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The Investor is unwell, I mean on holiday. Definitely not too drunk to write his column this week. Nuh-uh. No way, Jose. Nope.
Hi! The Accumulator here. Just covering while my good friend The Investor is having a nice rest.
OK, links is it? I’ve got loads. Because we’ve been planning this for weeks. Sure have.
Anyway, one article that sobered me up this week is a penetrating critique of defined contribution (DC) pensions written by the esteemed William Bernstein and Edward McQuarrie.
They elegantly show that most people relying on DC pensions to provide for a successful retirement need:
- Much higher savings rates than is commonly admitted
- 100% stock portfolios throughout their entire investing lives (accumulation and decumulation combined)
- A dose of luck: in the form of a benign sequence of returns and average historical return rates (Woe to thee if you’re below average.)
The savings rates required to retire on a portfolio of low-risk assets (e.g. index-linked government bonds) are just not doable for most people. From the article:
Grim indeed: using historical data, our analysis shows that not until the savings rate approaches 25% does the saver have more than a 50/50 chance of success, and to approach certainty requires savings rates in the 40% range. Lower savings rates require a market return that has seldom been on offer.
To bring savings rates down to something half manageable, it’s 100% equities all the way:
It turns out, counterintuitively, that only one maneuver improves the success rate, and that’s a 100% stock portfolio both during accumulation and retirement.
Even then you need a 20% savings rate to push down your chance of retirement ruin to 4%.
How likely is it that the majority can achieve that? We’ve known for a long time that the median UK pension pot is ridiculously underfunded. And those who struggle to save likely face bleak retirements, or a working life that stretches far into old age.
Bernstein and McQuarrie’s prescription:
The current system doesn’t need more nudges; it needs dynamite and rebuilding from the ground up on the DB [defined benefit] model.
That isn’t going to happen here. Nor in the States. Indeed, the authors’ aim seems to be to push back against libertarian forces who seek to dismantle all forms of social insurance, and leave individuals at the mercy of the market.
Whatever you think of the politics, the underlying research paper by Bernstein and McQuarrie is a clear-eyed education in investing risk. Most of all, it relentlessly strips away the many myths that comfort us when we look at a global equities returns chart and notice that it’s done pretty well for fifty years.
Have a great weekend.
I’m delighted to say we have long-time Monevator reader ‘London A Long Time Ago’ doing her FIRE reveal this month. While our career paths are world’s apart, I was surprised by the echoes to my own perspectives on freedom, self-determination, and how fragile life can be. Few of us will be lucky enough to retire to the glorious beaches of Australia, but there’s still lots to mull over. Enjoy!
A place by the FIRE
Hello! How do you feel about taking stock of your financial life today?
I think it’s been a terrific opportunity to conduct an honest reckoning. I’ve benefited from the honesty of The Accumulator and other commentators over the past few years, so thank you!
Before we go further, I think it’d be useful to explain your Monevator username – you post by the name of London a Long Time Ago – for the context it will give to your life story…
Sure.
My first Australian job was at a merchant bank at age 21. But within 18 months, I was on a plane to London armed with a two-year UK working visa and $30,000 in savings.
London was easy to navigate. I organised an interview on the train from Heathrow, attended it in the afternoon, and started working the next day. I lined up an evening job at another investment bank where I was equally over-paid and under-utilised.
Lunch was free in a private restaurant at the first bank and the second bank paid for my taxi home. I lived in a hostel, and on Saturdays I copied my new backpacking friends and waitressed at a High Street Kensington hotel for the free breakfasts and fun.
Eventually life scaled. A futures and derivatives boss promoted me and offered a sponsorship deal, plus a pay rise in line with my extra evening hours. I dropped the excessive hours, and moved to a Holland Park flat with a latch key garden.
London was playful, exuberant, and safe – Conran restaurants, events at private member clubs, city bars, country off-sites, and bottles of Bollinger alongside other young, high-spirited colleagues.
How old are you now?
49
Do you have any dependents?
I live with a feline. She has the emotional regulation of a psychopath. I love her a lot.
The wriggly spaniel puppy in my Monevator avatar photo belongs to a close friend. My cat and I hosted this adorable canine recently, and despite the puppy fun we have never been so relieved to bid farewell to a guest in our lives.
Whereabouts do you live and what’s it like there?
I live in Melbourne, surrounded by parks and a short drive to the beach. I can walk to the Arts Precinct, ‘G’, the botanical gardens, the Australian Tennis Open, and the Grand Prix.
When do you consider you achieved Financial Independence and why?
2025. It’s taken a while to feel rich enough… I had to practice deaccumulation first.
What about Retired Early?
I retired in 2024.
A local’s view. I wonder why London A Long Time Ago ditched the Central Line and her 9-5?
Assets: super savings
What’s your net worth?
Over $2.5 million. (That’s Aussie dollars!)
What are the main assets that make up your net worth?
Over $1.75 million in shares, cash, and superannuation… Less than I wanted, more than I need.
The majority (more than $1 million) is held in superannuation – only accessible at 60 – split 80% balanced (includes bonds), 10% Australian, and 10% International.
Available funds include $400,000 in a diversified global ETF (separate bucket) and $350,000 (split between Australian ETFs/direct shares and cash), designated as burn money to fund most of the decade ahead.
Cash of $70,000 is available to spend at any time for any reason. I’m in year two of my drawdown phase!
Can you explain to those of us back in the old country more about this superannuation malarkey?
Superannuation – often shortened to ‘super’ – is Australia’s compulsory pension scheme.
Employers contribute at least 12% (from 1 July 2025). Mine was higher. Individuals are able to concessionally salary sacrifice up to $30,000 annually inclusive of employer amounts (paying 15% tax on these contributions).
There is a 15% capital gains tax on returns in the accumulation phase on balances up to $3 million, and 30% CGT on returns above $3 million. However there is nil tax payable if/when funds are converted to a pension phase.
Non-concessional transfers – often from a windfall – are capped at $120,000 per year. Individuals can contribute three years worth if their super is under a certain balance ($1.9 million).
As I noted above my superannuation set-up is 80% balanced, 10% International indexed, and 10% Australia indexed – with ten-year returns averaging over 8% in aggregate and for negligible fees.
What about the Australian State Pension?
A full pension – $29,874 singles or $45,037 couples – is available for Australians age 67 who fall under an asset cap ($314,000 for a single homeowner and $470,000 couple homeowners) with home values excluded.
This Australian pension effectively backstops any superannuation portfolio failure.
Essentially, albeit at the risk of over-simplifying two tests (asset and income), a part-pension is available should funds ever fall below $674,000 for single homeowners or $1.014 million for couple homeowners.
The value of the government pension is scaled progressively. Many people appear to structure assets to qualify for a part-pension, mainly because of other concessions such as a senior healthcare card.
The scenario for renters is a whole other story. Suffice to say it’s desirable not to fall into this camp.
What’s your main residence like? Do you own or rent it?
I live in a two-bedroom flat in a 1920s heritage building, purchased off-plan the same week I returned from London – more than 20 years ago.
My flat took two years to complete. I spent a year in Dublin while it was being redeveloped. It’s unique and stunning. I like it more every year.
Do you consider your home an asset, an investment, or something else?
I consider my home to be shelter. I moved in when I was 26-years old. I covered most of the purchase with cash, but it still took five years to pay off the mortgage (Interest rates were 7%).
I chose not to leverage or future-promise my energy again. However property is the most common wealth building strategy for most Australians. Thanks to former Prime Minister John Howard’s introduction of negative gearing, most of my peers own multiple investment properties.
Negative gearing dramatically boosts asset wealth, given the mix of leverage and tax deductions. It’s also contributed to high property prices, generational inequality, and rental insecurity.
In my case, renting somewhere comparable would probably cost $50,000 a year, with the spectre of a significant increase every two years – assuming the lease was even renewed.
Earning: at what cost…
What was your job?
I’ve experienced two disparate careers – finance and government – both within high stake arenas. My salary has generally hovered somewhere in the 80th percentile band.
Both careers were ostensibly glamorous. I worked for the best organisations and agencies in the best buildings, alongside clever, ambitious, highly efficient and self-directed colleagues.
Both careers provided money, networks, vivid memories and goal attainment, but they also exacted a toll.
First job first please!
My longest role in my first career was at an American investment bank.
Trading floors are high energy, high spirits, and banter, but Australia was a grotesque facsimile compared with London – misogynistic, amateurish, and ugly. I was objectified, even targeted and drugged at a work event, and was generally gas-lit by a veneer of civility into believing I could one day crack the bro-code.
I also had a front row seat to events described by Michael Lewis in The Big Short. The people most responsible for the disaster completely evaded its consequences, whereas my dad retired and his retirement funds halved a week later.
It took three attempts to leave this career path, as I was continually headhunted back. Eventually, my disinterest was total and irrevocable.
I then had a six-year career break. I would liken this juncture to a cerebral switch.
I don’t consider it burn out. But I had a profound disinterest in goal attainment, monetary success, and status. I floated around, googled ‘top 10 hotels’ and holidayed there, had spine surgery, travelled, adopted rescue pets, redecorated, and read books.
I also returned to university, worked part-time in a bar for a year (great job), and completed a new degree. I spent a few hundred thousand dollars from my savings.
But there was that second act to come?
My second career had a much higher bar to entry.
Overall, I’m grateful for my undergraduate degree, the skill set I gained and resulting tenor of my mind. Prized memories include golden moments enmeshed in certain teams. It is an incredible feeling to play a vital role in a cohesive team, amidst other teams within an overall architecture working in concert on something that desperately matters in time-sensitive situations.
‘I just don’t want that for myself anymore’ is a valid reason to stop anything. I’m glad I resigned.
What is – or was – your annual income?
I assigned my final role a $3.5 million value – using the 4% rule – to try to cheer myself up.
How did your career and salary progress over the years – and to what extent was pursuing financial independence part of your plans?
Financial independence has always been a high priority. I was laser-focused on attaining it but never at the expense of legality, ethics, sound principles, and justice.
Did you learn anything about building your career and growing income that you wished you’d known earlier?
Marx’s maxim that: ‘We are our means of production’. No one is exempt from the truisms about power, money, and influence.
Do you have any sources of income besides your main job?
In terms of the recent past, share dividends and interest.
My dad died this year. I will receive a gift after probate.
In terms of the distant past, I made money trading. I thought I had an edge. I stopped when I lost it. I still have carry-forward losses from being stopped out of risk I failed to monitor in 2011!
I’ve never traded since.
Did pursuing FIRE get in the way of your career?
No. It helped. I exercised the optionality it afforded on multiple occasions.
Saving and spending: simple but not simplistic
What is your annual spending? How has this changed over time?
My base spend is roughly $30,000 a year, split fairly evenly between:
(1) Fixed core costs – rates, body corporate fees (what you call service charges in the UK), utilities, insurances, and general home maintenance.
(2) Discretionary staples – food, restaurants, transport, gym membership, pets et cetera.
(3) Luxury expenditure – clothes and grooming, entertainment, redecorating, holidays.
I’m not tethered to this annual amount. If I want something, I’ll pay for it. But I already live well amidst beautiful possessions, so nothing is on my radar right now.
And you’re confident this will see you good for the foreseeable?
No!
My deaccumulation calculation is based on my birthday month – versus the tax or calendar year.
Year one spending (that $30,000) includes the final three months working and retiring in winter. I then spent my first four months re-reading comfort books. Holiday costs were negligible.
I expect my spending to rise or at least incorporate choppy big budget items in the future.
I’m already trying new activities, which is how I discovered Formula 1! (I would hate to calculate how many hours I’ve dedicated to Drive to Survive…)
However my expenditure has been fairly stable for the past five or so years because of work, related travel opportunities, and the fact that Melbourne was the most locked down city in the world during the pandemic (2020 and 2021).
Australia’s 22% aggregate CPI increase from 2020 barely impacted my core expenses, other than increases in grocery prices. This is probably because we have competitive insurance and communication providers, plus the Australian government has countered rising energy costs with household credits.
As UK utility prices appear high, it may be interesting to share granular costs in Australia, for comparison:
(1) Energy (electricity and gas) – $968 (five-year high $1,450 without government rebates)
(2) Water – $950 (stable)
(3) Telecommunications (top brand phone and 220GB internet) – $1,265
(4) Private health insurance (includes dentist, optometrist. and partial physio) – $1,700
As is the case with the NHS in the UK, Australians have access to enviable free medical care and we are able to pick and choose if and when to use private health cover.
Do you stick to a budget or otherwise structure your spending?
I don’t budget, but I do track data. My spending has always been significant in areas, but also negligible in aggregate. In both careers, I probably only ever spent $15,000 annually on luxuries.
In my first career, fun was expensed. Almost everything was free.
Aside from that, I grew up reading. That’s never changed (also it’s mostly free).
Parties, holidays, and restaurants barely move the needle, and anyway, I prefer my cat to travelling at the moment. And I’m Australian so of course I’ve already travelled extensively!
Are you using the 4% rule or some similar strategy to manage your drawdown and spending?
I’m using a dynamic approach. My current approach is to ignore superannuation (accessible at age 60) and aim to spend at least 4% of currently accessible funds (more than $750,000 when factoring in a six-figure sum I will receive from my Dad’s estate).
I’ve found it helpful to assign a fixed amount ($350,000) as ‘burn money’ and to think of the first couple of years as practice, because I predict my spending and personalised asset allocation will alter with time.
My $400,000 portfolio contains some favoured investments, so I’m also ignoring these for the time being. Mental gymnastics works for my neurology.
As previously mentioned, $350,000 is currently split between $280,000 in Australian ETFs and shares, and $70,000 cash. This allocation throws off more than $15,000 a year and I need another $15,000 for my current base spend.
I’m using cash, interest, and franked dividends in this portfolio to shield against sequence of returns risk. (A franking credit is an amount of imputed company tax. Fully franked dividends provide franking credits at the corporate rate of 30% to avoid double taxation. Australian ETFs provide partially franked dividends with proportionate tax credits).
I will use my inheritance to increase the Australian asset allocation within this portfolio.
My Excel calculation is simple – inflate annual spend, use cash, sell ETFs/shares as needed, and deflate interest and grossed dividends appropriately.
‘Seeing is believing’ in Excel. For instance, @TA has frequently commented that sequence of returns and the first annual withdrawal figure profoundly impacts a portfolio’s health and longevity. Market increases and my lower-than-expected first year of spending had a dramatic effect on the penultimate balance (even without the unexpected gift from my Dad).
Should I want something expensive, I’ll add it to the spreadsheet, the numbers will change – but for now, the bottom line is healthy despite the low ($350,000) starting balance.
My second column (more than $750,000) is currently outpacing spending and inflation, but perhaps a few big trips will change that at some point.
Deaccumulating has tax advantages. In my case, Australia has a tax-free threshold of $18,000, followed by 16% until $45,000.
As mentioned, a significant portion of my dividends attract imputation credits, so I receive a tax credit annually. Australia also provides a 50% capital gains discount on share sales. I’ll also ultimately be able to use those carry-forward losses.
What percentage of your gross income did you save over the years?
I only have net income calculations for my second career. In the first two years, my saving ratio was 36% and 29%. Savings then increased to 65% of net income, aided by Covid 19 lockdowns and salary increases.
What’s the secret to saving more money?
I found a dose of anxiety with a dash of comparative childhood poverty highly motivating. It took my parents a couple of decades to build wealth from scratch as émigrés.
Apparently, the best definition of ‘anxiety’ is a disturbed relationship with certainty. If so, I’ve greatly benefited from leaning into my anxiety!
Personally though, I fail to understand how anyone manages to escape anxiety in a neoliberal society, given the absence of safety nets and the political weaponisation of poverty. (See Robodebt in Australia).
Do you have any hints about spending less?
No, I find spending effortless if and when actions are congruent with values.
I believe in ethical farming practices and environmental protection.
I like expensive clothes and shoes, beautiful textiles, art, and some high-end goods, but I try hard to limit excessive consumerism and waste.
Australian food prices doubled in the last five years, but I’m a vegetarian, so doubling the cost of blueberries is not the same as the price of steak. I see no reason to economise on quality food given my low overall spending.
I enjoy the normal things, like new restaurants, but in my opinion real-life riches are much nicer than purchased riches. For me that means Zen walks, dog parks, silly fun with friends and their pets, the library, ocean swims, becoming a beach or pool lizard in summer, sunshine, and reading on a gloomy day with every lamp lit and my cat purring close by.
But do you have any particular passions or hobbies or vices that eat up your income?
I’m still finding my feet post-retirement. This year, I implemented a new ritual whereby I have to try something different and new each and every month.
So far I’ve been astoundingly unimaginative. For instance, getting tickets to Melbourne special events such as tennis (boring) and the Grand Prix motor racing (unexpectedly terrific).
I think my appetite for new experiences is going to burgeon with time!
Investing: a means to an end
What kind of investor are you?
Passive with a home bias tilt.
What was your best investment?
A bank share – Australia is a financial services economy.
Did you make any big mistakes on your investing journey?
Of course! As I said I still have carry-forward losses from 2011. I failed to monitor risk and was stopped out.
I also thought I needed $80,000 for spine surgery, and sold shares at a loss. At the time, I expected to privately fund my ‘elective’ operation after an insurer tried to limit liability and claim the operation was unnecessary. Ultimately, the surgeon and the anaesthetist refused payment, operated, made me whole, and waited for the arbitration case to settle in my favour. It took years, but eventually the insurer paid.
What has been your overall return, as best you can tell?
This question invoked a miasma of disinterest.
At some point, I stopped focusing on metrics and building a perfect portfolio.
I stopped caring ‘how’ – I just feel gratitude and relief that I did!
How much have you been able to fill your tax shelters?
I always salary sacrificed the maximum amount each year into superannuation for the tax concession.
To what extent did tax incentives influence your strategy?
I over-saved in superannuation. The tax incentive explains why.
How often do you check or tweak your portfolio or other investments?
I check monthly when I move funds around to pay bills.
I’m interested in politics, economics and global markets, but less interested in my own portfolio now that I feel safe. I’m busy trying to build ‘life’.
Wealth: …and health
We know how you made your money, but how did you keep it?
I built in stacks: cash, share trading, then property, then shares (in different configurations), then more cash.
I used leverage sparingly and only infrequently via derivatives, so I never risked the bulk of invested funds.
When I needed to exercise optionality, I spent reserves freely as needed, and then rebuilt.
Which is more important, saving or investing, and why?
Saving was key initially. London super-charged my net worth.
I’m pretty sure I earned £45,000 annually in my early London years – including a few thousand extra a year AUD trading. I invoiced as a company.
When did you think you’d achieve financial freedom – and was it a goal with a timeline?
I was trying for conventional financial freedom in career #1, but I couldn’t sustain the effort. I spent a stack of savings in my six-year sabbatical, and had to start again during career #2, although not from scratch.
I was aiming for at least $1 million outside superannuation the second time around. I’m inordinately grateful that I obsessively read Monevator. The Accumulator and The Investor plus commentators were all a positive influence for different reasons. (All errors are my own, of course).
I’m aware I fell short of my financial potential and my achievement-oriented peers. But I feel successful based on my own metrics.
In my opinion financial freedom and good health need to be paired together. I shortened my financial freedom timeline (to a bare bones finishing line) because my health was objectively at risk.
Superficially, I’m glad I left before I acquired dark circles under my eyes – and wrinkles and grooves in my face mapping my unhappiness – or bowing my posture.
I resisted or at least limited using alcohol as a crutch. I stopped SSRIs the week I resigned.
Did anything unexpected get in your way?
Spine surgery because I have always been healthy. My surgeon promised to make ‘me whole’ and he did! I was pain-free from the moment I woke up.
Are you still growing your pot? If so, how? If you’re de-accumulating, how?
I’m still figuring out my post-work ‘life’ and its impact on deaccumulation, hence I’m reading @TA’s No Cat Food posts.
I’m a vegetarian, so cat food is not an option anyway…
Do you have any further financial goals?
It’s too early to say. I’m still quite young. In the future, I might choose to work for a purpose, so I’m not ruling out another career? But presently I can’t fathom in what field.
I’m hyper aware that I should maximise this decade and accomplish travel-related goals – while I’m healthy – and later determine whether I want to restructure my financial assets into a higher-value principal place of residence (PPOR). This is because it costs at least $1 million for high-needs care in a 7-star facility (present day terms), and a PPOR makes an excellent tax and pension-exempt store of wealth and inflation hedge for this purpose.
It also makes sense to maximise this decision on that grounds that I seem to have become a homebody.
You’re quite young to be (sensibly) thinking about later life care…
Dignity in aged-care is purchased, not automatically provided.
The nursing care and level of kindness displayed by staff members to both my parents has been largely exemplary. However the difference in aesthetics, activity options, and chef-prepared meals between a $600,000 and $1 million option is stark.
Hopefully I’ll be healthier than my parents, but I will actively plan for this contingency.
In Australia, aged care is means-tested, but very reasonable for high-needs care. Most individuals choose to pay a bond, which is returned to the estate with a minor surcharge deducted (only recently legislated, so grandfathered for existing residents).
Individuals also pay a monthly fee, but the total lifetime amount payable is capped.
What would you say to Monevator readers pursuing financial freedom?
People reading Monevator will almost certainly pursue their goals with greater élan and resilience. My inner animal was howling and gnashing its tail. I feel an ocean of relief that it’s done.
I was deeply affected by my Dad’s diagnosis. His form of Parkinson’s disease progressed slowly over more than 17 years. He spent his final three years in a high-care facility. He became non-verbal in his final year, so we were slow to spot that he was suffering extreme oral pain. The diagnosis – tongue cancer – added an incomprehensible level of indignity, pain, and cruelty to his final months of life.
His death in palliative care was agonising. He died minute by slow minute over a week.
The enormity of his diagnosis and death were impactful. Time matters. I have enough money now, so I’m going to prioritise friendships, good deeds, interesting books, my calm mind, and a clear conscience.
In the weeds: doing it for yourself
When did you first start thinking seriously about money and investing?
I always cared about money. I wanted economic freedom even in adolescence, which felt stifling.
Politics, markets, and health diagnoses can disrupt even orderly lives. I wanted to be prepared.
Did any particular individuals inspire you to become financially free?
My friends were high achievers and one by one chose marriage and motherhood over careers. None of us define success through corporate or material stakes.
I wanted financial freedom on my terms and achieved it without a partner.
Can you recommend your favourite resources for anyone chasing the FIRE dream?
Aside from Monevator, Money Flamingo for its original premise – save half your desired FIRE amount, then coast for ten years while investments compound and double in the background – and Weenie’s site for her self-reliance, honesty, and determination.
What is your attitude towards charity and inheritance?
I’m inordinately glad that I achieved independence on my own for my self-esteem.
As I mentioned, my dad left me a bequest in his will this year. It felt like a written declaration of love, particularly because he was unable to speak verbally in the end.
My view is that life can be hard and uncertain, so an inheritance is a valuable stepping-stone or safety net, particularly for the generation behind me. My sibling and I will most likely receive a legacy each from my mother’s future estate.
I’ve named the Sheldrick Trust and an Australian sanctuary as beneficiaries in my will, with my sibling prioritised in the first instance.
What will your finances ideally look like towards the end of your life?
I feel as though I’ve been taking stock since retiring unexpectedly early in 2024!
It has taken months to decompress. I would say the prize has been peace and a truly calm state of mind. I feel happy, optimistic, and alive to the infinite possibilities ahead.
My ardent hope is to remain kind, empathetic, and happy in my senior years. I envisage ‘future-me’ funding worthy causes from the pool deck of a Richard Osman-esque retirement complex surrounded by my sea of rescue pets and quirky friends.
Thanks to London A Long Time Ago for a thoughtful and revealing interview. I specially liked the idea of the ‘burn fund’ as a forcing function to switch from an accumulation to drawdown mindset. Do let us know your takeaways in the comments below. Please remember that constructive feedback is welcome, but anything bad-tempered or nasty will be deleted. And be sure to read our other FIRE-side chats.
Should you invest in a pension or an ISA? Is there a decisive answer to the eternal SIPPs vs ISAs question?
Well… almost. We can make a few immediate statements that provide clear direction – although the decision tree gets pretty thorny after that:
- If you hope to live off your investments before your minimum pension age1 then a stocks and shares ISA is the clear winner.
- Employer pension contributions are an unbeatable leg up. Take them, take them, take them. It’s free money, unless you plan on dying a rock ‘n’ roll death. (Pro tip: almost nobody does.)
Otherwise, much depends upon if you’re contributing to your SIPP (or other pension type) at the higher-rate of income tax or at the basic rate:
- Paying higher-rate tax? Then prioritise your pension accounts over ISAs.
- Paying basic-rate tax? Then the choice between a SIPP and a Lifetime ISA (LISA) is finely poised. We delve deeper into this below.
- If you’re a young basic-rate taxpayer who won’t retire until State Pension age, an ISA may beat a SIPP in certain scenarios. Again, we’ll explain more below.
The Kong-sized caveat to all this is that future changes to the tax system may move the SIPP vs ISA goalposts.
Goalposts on wheels
Tax-strategy diversification can help you address the uncertainty. It involves you employing several different tax shelters, irrespective of their current pecking order.
Spreading your savings across various tax shelters is particularly sensible for young people for whom retirement is decades away. But the technique is worth everyone else considering too, because SIPPs and ISAs hedge against different tax risks. We’ll talk about that in a sec.
To set the scene, let’s first recap what ISAs and SIPPs have in common – and what sets them apart.
Terminology intermission: I mostly talk about SIPPs in this article but the conclusions apply equally well to other defined contribution (DC) pensions, such as Nest-style auto-enrolment Master Trust Pensions. I’ll use the term ISAs to refer to all ISA types, except for the LISA. I’ll mention the LISA when its special features alter the SIPP vs ISA comparison.
SIPPs vs ISAs: these things are the same
SIPP or ISA? There’s nothing between them on the following counts:
| Tax shelter / feature | SIPP | Stocks and shares ISA |
| No tax on dividends | Yes | Yes |
| No tax on interest | Yes | Yes |
| No tax on capital gains | Yes | Yes |
| Invest in funds, ETFs, bonds, shares | Yes | Yes |
| Ceiling on lifetime tax-free income | No | No |
| Versions for children | Yes | Yes |
SIPPs vs ISAs: these things are different
ISA or SIPP? Well, on the other hand…
| Tax shelter / feature | SIPP | Stocks and shares ISA |
| Free of income tax on withdrawals | No | Yes |
| Income tax relief on contributions | Yes | No |
| Tax relief on National Insurance | Yes, with salary sacrifice | No |
| 25% tax-free cash on withdrawal | Yes, up to £268,275 | N/A |
| Access anytime | No | Yes |
| Annual limit on contributions | £60,000 | £20,000 |
| Employer contributions | Yes | No |
| Inheritance tax exempt | Only until April 2027. Fine if passed to spouse | If passed to spouse, otherwise no |
As you can see, a SIPP gathers more ‘Yes’ votes than an ISA.
Those advantages stack up.
ISAs are superior to SIPPs when access to your money before the normal minimum pension age is your top priority.
However, the various pension tax breaks on offer combine to make SIPPs the best option for the bulk of most people’s retirement savings.
LISAs are a different kettle of tax wrapper. Their dream combination of tax relief and tax-free withdrawals make LISAs an attractive option for basic-rate taxpayers vs pensions – under some circumstances.
The devil is in the detail and we’ll dance with him shortly. Before that, let’s talk tax-strategy diversification.
Tax-strategy diversification in retirement planning
Tax-strategy diversification for UK investors means spreading your retirement savings between your LISA, ISA, and SIPP accounts. It’s a defence against adverse changes to the tax system in the future.
The concept is analysed in a US research paper called Tax Uncertainty and Retirement Savings Diversification by Brown et al.
The paper examines the impact of tax code changes upon the traditional IRA and the Roth IRA. These two American tax shelters are analogues of our SIPP and ISA, respectively.
The authors make several key observations. I’ve translated their US tax-shelter language directly into their UK equivalents, as follows…
SIPPs are negatively affected by income tax hikes in the future. They are positively affected by income tax falls.
For example, if you get tax relief at 20% now but are later taxed on retirement withdrawals at 22% then that’s a blow against pensions.
The reverse is true for ISAs. They’re taxed upfront and so enable you to lock in your income tax rate now. This is an advantage for ISAs vs SIPPs if tax rates rise in your retirement.
For example, you win if you took a 20% tax hit on the salary that funds your ISA contributions today but then the basic rate of tax rises above 20% by the time you come to withdraw tax-free in the future.
Meanwhile SIPPs offer a hedge against poor pension performance. If your investments are hit by a terrible sequence of returns then more of your withdrawals will probably be taxed at a lower tax bracket. This offsets some of the damage wreaked by bad luck, especially if you banked higher-rate tax reliefs when you were working.
The long game
The whole research paper is worth a read. But the following quotes provide particular insight on how future tax changes could boost or hobble SIPPs and ISAs for different demographics.
Future tax rates are more uncertain over longer retirement horizons. Our analysis of historical tax changes also suggests that the rates associated with higher incomes are more variable.
The paper’s authors found that income tax rates were much more volatile for high earners going back to 1913…
…as a result, the highest tax-risk exposures will occur among younger investors with sufficient traditional account [such as SIPP] savings to produce taxable income in retirement that exhausts the lower-income brackets. Young, high-income investors who are likely to meet these criteria can manage their exposure to tax-schedule uncertainty by investing a portion of their wealth in Roth [for us, ISA] accounts.
High-income investors increase their allocations to Roth [ISA] accounts when faced with uncertainty about future tax rates. At these income levels, reducing consumption risk in retirement by locking in tax rates today is more valuable than realizing a potentially lower tax bracket in the future.
(Our pointers are in italics).
Young, higher-earners are the most susceptible to steep future tax rises, according to this analysis. Tax-strategy diversification implies that they should hedge against that possible fate by ploughing a significant portion of today’s income into ISAs. The danger with SIPPs is that future withdrawals may be made at tax rates that are higher than the reliefs on offer today.
I’d caution, though, that the biggest SIPP vs ISA gains come from taking higher rates of tax relief on pensions that are subsequently taxed at a retiree’s much lower income tax rate. UK income taxes would have to rocket in the future to negate this advantage.
On the other hand, here’s a reason to invest in pensions that most of us would rather not think about:
Investors with sufficiently high current income must pay the top tax rate in the current period, however, such that the traditional [SIPP] account is preferable for higher-income investors who may end up in a lower tax bracket if the stock market performs poorly.
Eek. Well, bad things can happen.
The case for a bit of both
Ultimately the paper comes to a conclusion that I suspect many investors reach using their gut:
The optimal asset location policy for most households involves diversifying between traditional [SIPP] and Roth [ISA] vehicles.
Spreading your bets makes sense (as ever), especially when retirement is a dim and distant prospect.
But that said, do bear in mind this is a US-focused study. Their income tax bands are more incremental than ours.
In contrast, our SIPPs benefit from a massive cliff-edge if you enjoy higher-rate tax relief when you pay in but your retirement income falls mostly in the 0-20% band.
This feature of the UK tax system tilts the playing field heavily in favour of pensions vs ISAs, as we’ll see.
(Note: I’ve used UK income tax rates throughout the article. The maths does change a little for Scottish taxpayers. While the broad conclusions are the same, the pecking order may change at the margins.)
ISA vs SIPP: when it doesn’t matter
You’re taxed upfront on money that goes into your ISA, but your withdrawals are tax-free.
SIPPs work the other way around. You pay less tax on contributions, but are subject to tax on money taken out. Thus UK pension vehicles can be thought of as tax-deferred accounts.
ISAs vs SIPPs is a dead heat when the tax deducted from your ISA contributions matches the tax you pay on pension withdrawals.
The amount of cash you can take out of each account is exactly the same in this situation, as shown in the following example:
| Account | Gross income | Net after tax | After tax relief | Withdrawal |
| ISA | £100 | £80 | £80 | £80 |
| SIPP | £100 | £80 | £100 | £80 |
The example tracks the value of £100 through the tax shelter journey, from contribution to withdrawal.
Think of it as comparing each £100 that you could choose to put in either your ISA or SIPP.
- Gross income is earned before tax.
- Net after tax is the amount left in your account after HMRC takes its bite.
- After tax relief is the value of your savings after any rebates.
- Withdrawal is what’s left of your original £100 once taken in retirement (based on current tax rates and ignoring investment returns because they’re ISA vs SIPP neutral).
A previous post of ours walks you through the underlying SIPP vs ISA maths.
But just to be clear, pensions always win when an employer contribution match is on the table.
Pound-for-pound an employer match doubles your money. Not taking the match is like volunteering for a pay cut.
Same difference
Employer contributions notwithstanding, the example above shows that the tax-saving powers of an ISA or a SIPP are evenly matched when:
- You’re taxed at 20% on the ISA cash you put in, and
- You’re taxed at 20% on the SIPP cash you withdraw
The amount of income you can take from each vehicle is the same, if the tax rates are equal. The order of tax and tax relief makes no difference to your investment returns, as The Investor has previously shown.
If both accounts gain, for example, 5% a year, then your SIPP’s balance will be larger than your ISA’s because there’s a bigger sum of money to grow after tax relief.
But the SIPP’s advantage is cancelled out by tax on withdrawal. Hence the Withdrawal value is identical for both accounts in this scenario.
If that’s the case for you then we need to head into an ISAs vs SIPPs tie-breaker situation.
ISAs vs SIPPs: tie-breaker situation
| Priority | ISA | SIPP |
| Access before pension age | Yes | No |
| Inheritance tax benefit | Spouse | Spouse2 |
| Means-testing / bankruptcy advantage | No | Yes |
| Tax-strategy diversification | Use | both |
Personally, if I was many years from retirement I’d favour the accessibility of ISAs as a handy backstop. Just in case life took an unpleasant turn.
However the wisdom of tax-strategy diversification still suggests splitting your savings between both vehicles.
SIPPs vs ISAs: back in the real world
Because most people will be taxed at a lower rate of tax as retirees than they are as worker bees3, in practice pensions usually beat ISAs for retirement purposes.
Albeit LISAs are the wild card that can disrupt the SIPP vs ISA hierarchy.
Much depends on:
- How much 0% taxed cash4 your SIPP ultimately provides as a percentage of your retirement income.
- Whether your SIPP income is taxed at a lower bracket in retirement relative to the tax relief you snaffled while working.
To unpick the complexity, I’ll try to find the best-fit tax shelters for most people by running through some common retirement income scenarios.
I’ll account for variations in individual circumstances by looking at key breakpoints that alter the ISA vs SIPP rankings.
Breakpoint 1: the tax shelter types available
I tested the tax efficiency of four kinds of accounts that are useful for retirement savings:
Salary-sacrifice SIPP – this wrapper enables basic-rate employees to legitimately avoid 28% tax (20% + 8% NICs) while higher-rate employees avoid 42% tax (40% + 2% NICs)
SIPP – a standard pension account provides tax relief at the 20%, 40%, and 45% rates but you still pay national insurance contributions (NICs)
Stocks and shares ISAs – can deliver the investment growth needed for retirement.
As can LISAs – they also accept investments.
Breakpoint 2: retirement income levels and stealth taxes
I’ve examined three retirement income levels that align with the research published in the Retirement Living Standards report.
These three tiers equate to a Minimum, Moderate, and Comfortable living standard in retirement.
However, I’ve adjusted the incomes to account for our current era of stealth taxes.
The UK’s tax thresholds are frozen until April 2028. That is a tax hike by any other name.
The Office for Budget Responsibility estimates this manoeuvre amounts to increasing the basic rate of income tax from 20% to 24%.
Rising tax rates disadvantage pensions vs ISAs as noted earlier. So I’ve inflated the three retirement income levels by 2024-25 annual CPIH plus 3% assumed inflation for every year until 2028. This increased income requirement models SIPP withdrawals losing more to tax, as inflation erodes the lower brackets.
I assume that the tax thresholds rise with inflation after April 2028, as they should.
Breakpoint 3: how you use your personal allowance
The less your SIPP income is taxed in retirement, the better SIPPs do versus ISAs.
If you retire at age 55 and don’t receive a State Pension until age 67 then your SIPP’s tax performance improves – especially at lower retirement incomes – because a significant chunk falls into your personal allowance.
But the SIPP advantage contracts if your personal allowance is mopped up by the State Pension, defined benefit pensions, or by any other income.
Indeed, with the personal allowance frozen and the Triple Lock intact, the full State Pension could grow large enough to entirely fill the 0% income tax band by April 2028, or soon thereafter.
I’ve used that assumption in the examples below to guide anyone who thinks they’ll retire at State Pension age, or with a substantial source of alternative income.
Even if you retire early, the State Pension will arrive around ten years after your normal minimum pension age, from April 2028.
I account for this by modelling a 40-year retirement journey. This sees SIPP income cease to benefit from the personal allowance after the first decade.
Breakpoint 4: the fate of 25% tax-free cash
UK pensions are boosted by another blessed benefit. That’s the 25% tax-free cash that can be taken as a lump sum (known as the PCLS) or in ongoing slices as part of phased drawdown.
Before the Lifetime Allowance was abolished, the tax-free sum used to automatically reduce a basic-rate payers overall income tax burden from 20% to 15%.
But that can no longer be taken for granted – because the 25% tax-free cash allowance is now capped at £268,275.
It sounds a lot as of today, but the Chancellor has said the limit is frozen.
- Frozen until April 2028 – after which it rises with inflation?
- Frozen forever? In which case inflation will eventually swallow it like light quaffed by a black hole.
It’s not clear, so I’ve tested both scenarios.
The first scenario is relevant to near-term retirees who can assume their tax-free cash allowance will retain most of its current value when they retire. Especially if they’re at the Minimal to Moderate income levels and inflation is tamed again (which helps if the cap doesn’t rise in future years).
The second scenario may make sense if you’re three or four decades from retirement, and the cap remains frozen in time while inflation crushes it.
Right, let’s get on with our key ISA vs SIPP case studies!
SIPPs vs ISAs: £15,842 Minimum annual retirement income
In this example, SIPP contributions are made at the basic income tax rate and the 25% tax-free cash cap is not reached during a 40-year retirement.
| Ranking | PA5 intact | Retire on State Pension | 40-yr retirement |
| 1. | Salary sacrifice | LISA | LISA |
| 2. | LISA / SIPP | Salary sacrifice | Salary sacrifice |
| 3. | – | SIPP | SIPP |
| 4. | ISA | ISA | ISA |
- PA intact = SIPP income benefits from the 0% personal allowance (PA)
- Retire on State Pension = SIPP income does not benefit from the personal allowance
- 40-yr retirement = The ranking for a 40-year retirement journey where the personal allowance is available to your SIPP for the first decade, while the State Pension absorbs the PA thereafter. 25% tax-free cash may run out at some stage. (Though not at the Minimum income level)
The headline is that a LISA wins across a 40-year retirement journey. The salary sacrifice pension used to win this category when we’ve previously run the numbers. But the reduction in National Insurance Contributions means that the LISA edges the contest now.
You can’t access a LISA until age 60 though, whereas it’s age 57 for most SIPP-owners from April 2028.
The LISA also now beats a salary sacrifice SIPP if you retire later with a full State Pension at age 67 (and/or a decent defined benefit pension et cetera).
A normal SIPP (‘relief at source’ or ‘net pay’, no salary sacrifice option) lags behind a LISA overall. Standard ISAs come last.
Despite this outcome, remember any pension is immediately catapulted above a LISA when your employer matches your contributions.
After you’ve trousered your employer’s contributions, you’re best off stuffing your LISA up to its £4,000 annual hilt on tax-strategy diversification grounds.
LISA contributions locked in at today’s tax rates will benefit versus pensions if taxes go up in the future (which they are doing until April 2028 at least, due to that infernal fiscal drag).
Basic-ally no difference
Intriguingly, a normal SIPP isn’t that far ahead of an ISA if you retire at State Pension age in this basic-rate taxpayer scenario.
You pocket £77 from a SIPP, and £72 from an ISA, for every £100 you originally contributed to each account. That’s a 7% difference.
Such a slim margin suggests that diversifying between the two accounts is a sound idea. Albeit I’d still heavily favour my SIPP, given that small gains make all the difference at lower incomes.
If the 25% tax-free cash is eliminated
| Ranking | PA intact | Retire on State Pension | 40-yr retirement |
| 1. | Salary sacrifice | LISA | LISA |
| 2. | LISA | Salary sacrifice | Salary sacrifice |
| 3. | SIPP | ISA / SIPP | SIPP |
| 4. | ISA | – | ISA |
This scenario downgrades pensions, which means a LISA should take priority before you load up your pension.
For those retiring at the State Pension age, an ISA strategy even draws level with a non-salary sacrifice SIPP in terms of withdrawal value: £72 a piece for every £100 contributed.
If I really believed that the 25% tax-free cash benefit was set to whither to nothing then I’d overwhelmingly favour my ISAs vs SIPPs in this scenario.
However I think it’s more realistic to assume that the 25% tax break will retain some residual value, even if you’re 30-40 years away from retiring.
SIPP contributions made at higher-rate taxpayer level
| Ranking | PA intact | Retire on State Pension | 40-yr retirement |
| 1. | Salary sacrifice | Salary sacrifice | Salary sacrifice |
| 2. | SIPP | SIPP | SIPP |
| 3. | LISA | LISA | LISA |
| 4. | ISA | ISA | ISA |
Higher-rate taxpayer contributions lead to a decisive win for pensions in the SIPPs vs ISAs match-up.
LISAs and ISAs form the bottom half of the table in this scenario and stay there.
Salary sacrifice and normal SIPPs continue to beat the L/ISA gang whether you retire at the Minimum, Moderate, or Comfortable income level.
However, if you expect tax-free cash to be disappeared by government chicanery then the LISA draws level with the SIPP at the £47,000 retirement income mark.
At £56,000 LISAs draw level with the salary sacrifice pension and are the best choice for investors who expect to rock a £61,000 retirement income.
Essentially, exposure to greater levels of higher-rate tax, and the loss of tax-free cash, knock the gloss of the SIPP relative to the LISA’s tax-free withdrawals.
LISAs also tie with salary sacrifice SIPPs at the £86,000 retirement income level even when you do have tax-free cash. That’s because you hit the lifetime tax-free cash cap so quickly.
But again, none of this undoes the primacy of pensions pumped up by employer contributions.
For those of us operating below such Olympian heights, the higher-rate tax reliefs are the sweet spot for pension contributions – because 40%-tax workers are likely to become 20%-tax retirees.
SIPPs vs ISAs: £34,435 Moderate annual retirement income
LISA is the way to go again if you’re making contributions at the basic income tax rate:
| Ranking | PA intact | Retire on State Pension | 40-yr retirement |
| 1. | Salary sacrifice | LISA | LISA |
| 2. | LISA | Salary sacrifice | Salary sacrifice |
| 3. | SIPP | SIPP | SIPP |
| 4. | ISA | ISA | ISA |
Salary sacrifice’s lead over a LISA (in the left-hand column) is slight, even when you’re able to protect some withdrawals via your 0% tax personal allowance.
The principle of tax-strategy diversification suggests you’d do well to fill the LISA first.
Salary sacrifice outcomes continue to dominate normal SIPPs. That’s because they effectively gain relief on 32% tax, instead of 20%.
Meanwhile normal SIPPs enable you to withdraw 7% more than ISAs across a 40-year retirement, or if you retire at State Pension age.
If the 25% tax-free cash is eliminated
| Ranking | PA intact | Retire on State Pension | 40-yr retirement |
| 1. | LISA | LISA | LISA |
| 2. | Salary sacrifice | Salary sacrifice | Salary sacrifice |
| 3. | SIPP | ISA / SIPP | SIPP |
| 4. | ISA | – | ISA |
The ISA / SIPP draw occurs because the SIPP’s 20% tax relief on contributions is the same as the ISA’s 20% tax exemption on withdrawals.
The SIPP vs ISA rankings for higher-rate taxpayer contributions are the same as the Minimum income level, regardless of what happens to the 25% tax-free cash. Prioritise pensions first, then LISAs, and ISAs come last.
SIPPs vs ISAs: £47,417 Comfortable annual retirement income
SIPP contributions are made at the basic income tax rate in this scenario. The 25% tax-free cash cap is reached after 23 years of retirement.
| Ranking | PA intact | Retire on State Pension | 40-yr retirement |
| 1. | LISA / Salary sacrifice | LISA | LISA |
| 2. | – | Salary sacrifice | Salary sacrifice |
| 3. | SIPP | SIPP | SIPP |
| 4. | ISA | ISA | ISA |
LISAs have reeled in salary sacrifice SIPPs across the board at the Comfortable income level.
Meanwhile, SIPPs only just beat ISAs across a 40-year retirement because the tax-free cash spigot splutters dry after 24 years.
However, it’s possible to avoid this fate by pulling out your 25% tax-free cash as a lump sum (PCLS) before the ceiling is reached.
Ideally, you’d get it all under ISA cover as quickly as possible. Once in an ISA your money can continue to grow tax-free without limit. (That is, as if the tax-free cash cap had not been introduced.)
How doable is that?
Sheltering your tax-free lump sum
Let’s say you retire in late March and deliberately leave that year’s ISA allowance free until then. That’s £20,000 under your tax shield straightaway.
The tax year clock ticks on to April 6. Now you’ve got another £20,000 worth of ISA to fill with newly-minted 25% tax-free cash.
Perhaps you also have some emergency cash standing by, an offset mortgage facility, or other cash savings?
With a bit of planning, you can use these resources to expand your flexible ISA’s elastic band in the years before your retirement date.
Check out the ‘Flexible ISA hack to build your tax-free ISA allowance’ section in our ISA allowance post. (Hat tip to Finumus who came up with the idea.)
Double your ISA allowance numbers if you have a trustworthy significant other.
You’ll be able to stash a bit more tax-free in General Investment Accounts, too. However, the much-shrunk dividend tax and Capital Gains Tax allowances mean that only a smidge of your subsequent returns will escape HMRC’s tractor beam.
All the same, you’re better off being taxed at dividend and capital gains rates than income tax rates. Hence you should withdraw any 25% tax-free cash as soon you can, once you look like you’ll hit the cap. It’s better out than in.
If the 25% tax-free cash is eliminated
| Ranking | PA intact | Retire on State Pension | 40-yr retirement |
| 1. | LISA | LISA | LISA |
| 2. | Salary sacrifice | Salary sacrifice | Salary sacrifice |
| 3. | SIPP | ISA | ISA |
| 4. | ISA | SIPP | SIPP |
Notice that a SIPP actually performs worse than an ISA in the main two scenarios. That’s because a ‘Comfortable’ income earner ends up being partially taxed at the higher-rate, once you add on their State Pension.
This scenario could unfold for a basic-rate worker who saved into their SIPP from a young age, experienced outstanding investment performance, or suffered elevated tax rates in retirement.
Aside from that, frozen tax thresholds and the pernicious effects of fiscal drag make it increasingly likely that retirees will be dragged into the 40% band.
The SIPP vs ISA rankings for higher-rate taxpayer contributions differ slightly from the Minimum income level.
The ranking is: Salary sacrifice SIPP, non-salary sacrifice SIPP, LISA, then finally ISA.
Except… that LISAs and non-salary sacrifice SIPPs are tied if you retire at the State Pension age.
LISAs vs SIPPs: tie-breaker situation
There are quite a few scenarios that end in a draw between LISAs and pensions. Let’s head into the tie-breaker:
| Priority | LISA | SIPP |
| Access before age 60 | No | Yes |
| Can help to buy a house | Yes | No |
| Inheritance tax benefit | Spouse | Spouse6 |
| Means-testing / bankruptcy advantage | No | Yes |
| Tax-strategy diversification | Use | both |
I don’t think the few years’ gap in account accessibility is an issue. You can always drawdown harder on pensions until age 60.
Interestingly, the government seems to have cooled its jets on advancing the normal minimum retirement age in lockstep with the State Pension age.
Accessibility aside, the LISA’s low allowance, restrictions on contributions beyond age 50, plus the principle of tax-strategy diversification all suggest maxing out the LISA if/while you can.
That goes double if your financial position means that salary sacrifice actually makes you worse off. Hit that link for the gory details.
Pensioned off
There have probably been retirements that lasted less time than it took to write this post. Alas recent developments have not made the SIPP vs ISA question any easier to answer, I’m sorry to say.
But I hope this guide helps you think through the options. Assuming you haven’t lost the will to live in the meantime.
Do I need to plug taking your employer pension contributions one more time? Probably not…
Take it steady,
The Accumulator
P.S. Here’s more on how much should you should put in a pension and how much you need to retire.
P.P.S. We’ve updated this post as noted to reflect the latest output of our fearsome spreadsheets given today’s realities. Many comments below will refer to the earlier iteration of the post, so please have a care when perusing.