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How to maximise your ISAs and SIPPs to reach financial independence

How to maximise your ISAs and SIPPs to reach financial independence post image

Let’s explore how you can combine your UK tax shelters to reach financial independence (FI) as quickly as possible and as safely as you deem necessary. I’ll explain my thinking as we go, so you can decide if my safe is safe enough for you.1

First we need to re-state the problem with the standard FI approach.

Legend has it that you are financially independent once you’ve saved 25 times your annual expenses.

Say your annual expenses equal £25,000:

£25,000 x 25 = £625,000 = living the dream!

Except no. That’s not realistic – and I’m not even slagging off the notorious 4% rule.

It’s not realistic because most of us will have our wealth locked up in ISAs and pensions.

And this inconvenient truth changes the game.

Got 99 problems and a 4% SWR ain’t one

Let’s say you want to retire early. Continuing our example above, we’ll assume you’ve got £300,000 in your ISA by age 40 and £325,000 in your SIPP.

You’re at the magic £625,000 mark. Theoretically you can draw an income of £25,000 at a sustainable withdrawal rate (SWR) of 4%.2

But wait! You can’t access your SIPP until age 55 at best. Perhaps not until age 57, or higher still if politicians keep moving the goalposts.

That means you’ll be withdrawing £25,000 from your £300,000 ISA account for at least 15 years – an 8.3% SWR.

Such a rapid rate of withdrawal means your ISA risks running out of money too fast in more than 25% of scenarios, according to work by one of the top researchers in the field, Professor Wade Pfau.

Frankly, that’s an unacceptable failure rate.

I don’t want to entertain a one-in-four chance of having to go back to work before I can tap into my pensions.

  • Save the entire £625,000 into an ISA and the problem disappears. Trouble is, it’s far harder to retire early without using the powerful tax reliefs available with pensions.
  • Save everything into a pension and retire after the minimum pension age and the problem disappears. But many Monevator readers hope to retire earlier.

The average FIRE-ee will spread their wealth across tax shelters – and the different access times, rules, and quirks can defeat simplistic withdrawal rate tactics.

However, we can crack the code so you can maximise your tax advantages, and hit FI with a realistic plan that minimises the odds of having your dream derailed by a casual cuff of chance.

Ground rules

This is going to be a series of around six posts.

Yes, it’s going to be a bit hardcore. But by the end you’ll have a guide to the key steps, tools, research, calculations, and assumptions that’ll enable you to customise your own plan.

Financial Independence means being able to live off your investments without going back to work. Yes, you can make up shortfalls in savings by picking up work but then you’re not independent. Our plan needs to be robust enough to avoid that scenario if possible.

Of course other income streams can make all the difference if you can engineer them.

Here are my working assumptions:

  • Before minimum pension age, we’ll fund our retirement with ISAs and – if your pre-FI income is high enough – General Investment Accounts (GIAs), which are the non-ISA, non-SIPP broker accounts that are taxed at standard rates for capital gains, dividends, and interest.
  • For money you’ll access beyond minimum pension age, a personal pension wins hands down as your primary savings vehicle. Some people will hit the lifetime allowance, but that’s a nice problem to have, and nothing to be afraid of. To keep things simple, I’ll assume a SIPP is our account of choice from minimum pension age on.
  • I’ll use conservative SWRs as the benchmark for the sustainability of our plan. The SWR metric strikes a good balance between achievability, and relative safety. Our income will be tithed from the total return via capital sales and any income generated by our assets. (Some Monevator readers3 aim to increase their level of security by living off investment income only. I salute them – but it’s a higher bar, takes longer to reach, and still entails risk.)
  • I’ve used UK tax rates in all case studies for the sake of sanity. Scottish and Welsh income taxpayers may have to adjust slightly where relevant.
  • We’ll adjust for the fact that much of the historic research relies on benign US investment returns.
  • Obviously we don’t know what tax regimes will look like in decades to come. Ditto for investment returns, life expectancies, and the price of fish. All we can do is make use of the best information we have and adapt along the way. So err on the side of caution, have a back-up plan (we’ll discuss those), and let’s not be paralysed by the unknowns.

In part two of the series, I show why personal pensions are much more tax efficient than ISAs and shouldn’t be ignored, even by early retirees.

Take it steady,

The Accumulator

  1. Acknowledging that there is no absolute safety in this world. []
  2. £625,000 x 0.04 = £25,000. []
  3. And my co-blogger, The Investor! []

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{ 84 comments… add one }
  • 51 jc2858 January 17, 2020, 11:05 am

    @Vanguardfan, thank you for your reply. I’m vaguely aware of the pitfalls of the GIA, and it is the account of last resort for me after filling ISA, LISA, and pension contributions.I want keep everything simple, so my current thoughts are just buy single global tracker acc units ( to avoid calculating dividend tax) and keep it below 50k for myself and my partner.

  • 52 NervingMyselfUpToPressTheButton January 17, 2020, 12:49 pm

    I’m very excited to hear about the series – February is always the time I consider long term financial planning once the dreaded self assessment deadline is passed – and our recent instinct has been to max out pension contributions (and the max is almost impossible to calculate now), mainly driven by short term tax considerations, but perhaps that is not optimal long term. It will be great to have a UK centric take on this.

    But can I chuck in another requirement before you get started – any chance you could include property/lettings/long term rentals as a potential asset pot and income stream in the thinking? It has slightly different tax and convertibility options to either an ISA or a Pension.

  • 53 Vanguardfan January 17, 2020, 1:20 pm


    @jc, please read the above. If you’re investing in a taxable account, income units are easier to manage the tax implications than accumulation units. Buying accumulation units does not exempt you from taxation on distributions, it simply means the distributions are not paid out. You have to account for and pay tax on distributions just as if they were paid out, and then you have to subtract that from the unit price to calculate the capital gain. It’s much simpler to manage this for income units where the distributions are paid out. (I learned that the hard way).

  • 54 ZXSpectrum48k January 17, 2020, 2:59 pm

    @vanguardfan. Until your pension and ISA are filled there is no reason to touch anything else. Once filled, however, then the choice is between GIAs and wrappers like life bonds, PICs and trusts. I opened my offshore bond because I could make no further payments to my pension (having taken fixed protection). Moreover, having implicitly transferred a large sum from my pension to ISAs using a bit of cunning financial engineering, I felt that my ISAs could be vulnerable to an LTA. So I wanted to focus some of my asset growth outside ISAs to obtain some regulatory diversification.

    Fees are a clear problem. I’ve heard some people are charged over 1% to hold such an offshore bond wrapper; clearly not worthwhile. I’m being charged around 40bp, similar to holding assets on a broker like HL, but still enough to make me think twice. In recent years that cost has been easy to justify since the NAV drag from fees is more than offset by the uplift from gross roll-up. That scenario may not be sustained.

  • 55 miner 2049er January 17, 2020, 7:04 pm

    its the working out of being tax efficiency of the ISA v SIPP im interested in, ive got a feeling of me trying to get one over the taxman by using my ISA means im actually going to be less well off than actually stumping up some income tax come pension time.

  • 56 Metro January 17, 2020, 7:39 pm

    Is it possible and tax efficient to have a final-salary pension from an employer and a SIPP at the same time. What are the pros and cons of this.
    Or is better to keep the company final-salary pension and invest in ISAs. I’m age 56 years.

    Thanks for your advice and comments.

  • 57 TimePasses January 17, 2020, 9:24 pm

    I am a regular ready and posting for the first time.
    This series is very timely for me as my retirement is planned in June 2022 when I turn 66 and my state pension kicks in.
    I am a solo company director and hold a SIPP and an ISA. My company contributes into my SIPP (up to the 40k limit) on my behalf and I also top up my ISA every year up to the limit from my PAYE and company dividends.

    My current plan is to sell particular fund(s) in the SIPP to enable a draw down of the amount I would need each month. My wife is retired and gets the state pension but no other income. I have just paid off my mortgage and I am now totally debt free!!

    My retirement needs to be tax efficient so my current plan is to draw down enough to keep me below the 20% tax threshold (currently £12.5k) but this amount would have to be topped up by drawing down cash from my ISA.

    I need to get my act together and this series will hopefully help me. My SIPP is currently £300k (50/50 split between equities & bonds) and my ISA is £100k at two platforms and is 95% in equities which I will need to de-risk to a 30/70 split between income shares and a global tracker fund (HSBC balanced or Vanguard LifeStrategy).

    Financially, I am frugal (its in my DNA) and don’t need much to live. Over the years since Brexit, I have become a passive investor but still cannot resist trading shares, and very often, I lose! I need to get a grip and learn from my mistakes and some rational thinking is needed. The problem is my philosophy of life is centered round time and eternity. We live as humans in a finite and constantly changing world from which we cannot escape. We are here forever in eternity, cannot loose ourselves and ready to return to the basic elements of earth. So I fear nothing, including death which gets closer each day and this attitude is preventing me from being risk averse when it comes to investing!

    I look forward to the next post in this series.

  • 58 Marco January 17, 2020, 9:50 pm

    Dividends in accumulating funds/ETFs are still taxable in GIA. This is the reason why most recommend income units in GIA, it’s much easier for tax calculations

  • 59 Marco January 17, 2020, 9:54 pm

    Also, even if you are below the 2k dividend tax free allowance you still need to declare it on your tax return, and it does count towards threshold and adjusted income so could trigger an annual pension allowance taper for higher earners (which can be a disaster!)

  • 60 Marco January 17, 2020, 10:08 pm

    Unfortunately 75 is not a cut off for failure/success. A lot of high spenders will not have ran out of money yet, but will have to severely restrict their high spending lifestyles

  • 61 Matthew January 17, 2020, 10:15 pm

    As far as you can fill a lisa and then at 60 transfer it into a sipp, using a lisa means its technically accessable

    Also you could think in cash terms for the time gap between retirement age and pension access age

  • 62 AVB January 18, 2020, 12:08 am
  • 63 Kid Cocoa January 18, 2020, 10:02 am

    When’s the next post in this mini-series?!!!
    Last time i was this impatient was watching Tony Soprano and co rampaging through New Jersey.

  • 64 Merlotman January 18, 2020, 10:05 am

    Congratulations- love the rationale for going to work
    You probably have already but if not I suggest you run your numbers on the lifetime allowance including your small DC which isn’t so small when you apply the x20 rule.
    I’m 56 and recently realised I needed to start drawing on my SIPP asap to reduce the size of my IT bill at 75

    Do you really think there could be a lifetime cap on the size of an ISA pot? I would of thought this might be possible but not without similar protections given to pensions. Also imo LTA on pension partly designed to prevent loss of IHT revenue for HMRC as SIPPs I suspect feature in a lot of IHT plans. Obviously this does not apply to most ISAs (AIM excepted)

  • 65 The Investor January 18, 2020, 10:07 am

    @Kid Cocoa — Hah. One a week, probably. Glad everyone is so up for this; I think there’s going to be lots of talking points/disagreement thrown up, but hopefully all healthy and illuminating. 🙂

  • 66 bob January 18, 2020, 2:35 pm

    Perhaps it’s pure nosiness but I do like to read people’s actual figures when they are considering this leap. Here’s mine:
    Age 40.
    Isas: £205k
    SIPPs: £301k
    DB pension: £156k transfer value
    Residence: £190k
    Cash: £300k (i know)
    Expenses £30k

    I don’t hate my job, just mildly detest it but I ‘m lucky I guess in that I only work for six months of the year. The earliest I will pull the trigger (unless the upcoming IR35 rules force my hand) is January 2021 which should put another £150k gross into the pot before FU-day.
    Very interested in the series.

  • 67 Krage January 18, 2020, 4:47 pm

    I can share what I do to maximaze tax free gains:

    – max isa 20k, for my and my spouse
    – all others are joined accounts with my spouse to max allowance
    – income funds allocation to target £4k tax free. aprox 100k
    – about 200k into growth funds with not income payout. Selling every year to realize capital gains. Even if it grows, still can sell every year to get full capital gains allowance.
    – max SIPP (need to calculate in march due to comlexity of high income)

    so the target is 4k dividends and 24k capital gains allows, 28k tax free income… even if you have more, let it grow with only realizing allowance every year…

  • 68 The Accumulator January 18, 2020, 7:18 pm

    Thank you for all the comments. I really wasn’t expecting this level of response. Hopefully the series will answer a lot of questions, but already this thread is giving me lots of ideas for follow-up posts. There are so many different individual circumstances out there. I’m hoping to provide a framework that’ll allow most people to test their plans, then I can explore some of the more unusual niches later.

    @ MonsAltusLad – re: offset mortgage. That’s a very interesting point. I have a question though. How does your plan account for the possibility of offset funds actually being used? Say you had to burn-up some of your offset funds and you went into your pension phase with a mortgage balance that’s down £30K to £50K. Are you ‘overpaying’ into your SIPP to account for that?

  • 69 Badger101 January 18, 2020, 8:50 pm

    “I’ve used UK tax rates in all case studies for the sake of sanity. Scottish and Welsh income taxpayers may have to adjust slightly where relevant.”

    Do you mean English tax rates then or England and NI?

  • 70 The Accumulator January 18, 2020, 10:41 pm

    Not as far as I can tell. The gov.uk sites refer to Scottish Income Tax and Welsh Income Tax. The rates that apply in the rest of the country are left as plain ol’ Income Tax. Other rates of tax e.g. dividend and capital gains seem to be described as UK tax rates, and these apply in Scotland and Wales too. To stop the post getting bogged down, I referred to UK tax rates as a short-hand for everything that didn’t include Scottish and Welsh Income Tax. Welsh Income Tax currently being the same as the rest of the UK except Scotland, but the Welsh Assembly has the power to change it. I’m Scottish btw.

  • 71 AVB January 19, 2020, 1:06 am

    Started looking at this in Excel and my initial take is that if the objective is to stop working as quickly as possible, and providing it is attainable before minimum pension drawdown age, then probably max out the isa if you’re 40 like me. The reason being you can’t withdraw the pension early (without a big penalty), and providing your not too old your pension contributions will be invested longer than those of your isa and combined with the upfront tax benefit it kind of takes care of itself in terms of getting to the SWR amount. The isa on the other hand is much harder to build up as quickly, as it’s funded out of post tax income and limited to £20k a year. If you are relying on the isa to take care of expenses before you can draw the pension then in most scenarios you have little choice but to max it out – otherwise you will end up pension-rich but isa poor so forget about quitting the job early. In testing the optimal combination for myself it became clear the £20k isa limit was a real hindrance – even maxing out the isa each year i’d reach my pension goal quickly but have to work more years maxing out the isa before i’d have enough to see me through. As such I think a third consideration is funding non tax sheltered investment accounts as well – at least in my case. Note my objective in the above scenario testing was to be able to stop working ASAP, which is not the same as maximising wealth – in fact I end up quite a bit poorer on paper by diverting money away from the pension. I’m 40, I don’t think the same strategy would necessarily be right for a younger person who has more time on their side.

  • 72 Vanguardfan January 19, 2020, 9:40 am

    @AVB, pensions can’t be accessed at all before 55 (and rising), it’s not a case of applying a penalty. The only exceptions I’m aware of are if an older policy or scheme has a protected earlier retirement age, or in cases of ill health (definition depends on scheme rules) or terminal illness.
    The LISA can be accessed early subject to penalty.

  • 73 AVB January 19, 2020, 10:16 am

    Are you sure? I thought you could get it earlier but HMRC will charge you a big tax bill for it (40-55%). This is what happens to people who are scammed into accessing their pension early. I don’t recommend taking a pension early because of this tax penalty, but would argue it’s not impossible just a really stupid/naive thing to do (unless in very ill health in which case hmrc may allow you to take it without a penalty – you would need to get them to agree first though). I would certainly not contemplate it ever!

  • 74 AVB January 19, 2020, 10:21 am


    Taking money out of your pension saving early can result in tax charges of more than half the value of the money you take out.

  • 75 Vanguardfan January 19, 2020, 10:56 am

    @avb, yes, I am sure. From the same article you linked, a scam may ‘claim they can help you access a pension before the age of 55..Only in very rare cases, such as very poor health, is this possible’.
    This is a scam, no regulated or legitimate pension provider will allow access routinely below the age of 55, tax charge or no. It’s against the rules. I assume the punitive tax rates are about paying back the tax relief if you have been scammed into doing this.

  • 76 AVB January 19, 2020, 11:16 am

    Thanks for clearing that up, I was under the impression that the rules were enforced by the high tax charge (such that no rightly informed person would do it), but looks like your pension provider would most likely stop it from occurring in most instances. Does make me wonder though how the scammers manage it as sure I have read stories of people who have accessed it early via a scammer and were (a) surprised by the tax charge (b) subsequently lost what was left in the high risk scheme it was transferred into (or stolen).
    Looks like both the person need to be scammed and the pension provider as well (either that or they just fail in their basic duty of care)


  • 77 Vanguardfan January 19, 2020, 11:20 am

    The scam involves tricking you into transferring out of your pension provider into the scammers’ scheme. I agree that protections and action against scammers are woefully inadequate.

  • 78 AVB January 19, 2020, 11:27 am

    Think the scam involves transferring between from a UK pension scheme into one outside of UK jurisdiction; then withdrawing from that new scheme (into the scammers account) which doesn’t have the same controls in place. Then you still get hit by the tax bill. So lose/lose scenario. Well I’ve learnt something today! I will now stop posting so may off topic comments!

  • 79 Naeclue January 19, 2020, 8:47 pm

    @zxspectrum48k, I would be very interested to hear how you “implicitly transferred a large sum from my pension to ISAs using a bit of cunning financial engineering”. I looked into this several years ago and could find no legal way of doing it.

    Also, who is your offshore bond with? 40bp is remarkably cheap.

  • 80 MonsAltusLad January 20, 2020, 11:22 am

    @The Accumulator “How does your plan account for the possibility of offset funds actually being used? Say you had to burn-up some of your offset funds and you went into your pension phase with a mortgage balance that’s down £30K to £50K. Are you ‘overpaying’ into your SIPP to account for that?”

    I am not ‘overpaying’ into the pension to account for needing to find a sum to repay a utilised offset facility as I am not planning on utilising the offset facility – it is purely a hedge to a risk, adding flexibility should it be required. The most likely scenario in which I would utilise the offset is if there is a significant and late change to the age at which pension funds can be accessed, when I may have already significantly depleted ISA/GIA pots. In this instance during the period I was withdrawing from the offset I would not be withdrawing from the pension (for the years that the pension access date shifted back), thus there would be more in the pension at the time I finally access it then I had modeled, so at the point of access I’d be withdrawing from a bigger pot and would likely clear the outstanding offset balance with a lump sum (thus hopefully leaving me in approximately the same position I would have been had there been no legislative change and need to draw on the offset). If I found myself drawing on the offset I would regularly review asset allocation as dipping into the offset whilst leaving pension funds invested as in my basecase asset allocation would effectively introduce leverage in my overall position, which may be suboptimal, thus a pension asset allocation that reduced risk levels may be prudent as I would know I would be needing to make a fixed withdrawal at a certain future date to clear the offset at the point pension assets finally become accessible.

    Important thing is to get this set up ahead of any RE as getting a bank to agree to give you an offset mortgage will be a lot harder/impossible after you have given up the salary.

  • 81 Hare January 20, 2020, 11:01 pm

    I would like to thank TA for this series and for acknowledging that some of us can’t/don’t have the ‘luxury’ of adding paid work into the mix when/if desired.

    There was a commenter on another post who, like myself, retired early without choice and isn’t employable, I don’t think a person can assume work is available after a certain age as many industries have age bias (my partner is in this category), and many people find themselves out of marketable skills/specialised/things change so paid work isn’t an option.

    Some people have more options than others in this regard, including the folks who at this point assume they can get work when they want it to fill in a shortfall. It’s a risk that needs allowing for and part of the numbers before going FI.

    Assuming paid work can be obtained when wanted/needed to top up or address a shortfall (very different to choosing to access a paid opportunity) is like assuming a bull run will go on forever.

    It won’t and people can’t assume access to paid work will always be there either. It’s incredible how often this risk is not included like the others more talked about.

    I’m reminded of the excellent post ermine wrote on the subject.

  • 82 Vanguardfan January 21, 2020, 8:48 am

    @hare, I couldn’t agree more. All of us are likely to get to the point where we can’t work due to ill health/incapacity, and long before that our high flying careers will have become closed to us.
    I wish SHMD had written that blog post he promised about finding work in his 50s. I see many people being forced to take much lower paid work at that stage in life, because their industries have changed or disappeared. And it’s much harder to earn that £10k a year as a Walmart greeter on minimum wage zero hour contract.
    I personally think that the quest for meaningful activity is not something you FIRE for, it’s something you try to incorporate as far as possible into your working life. Your FIRE fund is there so that when the road runs out on meaningful paid work, as it surely will, whether due to redundancy, age, or ill health, you aren’t completely stuffed…

  • 83 Vanguardfan January 21, 2020, 8:53 am

    And coincidentally ‘companies face trouble from older staff’ in the FT

  • 84 The Accumulator January 25, 2020, 12:52 pm

    @ MonsAltusLad – thank you for your comprehensive and thoughtful reply. If it’s OK, I’m gonna quote you when it comes to listing out Plan B options. I have a natural offset mortgage (low interest only mortgage from before Great Recession versus cash ISAs and ridiculously elaborate system of bank accounts) but I haven’t thought through this side of things as deeply as you.

    @ Hare and Vanguardfan – I completely agree. I think it’s vital to plan for not being able to return to the workforce whether due to ill-health (yours or a dependent’s) or role obsolescence or whatever. My industry has been severely disrupted over the last decade and I see a lot of down-on-their-luck veterans who can’t get back in or struggle to earn what they earned 20 years ago.

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