actually being able to access money to pay for food, power and shelter before an arbitrary age determined by administrative fiat

  • 92 Finumus January 24, 2020, 2:34 pm

    @Vanguardfan Completely agree that it’s a nice problem to have. As you say, the regret is simply that I would have arranged my pot/asset-allocation differently had I seen that coming. But then if I’d seen that coming…
    Going forward there’s a drift towards a lower risk/return allocation in the SIPP and higher in the ISA/FIC/GIA etc. Because I have to hold bonds somewhere, and there’s sort of a hope that inflation, and therefore the LTA can catch-up a bit.

  • 93 Neverland January 24, 2020, 2:34 pm


    I think a relatively large proportion of the dual income no kids fire community will get to the point that they find that they could FIRE in their late 40s in theory but they can’t because the funds are all tied up in SIPPs

    But who knows equally likely a bear market will gut that dream with a serated knife

  • 94 brian January 24, 2020, 2:51 pm


    That’s fair enough, clearly a pension can only partially play a part in an early retirement .

  • 95 Naeclue January 24, 2020, 2:56 pm


    “…. and you seem to be persistently incapable of understanding the value actually being able to access money to pay for food, power and shelter before an arbitrary age determined by administrative fiat”

    Not at all, I have never said any such thing and nor as far as I can see has Vanguardfan. Getting the balance right between pension and non-pension savings is one of the prime points of TA’s articles.

  • 96 The Investor January 24, 2020, 3:16 pm

    @all — Great thread. Let’s keep the comments constructive and about the various issues, not about the posters themselves, please.

  • 97 Mr Optimistic January 24, 2020, 4:16 pm

    @Jonny. I reckon 0.3% is just the platform. I understand there is a 0.75% fee cap for funds in contributory pensions. I have a link to something from Google but it’s too ugly to post. It was odd in the scheme I was in just how many of the fund choices were at that level. They didn’t offer us a single equity tracker.
    @Vanguardfan. Yes, surprised the x20 factor isn’t a bigger gripe but now doesn’t seem the time to correct it (but they might if they do something radical with the lpa.)

  • 98 AVB January 24, 2020, 9:10 pm


    Stating the obvious but the idea of putting money into the pension is to fund retirement from the point of the minimum retirement age (which is a bit uncertain, but we know ball-park). This is tax advantageous over an ISA – case closed. The point of the ISA is then to fund years between giving up work and drawing the private pension. An efficient strategy is fund the ISA just enough to run-out just after the pension becomes payable (though in practice you’d probably take a less risky approach akin to why you might use a 3.5% SWR instead of 4%). This is efficient because it minimises your total contributions across both the ISA and pension. Using an ISA to fund retirement after min draw down age is less efficient than using the sipp\pension.

    Now, efficiency does not always equal safety, so I understand potentially funding the ISA a bit more and the pension a bit less in order to:
    (1) have something put by in case of changes to the minimum retirement age
    (2) make pretty sure your ISA doesn’t run out in the intervening years (though tbh depending on age I might put it swap it from an S&S to a cash isa at point of quitting work if there’s not too big a gap before I can draw the pension)
    (2) retain full access to funds for other reasons – e.g. leaving the country in a hurry, distrust of government, etc

    So there is no right answer, as it’s a matter of your particular/individual risk tolerance and retirement horizon. Everyone’s both right and wrong as surely it comes down to perspective.

  • 99 Haphazard January 24, 2020, 9:50 pm

    Re USS:
    I wondered about the eggs in one basket thing and I had a look at their “statutes” or whatever they are called. Not a great bedtime read.
    My general impression was that in the case of a meltdown (however unlikely), DC pensions took “priority” over DB. My impression was that the assets would then need to be transferred out. Please don’t take my word for it… Presumably it is only the DB section of USS that would go to the Pension Protection Fund, if they were to step in – I thought that’s where their role ended?
    Again, my impression is that the concerns about USS are about the sustainability of the DB section.

  • 100 Jonathan January 24, 2020, 10:20 pm

    As commented above, this is a funded pension scheme which should easily be good for 30+ years. Should see me out!

    I recall an annual report which said their investments were 60% equity-like and 40% bond-like so no extreme risks. (The “like” is because a fund that can invest tens of millions at a time has options beyond regular traded shares; one wonders what the effect on markets would be if they took the easy low cost route and phoned Vanguard to ask for £60bn worth of LS60).

  • 101 DumbRadish January 25, 2020, 9:16 am

    I think AVB has it spot on. The flexibility of the ISA is surely worth sacrificing some potential extra return.
    Also I can’t see that anyone has mentioned any implications of tax rates changing. If the basic rate goes up after you retire, surely that makes pension savings vs ISAs less efficient?
    Of course taxes might stay the same, or even go down (I managed to keep a straight face whilst writing this), and yes the ISA rules might be tinkered with (though I struggle to believe the tax free nature of existing savings would be altered).
    Given the uncertainty of a post-Brexit society, with likely populist high spending governments, it seems pragmatic to have a decent pot of tax free money available at any time.

  • 102 The Accumulator January 25, 2020, 9:46 am

    Yes, I really don’t think anybody has advocated you put everything into a pension because it’s tax efficient at the expense of having accessible assets in an ISA. This is afterall, the whole point of the series! I’m glad we all agree on that.

    Regulatory changes to all and any aspect of the system are brought up by all and sundry. Whaddya gonna do? Hedge your bets of course, don’t bank on any one vehicle or institution to make your dreams come true but don’t get paranoid either. The system can and does change for the better sometimes.

  • 103 The Accumulator January 25, 2020, 9:53 am

    @ Naeclue and Aureus – gotcha. Thanks for setting me straight Naeclue. All the same, the slightly lower fee you can score with an ISA account doesn’t wipe out the SIPP advantage even focussing on the component saved after filling the Personal Allowance and ignoring any employer contribs. I’ve had a chance to run the numbers and the SIPP is still ahead after 50 years of compounding using a cost skewed in favour of Aureus’ thesis.

    Also Naeclue – thank you for your sterling contributions to the thread!

  • 104 Richard January 25, 2020, 11:29 am

    This series has really got me thinking about this, so thanks. The main issue is still trying not contribute to the pension more than the minimum required. Lets say you need 500k in pensions to cover from 58 onwards. Do you front load that and invest the max into pensions today. So you will be done saving in a few years and let natural growth get you to the final target by 58? Then switch to ISAs. Big pro is your earning potential could take a downturn in the future and maximising the tax relief now is clearly a winner. But what about future employer pension contributions (aka free money) and what if your growth rate is off? Dont want to be sitting on £1m at 52 and cant stop working as not enough in ISAs…. And how can you predict when you will stop work and so stop employer contributions? Etc.

    I need to spend time modelling different scenarios in excel!

  • 105 Faustus January 25, 2020, 12:14 pm

    I do wonder how much lifespan this (otherwise fascinating and helpful) advice will have, when there is a widespread expectation that tax relief on pensions will be dramatically overhauled in the near future.

    Almost annually now, for several weeks before the budget, we have a slew of articles in the media shouting about how pension tax relief is under threat. An example is in today’s Times which has two pension advisers suggesting that tax relief on pension contributions should either be scrapped entirely or a flat relief offered instead (to the detriment of those above the basic rate threshold). If that does happen it is likely that the opportunities around salary sacrifice will have to be adjusted too.

    Unfortunately, the political narrative has moved towards a position where pension tax relief is painted as a perk for the rich, and given our sclerotic economy, it is likely the Treasury will see this as a low hanging fruit to be plucked in order to juice up their balance sheet. I suspect that due to their nature ISAs are likely to be safer from fiddling than pensions, though it is possible to anticipate one day a limit being imposed on how much one can hold in them – perhaps around £1m to match the pension LTA (which for most of us would not be a serious imposition).

  • 106 Finumus January 25, 2020, 12:30 pm

    @Faustus These pundits always say this because they get paid a fraction of their money under management. They are just try to scare people into topping up now.

  • 107 The Accumulator January 25, 2020, 12:31 pm

    Variants on those articles are published every year around this time – presumably the media find they get a lot of clicks from readers wondering if they need to stuff more into their pensions before financial year end.

  • 108 Aureus January 25, 2020, 2:50 pm

    @TA and Naeclue

    Thanks for your responses.

    The scenario I’m interested in is a basic rate taxpayer who already has in place a work place pension, but wants to save extra for retirement. So the worker I have in mind has already exhausted (a) the personal allowance on their pension income, and (b) any matching employer contributions.

    In pure monetary terms, are they better off paying into an ISA, a LISA or a pension?

    @TA – from your analysis it seems that the worker I have in mind will get quite a lot more bang for their buck by paying into a LISA rather than a SIPP (85p v 72p). But a SIPP will have a small edge over a regular ISA (72p v 68p).

    As you’ve noted, my point was that the already small advantage of a SIPP over a regular ISA could be eroded somewhat by the higher platform fees. But perhaps this would not make a very big difference, provided they choose their platform wisely.

    I was delighted to read your article, because everything else I’ve found online, on the subject of LISA vs. pension, is highly simplistic. In particular, most articles tend to portray the situation as a straight choice between a 20-40% ‘bonus’ for paying into a pension, versus a 25% bonus on a LISA. Completely ignored is the fact that with pension contributions income tax is simply deferred till later, rather than avoided. Your article is also the first thing I’ve read that acknowledges the existence of national insurance. So thanks for the more sophisticated analysis.

  • 109 Sparschwein January 25, 2020, 3:07 pm

    AVB (#98) sums it up very well.
    I’d add that pensions come with “political risks” some of which have been mentioned here (access age, pension taxation/NI) while being a foreign citizen brings additional risks. Which increased with the Brexit mess of course.
    Higher rate tax relief is so valuable that I’m willing to bear the political risk. Below the higher rate threshold I prefer ISAs.
    But when moving abroad, under a foreign tax regime ISAs will probably become fully taxable – another point to consider in “RE” planning.

    If anyone here is in a similar situation, how do you handle this?
    (DC pension vs. ISA; LTA no concern.)

  • 110 The Accumulator January 25, 2020, 3:40 pm

    @ Aureus – I really appreciate your comment as I take a break from wrestling with some of the later episodes in the series. Like you I was frustrated by the lack of depth out there. You make an excellent point about LISA versus SIPP contribs that don’t benefit from salary sacrifice, P.A. or employer contrib uplift. My later case studies generally need to max out the full £20K in the ISA to cover the gap years between FI and minimum pension age, but that’s moot if you’re not going for FIRE.

  • 111 Al Cam January 25, 2020, 5:34 pm

    “An ISA that taxes you at 20% on the way in and 0% on the way out would leave you with exactly the same amount invested as a SIPP that taxes you at 0% on the way in and 20% on the way out.”
    Agree 100%.
    However, this is not the case if you are the tax collector.
    The tax collector gets more tax (albeit delayed) via the SIPP route!
    And, provided you hang around for long enough, he can even afford to incentivize you to take this path via the tax free lump sum.

  • 112 Haphazard January 25, 2020, 6:46 pm

    Not in exactly the same position, but I’ve wondered about these issues too as I’m not sure about staying in the UK.
    I think it depends if you’re moving abroad temporarily or permanently, and at what age. As far as I can work out (OECD website), the general rule is that if you spend over 6 months in another tax country, you may be taxed there on your “worldwide income”. That would include ISAs. If I were moving for the long term, I’d be tempted to look at what people do in the new country, e.g. buy property there – I don’t think you can contribute any more to existing ISAs anyway once you leave.
    International pension transfers can also be difficult – I think they have to be to a ROPS (recognised overseas pension scheme). That restricts options a lot. And if you leave it in the UK, you’d be subject to currency fluctuations in retirement, and any double-tax issues.
    I’d also be interested if others know more about moving abroad combinations.

  • 113 Mezzanine January 26, 2020, 12:18 am

    I’d been contributing a monthly amount into my son’s CTF (/JISA). However, since I’ll be 55 before he hits 17, I’ve decided to pay 115% of the CTF contribution value into my company pension scheme on the assumption that I’ll draw it down (25% TFLS + marginal 20% tax) and gift it to him when I’m 55+. I’m using a separate fund from my personal contributions that’s better risk-aligned to his situation. This shouldn’t affect my LTA position and I’m not concerned about the tapered 7y inheritance risk.

    On top of the tax/NI benefits of the above, I’m also using this to max out my matched employer contribution. From a FIRE perspective, I don’t need “more pension” as I’ve already hit my post-55 numbers with DC, DB and state. Bottom-line, this change means he will get broadly the same as if I’d contributed to his CTF, I get to add a little more of my NET pay into my ISA and I end up with a bit more pension on the side.


    re: USS – I know it’s been done-to-death in earlier comments but as an ex-NED of a now deceased USS-contributing organisation, I can say that USS has it’s contributing organisations in a last-man-standing hold. Any member organisation (mostly but not exclusively Universities) that wants to exit has to pay exit fees to bail out the future risk on all of it’s active, deferred and retired members. Of course, scheme rules may change over time to the detriment of member benefits from future contributions but for USS to actually fail would need _all_ of the contributing organisations to also fail.

  • 114 Vanguardfan January 26, 2020, 3:51 am

    Here’s another couple of factors to add to the calculations (sorry TA).
    Pension contributions via salary sacrifice reduce how much student loan you pay (remember for those graduates on the post 2012 student loan plan, their marginal income tax rate above the £21k – or is it now £25k- threshold is +9%). Maybe even straightforward contributions without sal sac would have the same effect?
    Similarly, making pension contributions to bring you below the threshold for child benefit surcharge would make such contributions even more cost effective (much like the threshold for withdrawal of personal allowance, but affecting rather more people).
    Apologies if I’ve missed these points being made already.

  • 115 Naeclue January 26, 2020, 11:42 am

    @Mezzanine, that sounds like a great plan. Only thing I would suggest is to make it clear to the plan provider that you wish the separate fund to go to your son should you die early.

    There is a risk as well of having to pay inheritance tax on the gift to your son. You need to survive 7 years after the date of the gift for it not to be considered part of your estate. Regular annual gifts to him into a jisa would likely be considered gifts from income and exempt from IHT.

  • 116 Anonymous January 26, 2020, 12:03 pm

    Yes, I’m doing it – (sacrificing to a level that you get benefits).

    I’ll start with the caveat I didn’t do it ‘deliberately’ -its just that when my life circumstances changed, I didn’t stop doing what I was doing before. My argument is I have always prioritized my pension.

    * Since 2012 ish I’ve been salary sacrificing at least 1/2 my income into employers pension/sipp. Combination of anger at help to buy, the bailouts and it being tax efficient the reasons for this. If I couldn’t have a house at a reasonable price, I’ll have a very comfy retirement plan was my thinking.

    * In 2016 I got a new job with a big payrise and the employers NI contribution given to me, so I upped it further.

    At this point, I’ll say I was single and it didn’t qualify me for benefits. I also work part time. Probably one of the highest paid part time workers in the country, but nevertheless I have long been part of the ‘cant tax free time movement’ too.

    In 2017 I found myself in a relationship with someone who, because of their life circumstances was getting a very large amount of tax credits. When I moved in, if I had changed my income to sacrifice less *they* would have lost all theirs, because as a ‘unit’ my income would have tapered away all their benefits. And I still wanted to prioritize my pension. Although we treat family money as family money, it’s important they kept that income for them too to feel like they also are contributing – and in case we split up!

    In 2019 I got another very large payrise. At this point some will have to be tapered away, but I’m minimizing it as much as I can by putting money in their pension, because they have zero provision.

    Money is moved from my work pension to my sipp annually.

    Now to the maths.

    Basically, it costs me 27p of household net income to put £1.138 into my pension, because we’d be entitled to tax credits all the way to the very top of my normal income because of unusual circumstances. Would anyone genuinely change that if that’s the situation you’ve found yourself in?

    I’ll say one thing that puts this into context for the income amounts we are talking about. If I was working full time, I would have started to lose my personal allowance.

    Ethically, some may say this is outrageous – but why? Why would anyone voluntarily accept a 73% marginal tax rate? We now have a comfortable family income and are maxing out retirement savings which is prudent. Theres no reason not to do this and the system is designed to allow it. Do some reading and you’ll find it’s been argued in parliament and accepted as a personal choice.

  • 117 Anonymous January 26, 2020, 12:30 pm

    Note – all the above has a limited shelf life to the children approaching the age where they no longer are accounted for for benefits (once over a certain age, the tax credits go away).

    It also wouldn’t work at all under universal credit if you have savings over 16k (which we do). And at some point in the near future, everyone will be moved on to that system so the opportunity disappears.

    At that time, it’s probably time anyway to reduce the contribs because I’ll have front loaded the sipp enough that with a fair wind on growth, I’ll hit the LTA anyway. And we’ll need the income so I’ll just have to go back to paying large amounts of tax. Que sera sera.

  • 118 Vanguardfan January 26, 2020, 1:06 pm

    @mezzanine, the other thing to be aware of is the MPAA (money purchase annual allowance) – once you’ve taken any taxable money from your pension (ie more than the 25% tax free) you have a reduced level of pension contributions you can make and get tax relief on, forever. Currently £4000 per year. This may not matter to you, if you have no further earnings post 55, or no wish to make further pension contributions, but it’s quite a severe restriction to impose at a relatively young age.

  • 119 miner 2049er January 26, 2020, 1:42 pm

    not sure how to ask this but here goes…
    Account/platform fee where to pay from?

    one thing I’ve noticed is that with vanguard you can choose to have the account fee taken from an account outside of the investment account this could be upto £375pa, is there a best practice for choosing?
    If its coming outside the tax shelter then in effect i’ll be paying more(if a tax payer) than if its taken from within the account, but if taken from within the account then it’ll be money that’s not compounding.

  • 120 Finumus January 26, 2020, 1:46 pm

    @miner 2049er Funny I’ve recently switched all that I can to take platform charges from ‘within’ the SIPP, because I’ve breached the LTA, so up to 55% cheaper that way!

  • 121 Naeclue January 26, 2020, 4:04 pm

    @miner, to a certain extent it is one of those “it all depends” questions, but if you pay isa charges from outside the ISA that keeps more money sheltered from tax. For your SIPP, money inside your SIPP will potentially be taxed on withdrawal, so paying charges from your SIPP means the taxman is contributing, which is clearly preferable.

    Combine the 2 and it may be best to pay your ISA fees from your SIPP, assuming that is allowed.

  • 122 Mezzanine January 26, 2020, 4:13 pm

    @Vanguardfan Good point about being mindful of the MPAA.

    I don’t intend to work beyond 55 (target is 51) but if I have the opportunity to reduce my hours after hitting my pre-55 numbers, I may keep working a bit longer. If so, I would sacrifice my entire salary into my pension after taking a nominal tax-and-NI-free amount to retain my NI credits (c. 8k for now although might be rising in future). I would supplement my income by withdrawing from ISAs as planned.

    Once I reach 55 or stop working (whichever is later), I intend to take my DB pension (early) while maximising my CLS/TFLS which I’ll invest back into ISAs. This will keep us going for some time and I hadn’t intended to start drawing down any of my DC pots until I was 61.

    Taking the DB wouldn’t trigger the MPAA – at least I don’t think so but taking more than 25% from a DC pot would. I have no intention to be earning post-55 but when it comes to it, I’ll need to think carefully about precisely when and from what source I gift the “pension money” to my son…

  • 123 Vanguardfan January 26, 2020, 4:36 pm

    Yes, the DB pension doesn’t trigger MPAA. Also, I think I’m right that you can’t salary sacrifice to below the minimum wage?

  • 124 Dan January 26, 2020, 6:52 pm

    I’ve been wondering about how much I should contribute to an ISA for some time now, as others have stated there should, in theory, be a mathematical solution.

    If we use the time value of money’s annuity formula to model our payments in:
    (P((1+r)^n-1)(1+r)/r)=Future value.
    Where: P = Contribution
    r=rate, and
    n= time

    This should determine the future value of the money in your account.
    Paying 100 in per a month with a return of 0.05 (5%) over the course of the year should leave you with 1,233 in your account.

    The time value of money also has a reducing balance formula, essentially it is the lump sum of money that you have to start with less the annuity formula.

    PV = the present value of your lump some.
    So in the same exact example, if you started with a notional amount of 4000
    You’d have 2,971.65 left in your account having drawn out 1,200

    Therefore, if we know the present value of our lump sum at the time of calculation will be the future value of our contributions and that we want the future value to be zero, to have exhausted all the money in the ISA over a 10 year (120 months) with a notional 2,220 per month withdrawal.


    Then a present value of 210,176 would be required with the above 0.05 rate per year.

    (P((1+r)^n-1)(1+r)/r)=Future value
    Future value = 210,176
    r=0.05/12 and
    n= time to retirement in months.
    In my example I’m 26, so say 29 years (348 months)
    I’d calculate that as a monthly contribution of £268.314

    (268.314((1+0.05/12)^348-1)(1+0.05/12)/0.05/12) = 210,175
    Would result in F= Minus 2.8

    Now obviously this depends on the expected rate of return, how many years you are out, how much you want to withdrawal etc. But as a basic model, does it serve the purpose of forecasting the amount you’d need to pay in now to expect to retire at the age you want?

  • 125 Mezzanine January 26, 2020, 6:58 pm

    Didn’t consider the minimum wage… 😉

    This means minimum annual salary after sacrifice depends on the number of hours worked. Maximum sacrifice for full-time work would leave you paying NI and a marginal 20% on the top £2-3k. However, reducing to 20hrs (2-3 days) per week for a nominal 48 weeks comes to around £8.3k per year under the new NLW on 1/4/20.

    Fine-tune it and I think you’d have no tax or NI to pay but would still receive NI credits…

  • 126 Sam January 26, 2020, 7:46 pm

    As someone at the start of the FIRE journey, my general strategy at the moment is as follows:

    – Where I am part of a company pension scheme, contribute enough to get the maximum employer contribution, but no more.
    – Contribute the maximum to the LISA (have managed to do the full £4,000 the last two years and on track to do so this year).
    – Any remainder goes into normal ISA.

    The reason I don’t contribute any more to the pension is partly because as a basic-rate taxpayer there is less benefit anyway. Mainly however, I believe that the age when you can first access will definitely raise, perhaps even to 65 at some point. This severe lack of flexibility is a major turn off for me.

    The LISA was always destined towards being used towards a house deposit, as I am also sceptical that the government will leave the LISA untouched until I reach the age of 60. However the bonus was and remains too good to ignore. I have contributed £8,333 in total to my LISA, and its current value is £12,000. Try getting that return anywhere else!

    As said, the rest goes into the ISA. The standard ISA is simple enough that it makes it less likely that future governments will try to interfere with it.

    Perhaps if I ever earn more, then I will start to focus more on pensions. But the government interference problem will likely always remain, so maybe I will just look to max out ISA allowances.

  • 127 Ste January 27, 2020, 1:31 pm

    @Sparschwein, @Haphazard:
    I’m in this situation, moved abroad after a few years in the UK. I decided to max out the ISA in the last year I was in Britain and keep contributing to my SIPP at the maximum allowed while I’m abroad (3,600/year gross for 5 years, basic rate relief). I figured there was no harm in putting as much as possible into the ISA – it is definitely not going to be treated favourably in other countries, but not worse either. So it’s essentially a default investment account abroad, but tax sheltered should I ever return (big disclaimer: all bets are off here if you move to the US – look up FATCA, FBAR and especially PFIC with potentially extreme reporting and tax burden on non-US accounts). And that’s right, you can’t contribute to the ISA after you leave.

    The SIPP is more complicated – I agree there is substantial political risk attached to it, especially now being European. For me personally the tax relief and the fact that it is hard to find low-cost private pension options in most European countries sold it to me in the end – the fee-savings/top-up will hopefully pay for any fees to transfer out should it become necessary. In addition it is at least far more likely to be treated as pension with favourable taxation in other countries (seems to probably include the US, but do your own research). I’m less concerned about currency risk, I could always put the fixed-income part into short- or medium-term bonds in the currency I need it in after all, doesn’t really matter that the SIPP is denominated in GBP. I should mention that the SIPP is a relatively small proportion of my overall pension plan in the long run, currently also contributing to a workplace DB scheme.

    You probably won’t be able to easily switch your broker after moving abroad, so make sure to be with one that’s got a low fee structure (obvious caveat you can’t know about future changes to fees). Also move all funds in the ISA to distributing versions in case you have to report dividends and capital gains in your future country.
    And last big disclaimer – individual situations will vary hugely so do your own research. I’m in a slightly unusual position in that I am largely exempt from national taxation in my current place, so you might for example be a lot more concerned about CGT (including unrealised gains in many countries) and dividend tax on the ISA.

  • 128 Ste January 27, 2020, 2:00 pm

    Just two more additions to the above to add some context:
    I’m not planning to stay in my current country of residence for more than a few years and am completely outside its social insurance/pension system – if you move to a place and plan to stay there for good, exploring local private and employer pension options could look appealing compared to paying into a SIPP (but again, it depends).
    And having looked at a LISA as well: I found it to be the worst option if you move abroad because it combines the inflexibility of a pension (to my knowledge you can’t use it to buy property abroad) with the tax treatment of a normal investment account (it’s unlikely to be tax exempt anywhere apart from the UK).

  • 129 Haphazard January 27, 2020, 2:40 pm

    @Ste – thanks. The practical experience is useful to hear. Good point about transferring ISA funds into distributing funds – would simplify the actual assessment of tax a lot. The last time I lived abroad I was also in an unusual situation in that I retained my UK tax residence throughout (working for an international organisation) – it does make life easier!

  • 130 Ste January 27, 2020, 2:57 pm

    Thanks, and glad I finally found someone with that experience. International organisation is my exact situation. It does make things easier in many regards but then there’s always the uncertainty about where you are going to be next! Plus I’m admittedly unsure about how long retaining the UK tax residence lasts, especially if I might not be entitled to actual residence there anymore at some point.
    @Moderators: Apologies, please let us know if this is getting too off-topic.

  • 131 Jonny January 27, 2020, 7:53 pm

    Thanks everyone for their advice, and apologies for taking these comments off at a slight tangent!

    @Jonathan re. adding 3.66x annual DB pension (to make up to 6.66x). You say it’s “well worth while getting as close as you can to maximum tax free lump sum at retirement”. This seems quite an achievable goal – e.g. a £15K annual pension would only allow up to £54,900 (as the additional 3.66x). I assume going over is not so much a worry (with the caveat that I’d be liable to pay tax on any withdrawals above and beyond 3.66x of the pot – and to watch out for the LTA, which for the moment doesn’t seem would be a problem for me). Also for this 3.66x figure, do you mean the total value of existing SIPP + Investment Builder (+ any stakeholder pensions etc.) – or just the Investment Builder element?

    @Vanguardfan re. USS becoming expensive. It’s frustrating. When I joined not so long ago contribution rates were around 7.5%, they’ve risen and risen to 9.6% now (and possibly to 11% in Oct 2021). It’s difficult to evaluate at which point the safety of having a ‘gold-plated’ defined benefit pension is outweighed by the rate at which I’m having to make contributions at.

  • 132 AVB January 27, 2020, 8:10 pm

    I had a thought about mitigating the risk of over-funding the pension and not having enough in your isa to see you through to the minimum withdrawal age. Providing it’s not too long a gap and you’re a homeowner you could probably get a mortgage to plug the gap which you could initially repay using part of the mortgage itself; so you’d borrow what you need plus enough to make repayments until you can access your pension. Then just use the pension to pay off the mortgage. Not advocating you intentionally plan to do this and conditionally on actually being able to get a mortgage (may be best to realise your mistake before quitting work) but is one way of dealing with a situation where you’ve overfunded one pot at the expense of the other.

  • 133 Vanguardfan January 27, 2020, 8:17 pm

    @jonny, it’s not just the contribution rates that determine the value of the DB scheme, it’s the rate of benefit accrual. So for example the new NHS scheme, which I know well, has contribution rates between 5% and 14.5% (they are tiered depending on salary level, the highest level is for people on six figure salaries), but the accrual rate in the CARE scheme is 1/54 of pensionable pay, no cap, which is not bad at all. It’s uprated by CPI (maybe plus a little bit, can’t quite remember).
    My understanding is that the USS rate of accrual is only 1/75 of pensionable pay up to £50,000 max. (I also thought it was still final salary rather than career average but I might have that wrong).

  • 134 Sparschwein January 28, 2020, 1:11 am

    @Ste, @Haphazard:
    Thanks for your interesting comments.

    Re SIPP/pension while abroad, I’d think (perhaps naively) that the drawdown is simply taxed as income in the country of residence? Another question is, how would they treat the tax-free lump sum (e.g in the Eurozone)?

    Re currency risk, one can certainly mitigate this by switching pension funds into local currency stocks and bonds. A caveat is that many UK pensions seem to offer few choices in foreign bonds. My company DC scheme has dozens of GBP bond funds and zero foreign. Most of Vanguard UK’s bond funds are GBP-hedged; there is one in USD and one in EUR, that’s it. I was planning to move into Vanguard’s SIPP and now have second thoughts because of the limited choice. On the other hand, Vanguard is more likely than most brokers to stick around for the next few decades, and to keep fees low.

  • 135 Haphazard January 28, 2020, 11:03 am

    A few years ago I looked into tax in relation to a Swiss pension, having worked in various countries abroad, but being tax resident in the UK. There is a UK-Switzerland Double Tax Agreement, with a specific section on pensions. That looked promising.

    It wasn’t, really. The pension in question is not a Recognised Overseas Pension Scheme (ROPS), so I couldn’t really transfer it to the UK during the contribution phase. A lump sum payment on retirement would be taxable in both countries, despite the Agreement (HMRC confirmed the UK position to me). This might just be different if I’d lived in Switzerland at the time of accrual (gets complex). This leaves me with no option but to accept the annuity provider chosen by the pension fund – in that case payments as things stand do seem to be just taxed like a normal pension in the UK. A daft situation as the sums involved are small.

    For anyone moving abroad, I’d suggest checking whether any foreign pension you get involved with is a ROPS if you want to move back at some point. Problem is, not many are.

  • 136 Simon T January 28, 2020, 11:19 am

    @Ste, @Haphazard, @Sparschwein
    I think we should have a Monevator thread on organising Finances for abroad (they asked me to do a post – but I have some knowledge but not enough).
    ROP – wouldn’t touch with a bargepole, certainly make sure you have a SIPPs placeholder of a bit of money just in case you can’t change from a Personal IFA pension into your own managed one in time, don’t forget you can do the £2880 in £3600 for five years whilst abroad (although this may not be a good idea of the taxes on the income you are taking out outlay the UK Benefit), if you need a TFLS for this countries who tax you as income (Spain) think about whether you take this out a year before hand, some TFLS might be beneficial in ISAs or a GIA where the dividends are taxed at a lower rate than Pension Income (you could split the two), I could go on.. I would love a IFA to actually write this stuff down, most of the firms Spectrum, Blevins etc, dance around it wanting you to engage. I would engage them if they actually told me this stuff. (and lets not get into the countries who don’t have a main residence relief for house sales – again Spain, you will get caught if you sell your UK housed move to Spain in the same tax year and don’t invest all the proceeds)

  • 137 The Investor January 28, 2020, 12:08 pm

    Re: expat investing, V
    very happy for you guys to share your wisdom to your hearts content here:


    I get a really proportionate number of emails and queries about this, as I’ve mentioned before, but just don’t have any expertise.

    Would love to see that thread become a powerhouse of knowledge. Perhaps at some point I could try and harvest it for an article (or better have another crack at persuading a practitioner to have a go! )

  • 138 Edward February 10, 2020, 8:15 pm

    My company pays 10% of pensionable salary and matches 7% more. I contribute 16% meaning I get 33% of my salary paid into my pension for the price of 16.

    If I took that 16% as income I’d see only £545 a month in my bank account after tax and NI, but over £1900 goes into my pension.

    As stated above I can take £25,000 a year drawdown in retirement and pay only 5% effective tax, so unless I’m missing something obvious this seems the best plan.

    I can wait until 55 to retire.

  • 139 br1anh February 11, 2020, 1:28 pm

    Lots more talk in recent days about the government scrapping the 40% rebate and potentially salary sacrifice I would assume. I’d be livid if they do so.

  • 140 Edward Bowden February 11, 2020, 3:03 pm

    Lots of people saying 40% tax relief is unfair and should be cut to 20%.
    It’s perfectly fair unless they reduce my income tax rate to 20%!

  • 141 Sparschwein February 11, 2020, 8:33 pm

    Has anyone looked into whether these government plans of slashing pension tax relief could hit in the *current* fiscal year? Is it certainly beyond them to change the rules retroactively?

  • 142 David Andrews February 26, 2020, 5:00 pm

    I aggressively use Salary Sacrifice as my employer as contributes half the employers NI saving into my pension. I salary sacrifice down to the NI lower earnings threshold and consequently pay on income tax and no NI contributions. I’ve previously paid a fair bit of both so I can live with the morality of my current decisions. I’m aware that my employer shouldn’t let me salary sacrifice below the minimum wage but that’s what they are presently doing. I’m already totally debt free and I’m meeting any living cost shortfall from the rental income from another house I own and drawing down on savings. After the next tax year I’ll have used up my pension carry over so I’ll have to reduce my pension contributions accordingly which will return me to paying income tax and NI again. I’ll be checking the budget to see if Salary Sacrifice gets curtailed.

  • 143 FIJOEBLOGGS September 30, 2020, 1:13 pm

    Not sure if this has been covered, but are the ISA figures negatively skewed by the 32% cumulative tax and NI treatment, as this doesn’t take in to account the personal allowance on the net income before it is paid in to the ISA. On an example of £50,000.00 gross wage you would take home £36,100.00. £50,000 – £36100 = £13,900. £13,900/50,000 = 28%.
    £1 gross – 28% = £0.72 net.
    Granted it would still be better off in SIPP, but puts the ISA in a little better light?

  • 144 Chromed October 22, 2020, 10:31 pm

    What if you are a business owner and your salary is at the lower threshold where you get national insurance contributions without having to pay it, and then you get dividends? Only tax paid is dividend tax so surely the LISA would be best? £1.15 per £1 earned?

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