We’re back with another interview with a Monevator reader who has attained financial independence and/or early retirement (FIRE). This month John explains how he achieved a very comfortable retirement by working hard, maxing out pensions, and buying property – all while raising a growing family. Plenty to chew on, especially for those aspiring to Fat FIRE…

A place by the FIRE

Hello John! How old are you and are you married?

I’m 53 and my spouse is 59. We have been together 30 years but only married in the last ten. (We didn’t want to rush!) Marriage does simplify things such as wills, defined benefit (DB) spouse pensions, ISAs, and so on.

We FIRE-ed about seven years ago and we still feel financially secure. But world events and double-digit inflation do concern me.

All this positive talk of inflation eating away at mortgages only works if you get inflationary pay rises. FIRE types may have ‘real’ investments such as property. But they probably don’t get many inflationary increases.

Do you have any dependants?

We have three kids and eight grandkids. The kids are 35-40, the grandchildren 3-23. All three of our children went to university and two work in the NHS. Their lives seem a little harder than ours in terms of getting on the housing ladder and settling into adult life. We still provide some financial help. Mostly interest-free loans and below-market rents.

Childcare can be expensive and we’ve helped out a lot during the last seven years. We even got NI credits for four years!

The little ones are now all in school so it’s more drop-off and pick-ups a couple of days a week. I’ve really valued time with the little ones this time round. The first time I was more selfish and work focused.

The older grandchildren seem like a different species. They just don’t grow up as quickly as I remember. Two of the older ones decided against university. One is an apprentice trades-person and the other works in the hospital, waiting for a suitable apprentice opportunity.

Whereabouts do you live and what’s it like there?

We are currently in East Anglia but have lived in the North and South following job opportunities.

The weather is fantastic compared to where I grew up. Rail links are good for the capital.

When do you consider you achieved Financial Independence (FI) and why?

By age 45 I thought I had enough for a fairly ‘Fat FIRE’ – around £5,000 per month – without running down investments in nominal terms, and hopefully not in real terms1.

FI to me means work is an option, not a requirement, and “how much is enough” to achieve that is a tough question for a young FIRE-ee. I needed to be confident that my living standard wouldn’t take too hard a hit and that we’d be robust to changes in interest rates and inflation.

The big question for me was about the gap between the work pensions and exiting date. I had ten years until I could access the defined contribution (DC) pension pot and 15 for the DB pension.

What ultimately decided it for you?

I resigned when I’d truly had enough of working 60 hours per week and being away from home for 150 days a year. The less you need the money, the easier it is to walk away.

Also, as your FIRE fund grows, each extra year of work moves the dial less. At some point you realise your assets earn enough to live off. At that point you start to think about things differently.

What about Retired Early?

I left aged 45 and haven’t returned to any full-time work yet. There has been some interim consulting and contract work and quite a bit of unpaid work with a tech start-up that eventually fizzled out. About 100 days in total paid work – things dried up post-Covid.

I’m still open to day-rate work and short contracts but the telephone calls are much less frequent than when I was working.

If I went back now, my earnings would be lower than when I left. A three to four-month well-paid winter contract every year would be nice. It would make the summers off even sweeter!

Assets: Fat FIRE

What is your net worth?

Current net worth is around £2.8m.

This roughly made up of:

• Four properties at £1.2m total (valued at 90% of the 2022 peak)
• Defined Benefit pension £900,000
• Defined contribution pension £450,000
• Cash £250,000
• ISA £500,000
• General investment account £75,000
• All minus two mortgages totaling £500,000 (@Jan23)

The DC pots have been set to retirement age 70 and I’m in the default funds. The ISA and General Investment Account are in the FTSE 100 and Pref shares (45/55% split).

I’m a sucker for yield. I should have bought a world tracker, I know!

The interest-only mortgages have been my friend for 12 years (costing the Bank of England’s base rate +.75% on average across two properties). But now rates have risen, the £1,800 per month interest is starting to hurt. I’ve had such a good run on ultra-low rates it’s hard to complain.

My main (and only) residence makes up about 20-25% of our net worth. It’s a four-bed detached house at 2,000 sq ft set on a quarter of an acre.

We will consider downsizing again soon. I just need to work out how to take the mortgage with me.

Is your home an asset or an investment?

I consider my home to be an asset. It’s an asset that pays your rent.

I often wonder what percentage of net worth is sensible to spend on your home? We have downsized once already and will probably do so again in the next five years. I’m keen to take advantage of the inheritance tax rules, so I will downsize in terms of size, but probably not value.

My three remaining buy-to-lets are clearly investments and a hassle I don’t need. I would like to sell at some point. But evicting family is unlikely, and a spare flat could be handy if we move abroad.

I sold one property last year with a rental yield of 3% and bought preference shares at 6% yield, so I nearly doubled the income. But I subsequently lost the capital gains potential and about 15-20% in their value!

Earning: High-earner, SAYE, and property investment

What did you do in your regular income-earning days?

I spent my career working in the finance departments of insurance companies in senior technical and director-level roles.

In order to achieve pay rises, I frequently applied for external roles. Sometimes I left and sometimes I stayed with a pay rise.

In all I had about seven different roles over 24 years, and worked at five different companies.

For the first half of my career my average earnings were ~£40,000, including a car and bonus, but excluding the DB pension. The second half averaged around £170,000 (including car, DC pension, and bonus). Total career earnings excluding the DB pension was around £2.5m, before tax & NI.

Other income sources included Save As You Earn (SAYE) share schemes and similar discounted share buying schemes. I tried to invest the maximum. Free money is the best money! I ended up with around £250,000 of employer company shares in total. All sold now, with minimal CGT.

Buy-to-lets happened accidentally at the first, and then on purpose. We relocated with work and we didn’t sell the old house for a few years.

All told we’ve bought nine properties. Four main residences and five rentals. Across the properties there has been around £900,000 capital growth and £250,000 income. Costs are harder to total up!

Did thinking about FIRE influence your progression?

Planning to retire early didn’t impact my career. With hindsight I wish I’d moved jobs sooner and more often to get broader experience.

I should also have been more choosy about my first graduate employer. A good graduate training program can offer a great foundation and career springboard.

Saving: a saver born and bred

What is your annual spending? Do you stick to a budget or otherwise structure your spending?

We don’t actively stick to a budget, but I’m a value-focused Northerner who isn’t keen on waste, and who demands value for money. It’s probably to my own detriment. I’d rather go hungry in an airport than pay £15 for a burger! But your money DNA or blueprint stays with you.

I’m very aware of what income is coming in and try not to spend too far over that level. The large volatile number is travel and holidays. And also gifts to kids.

Our income will increase significantly when I can access my pension pot at 55 and final salary pension at 60. Until then we stick to spending the current income, but we probably could spend more.

What percentage of your gross income did you save over the years?

I don’t have good record keeping for savings and cash flows.

The first half of my career didn’t involve savings, apart from owning two houses, a DB pension, and some employer shares. I recall my net worth was around £250,000 after 13 years, excluding the DB pension. Roughly £200,000 was from the houses, which benefited from the fall in interest rates around 2001.

In the second half of my career I moved to DC pensions. I usually put in about 10% on top of the company’s 10-15%. Towards the end I also put in bonus payments.

Based on my DC contribution and the properties I bought for cash, I estimate my savings rate in the last ten year to be around 35% of work earnings. That includes the company pension element.

As earnings increased and then later as children moved out, our savings headroom increased. We never massively changed our lifestyle – yes to a nicer car, house, holiday, clothes (my wife) but not in a silly way. We’ve only ever bought one brand new car and my daughter has it now 12 years later. The cost of that car works out at about £4 a day so far…

Essentially, most of the money came when we were over-35. By then we were set in our financial ways. It isn’t always a good thing. I’m going to Tesco later to take advantage of an £8-off coupon!

That’s always a good thing in my book! But what is the secret to saving more money?

Earn more, earn more, earn more!

Maximise free money – pension contributions. Don’t buy new cars, learn to cook, avoid keeping up with the Jones’s, and aggressively manage your direct debits and bills.

Savings happen when you earn more than your lifestyle is costing you.

If you want money and freedom, you must focus on your market worth in the job market. Think long and hard – about what industry, qualifications, and training time are required – and then work hard to become expert and knowledgeable.

Add value, be flexible, and move companies often.

Do you have any hints about spending less?

Everyone is different and enjoys different things. I suppose actively think about the cost of something versus how much joy it brings. We don’t think about opportunity cost often enough.

Looking at the grandkids, they seem to have a problem with delayed gratification and labels. They have £100 a month or more mobile phone contracts, £14,000 car loans – this when they’re 20 and earning £300 a week or similar.

I have a friend who is a city lawyer charging £600 per hour. Listening to his lifestyle is completely alien to me (but hugely interesting).

Having too many friends a lot wealthier than you must cause some anxiety and extra spending. So pick your social circle thoughtfully.

Investing: not over-thinking or too taxing

I tend not to check share prices too often and intuitively like the invest-and-forget approach.

Rebalancing hasn’t happened yet. So, I’d say I’m passive in that I very rarely buy or sell.

Most of my investments were made before I found the FIRE websites and before I read the books. A big mistake was not buying world trackers to begin with.

Best investments – or rather lucky ones that worked out well:

• Discounted company share schemes. Put in about £75,000 investment, sold for around £250,000 over a 20-year period.
• Residential property – we must be close to £1m up over 25 years.
• Joining the DB pension scheme on my first job, even though I thought I was leaving within two years.

It’s hindsight speaking, but while I was financially comfortable enough to have gambled a small percentage of my money on crytpo or tech shares in the recent boom, I didn’t do it. I lost £1,000 on Motion Poster shares in around 2000 and didn’t try my luck again!

I have no idea what my overall return has been. I mostly focused on the earnings and tax-efficient savings. Once I realized the size of the DB pension, the pressure was off a little.

Can you tell us more about your thinking about tax-efficient savings?

Tax incentives have had a big influence on my strategy. Pension tax relief at 40-50% was too good to ignore. My timing was fortunate in that the annual allowance taper didn’t exist – and I took Fixed Protection 2014 to preserve the £1.5m limit.

My plan is to drain the DC pot from age 55-60 tax efficiently – no 40% tax – and I will probably get close to hitting the £1.5m in aggregate.

DC pension contributions were around £250,000 for 2006-2014, including the company element. Avoiding 40% tax in retirement is also probably what led me to max out ISA for the last 12 years (for me and my wife).

I do wonder sometimes if I over focus on tax efficiency at the expense of growth.

Wealth: buying freedom

Did you have a target for when you’d consider you’d ‘made it’?

Between my late 30s and my early 40s my ‘number’ was around £800,000 plus pensions. But once I got close to this the number I revised it to £1.2m plus pensions. Mostly because 15 years is a long time to wait for the pension.

In real terms I’m broadly level with the 2016 position. I’ve given up potentially a lot of earnings, but I gained a lot of freedom and time.

There is still a niggling question around my children’s finances. Should I return to work to make their lives a little easier?

Things I wished I’d known sooner, or thought about more:

• Your spending habits change as you get older or retire. New shiny stuff isn’t that important – apart from a nice iPad obviously!
• Enjoy the journey more. Why rush? Some things are better enjoyed 25-40 than at 45-65.
• If you didn’t find time for it when you worked then you probably won’t when you retire. Fitness, learning Spanish, and so on.
• My working 60 hours a week for that last ten to 15-year stint was probably unnecessary.

Do you have any passions, hobbies, or vices that eat up your income?

We used to smoke, which was incredibly expensive. But we stopped after getting a cancer diagnosis. That was probably the catalyst for aiming to retire by 50. It also makes me think about selling the DB pension.

Our main areas of discretionary spending are family, travelling, holidays, and motoring. Motor homes aren’t cheap! I decided against flying lessons and I struggle mentally with the David Lloyd £120 per month membership. So I found one costing £32 with a monthly rolling contract instead.

We don’t have expensive tastes. That’s probably a good thing. An £8 bottle of red is good enough for us.

In the longer-term we are giving serious thought to moving to Spain or Portugal. The older I get the more I like spending time in shorts and in the sun!

Your money mindset

When did you first start thinking seriously about money and investing?

I grew up fairly poor on a council estate in the North. Since money was always short, I’ve always being focused on getting more of it. Probably over-focused.

Being relatively poor shapes you and your thinking, and it’s hard to change. I gambled quite a lot in my 20s but stopped when I started earning good money.

My 20s were focused on kids, career, and trying to get housing security. We spent five Christmas Days in five different houses. Tough with three kids.

Late 20s saw earnings increase. I took advantage of Save As You Earn share plan schemes (SAYE) to the tune of £250 per calendar month. This was probably my best decision as within a couple of years they were worth £60,000, though only briefly. I settled for about £30,000 in the end.

My 30s were about career, bigger houses, nicer cars, and a move from final salary pension to a money purchase DC pension.

From 40-45: my career, the four BTLs, and I started an ISA and maxed it every year since.

Around 45 I left work, downsized property, and tried to invest the proceeds sensibly.

Did any particular individuals inspire you to become financially free?

Mostly it was just that strong desire not to be poor – and to never be poor again.

The best FIRE resources are websites – Monevator, Indeedably, Simple Living in Somerset, and Retirement Investing Today. When I first found these websites it was like I’d found my tribe.

A lot of the old websites have died and their creators have (hopefully!) moved on to better things.

Other interesting reads include:

• Early Retirement Extreme – hardcore saving for retirement, with much to think about.
• The 4-Hour Work Week – read this around 2009 and loved the creativity and different style of thinking. Not sure about the podcast though.
• I’m also a fan of Nassim Taleb, Tim Hale, Mark Spitznagel’s Safe Haven, and The Psychology of Money by Morgan Housel.

What is your attitude towards charity and inheritance?

Seeing my father-in-law deteriorate quickly aged around 80 led my to see that the phrase “go-go years, slow-go years and no-go years” is probably correct.

I plan to help the kids into their own houses. One has already bought a buy-to-let off me, with a 25% discount. As an aside, filling their LISA accounts is great tip for free money from the government.

We also currently help with childcare, holidays, after school activities, and so on. I see this continuing.

An inheritance unknown is the grandchildren. We have about eight, but the number grows! They are aged between 3-23. My gut says to focus on their parents as they are not comfortable enough and let them sort out the grandkids.

Most of my giving or charity is within the family. This may change when I’m older and the kids are sorted. I admire those who tithe but I’d worry about what if I need it later myself? Growing up poor stays with you.

What will your finances ideally look like towards the end of your life?

My assumption is I have 25-30 years left.

I’m aiming to spend or give away down to around £1m in the ISAs and then maintain at that level. We will also probably have £1m in property – which is above the inheritance tax (IHT) main residence allowance – so there will be IHT to pay. I haven’t really given IHT enough thought, I tend to over-focus on income tax.

When we have a greater understanding of our spending patterns as we age, I can see gifting accelerating, because my DB and State pension together should be more than enough.

Mental abilities fade so I want to simplify and de-risk in later life. I’ve thought long and hard about selling the DB pension, as it dies with us. But keeping it also simplifies things. I can’t spend it, I can’t lose it, and it’s guaranteed (mostly).

My ambition is to give my kids the option to retire a little early. Two work in the NHS and should have decent pensions. I’d like them to be mortgage-free by 60 and have the option to give up work 5-10 years before the state pension. I probably don’t have enough to make that happen but I should be able to help.

The money game took a lot of my energy and focus from a young age. It’s funny how once you have ‘enough’ it’s just not important anymore.

Perhaps I’m lucky not to know many very rich people. I can see how that would make you more competitive.

But if £2m is your ‘enough’, and you have £3m, then wasting your life (and time) chasing £10m seems a bit nuts to me.

Lots of life lessons in there readers. Of course John’s balance sheet is at the higher end of the FIRE spectrum and will be out of range for many. But equally lots of our readers might well get there in the long-term. Besides, enough is enough, whatever your enough is, as John concludes. Questions and reflections welcome. As usual please remember John is not a regular Internet commenter and he is just sharing his story to inspire others, not to provoke nastiness. Of course you can disagree on practical matters constructively, but please keep that in mind. One particular person’s situation isn’t a comment on yours. Thanks!

1. That is, inflation-adjusted. [↩]

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 before age 55. (Pro tip: almost nobody does.)

If you’re self-employed, or have hoovered up your employer’s match, then much depends 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’ll 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.

Will you still need me, will you still feed me, when I’m 71?

Britain has both an aging population and a low productivity problem. It’s a recipe for more of us getting old and relying on a shrinking base of workers, who aren’t generating the higher economic output needed to bridge that gap.

No wonder retirement horror stories are floated in the press as often as disembodied heads in a Harry Potter movie.

Running with the metaphor, threats to scrap the State Pension triple-lock surface ahead of every Budget as predictably as Hollywood does sequels.

Meanwhile the age when the State Pension kicks in – and by extension when you’ll be able to access your own SIPP savings – is also a moving target.

Current legislation has the State Pension on-track to rise to 68 sometime between 2044 and 2046.

But with the dependancy ratio of workers to retirees set to hit 50% by 2050, some experts are warning this will soon need to rise to 71.

Such moving targets aren’t just frustrating for older people who are close to cashing in their workday chips.

They also make it very hard for young workers to plan for the future, especially given that – as we’ll see below – the best strategy often comes down to fine margins.

You can have it all

Tax-strategy diversification can help you deal with all this uncertainty. It involves you diversifying your tax shelters, irrespective of their current pecking order.

Spreading your savings across your tax shelters makes the most sense 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 come back to that.

With those broad ISA vs SIPP principles established, I’ll take you through the reasons why, in the least painful way I can. (Keep your aspirin on standby though, just in case…) 

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-enrollment 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	Yes	If passed to spouse, otherwise no

As you can see, a SIPP gathers more ‘Yes’ votes than an ISA, and those advantages stack up. 

Remember that ISAs are superior to SIPPs when access to your money before the normal minimum pension age is your priority. 

However, the various 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. The 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 partly 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. So 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, and are positively affected by income tax falls. 

For example, if you get tax relief at 20% but are 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.

So it’s worth remembering amid the current gloom that the tax burden isn’t a one-way street. Income tax-rates fell dramatically in both the US and the UK in the 1980s. Higher earners also enjoyed more recent cuts in America. 

As a result, the highest tax-risk exposures will occur among younger investors with sufficient traditional account [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.

Young, higher-earners are the most susceptible to steep future tax rises, according to this analysis. Thus tax-strategy diversification implies they should hedge against that possible fate by ploughing a significant portion of today’s income into ISAs. That’s because 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 soar 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.

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 still a dim and distant prospect. 

But that said, do bear in mind this is a US-focused study. Their income tax bands are more gradual 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.  

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 that doubles your money. Not taking the match is sort of like taking 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	Anyone
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. 

Some of you on loftier incomes may prioritise inheritance tax (IHT) planning. Monevator contributor Finumus came up with a particularly extreme – but seemingly legal – IHT avoidance wheeze using SIPPs. 

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 bees2, 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 cash3 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.

And 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 accounts that are useful in retirement:

Salary sacrifice SIPP. This wrapper enables basic-rate employees to legitimately avoid 32% tax (20% + 12% NICs) while higher-rate employees avoid 42% tax (40% + 2% NICs)

SIPP. A standard pension account provides tax relief at the 20% and 40% rates but you still pay national insurance contributions (NICs)

Stocks and shares ISAs can deliver the investment growth needed for retirement. 

As can LISAs which 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 rates of tax disadvantage pensions vs ISAs as noted earlier. So I’ve inflated the three retirement income levels by my CPI guesstimate up to 2028.4 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, after 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 (PCLS) or in ongoing chunks (UFPLS). 

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. 

Final preamble point: I’ve used UK income tax rates – though the results will still be relevant to most Scottish income taxpayers, with minor variations. 

Right, at last, let’s get on with the key ISA vs SIPP examples.

SIPPs vs ISAs: £15,480 Minimum annual retirement income

Here, SIPP contributions are made at the basic income tax rate. 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 / Salary sacrifice	Salary sacrifice
2.	LISA / SIPP	–	LISA
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 that relies on SIPP income 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 salary sacrifice pension wins across a 40-year retirement journey beginning about age 57. That is, the normal minimum pension age. 

But the LISA matches a salary sacrifice SIPP if you retire later with a full State Pension at age 67 (and/or a decent defined benefit pension etc). 

A normal SIPP (‘relief at source’ or ‘net pay’) lags behind a LISA overall. Standard ISAs come last. 

Despite this outcome, remember any pension is immediately catapulted above a LISA so long as 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.

Basic-ally no difference

Intriguingly, a normal SIPP only just scrapes in ahead of an ISA if you retire at State Pension age in this basic-rate taxpayer scenario. 

You pocket £72.25 from a SIPP, and £68 from an ISA, for every £100 you originally contributed to each account. That’s only a 6.25% 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

The advantage swings in favour of LISAs if the 25% tax-free cash ceases to be a factor in reducing SIPP taxation. 

For those retiring at the State Pension age, an ISA strategy even draws level with a SIPP in terms of withdrawal value: £68 a piece for every £100 contributed. 

If I really believed that the 25% tax-free cash will 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 even if the 25% tax-free cash disappears entirely – and whether you retire at the Minimum, Moderate, or Comfortable income level. 

LISAs do best SIPPs if you expect to earn around £75,000 per year in SIPP income. That’s because the tax-free cash cap is hit so quickly. 

But 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: £23,300 Moderate annual retirement income

SIPP contributions are made at the basic income tax rate in this scenario. The 25% tax-free cash cap is not reached during a 40-year retirement.

Ranking	PA intact	Retire on State Pension	40-yr retirement
1.	Salary sacrifice	LISA / Salary sacrifice	Salary sacrifice
2.	LISA	–	LISA
3.	SIPP	SIPP	SIPP
4.	ISA	ISA	ISA

Salary sacrifice outcomes continue to dominate normal SIPPs. That’s because they effectively gain relief on 32% tax, instead of 20%. 

Meanwhile SIPPs only just beat ISAs across a 40-year retirement, and for those retiring at State Pension age. Narrow margins strengthen the case for tax-strategy diversification.

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

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. 

SIPPs vs ISAs: £45,109 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 24 years of retirement.

Ranking	PA intact	Retire on State Pension	40-yr retirement
1.	Salary sacrifice	LISA / Salary sacrifice	LISA
2.	LISA	–	Salary sacrifice
3.	SIPP	SIPP	SIPP
4.	ISA	ISA	ISA

As before, SIPPs only just beat ISAs across a 40-year retirement, and if you stop work at the State Pension age.

LISAs top the table 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.	Salary sacrifice	LISA	LISA
2.	LISA	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. This might happen to a basic-rate worker who saved into their SIPP from a young age, experienced outstanding investment performance, or suffered elevated tax rates in retirement. 

The SIPP vs ISA rankings for higher-rate taxpayer contributions are the same as the Minimum income level. 

The ranking is: Salary sacrifice SIPP, non-salary sacrifice SIPP, LISA, then finally ISA.

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	Anyone
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 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. 

1. The Normal Minimum Pension Age will be 57 for most people from 5 April 2028. [↩]
2. As the rules stand. [↩]
3. That includes the Personal Allowance and any 25% tax-free cash. [↩]
4. 7.5% this year as per the OBR’s inflation forecast and 3% per year up to 2028. [↩]
5. Personal Allowance [↩]

What caught my eye this week.

Watching a handful of my friends get pretty rich over the past few years, it’s been striking how little they’ve changed.

Of course the props are swapped. Better cars breakdown. Household appliances are replaced with services, or even by part- or full-time staff. Baggage is stranded in more exotic locales. Arguments with their partners go upscale.

Sometimes one of them does something odd, like painting all the interior walls of their home griege and replacing literally 95% of the furniture to match the same rain cloud tone.

But mostly they are the same old Tom, Dick, or Harriet they were before.1

I recently had a coffee in Berkeley Square with one who was fitting me in between the hedge funds. He was lamenting in turn his success or otherwise with dating apps, and trouble with his teenage son.

The same pep talk I offered could have been delivered to an old childhood mate in his caravan in the provinces back home.

Spare any change?

Of course this is a convenient narrative for those who want to argue that we’re all in it together.

We’re not. Those of us with a lot of money have it better.

But it’s true, too, that there is a limit to how much better.

Not because of the canard that, after a certain point, happiness brought about by money plateaus. This bit of social science no longer appears to be true, according to recent research. (See the Guardian article I linked to above).

Rather, it’s because much of what really matters to us simply cannot be bought.

As a beautiful post by Lawrence Yeo on More To That put it this week:

You can be the healthiest person on the planet, but if you love no one, what’s all that vitality for?

You can be free to do whatever you want, but if there’s no one to spend that time with, what’s the point?

Is it even possible to feel a sense of purpose in your days if you believe that you’re loved by no one?

Yeo is doing original digging on a very well-worked seam in his article – albeit not so much in the Beatles-y extract above, which nevertheless ring true – and I’d urge you to give him a read.

Maybe follow up with Ben Carlson, who this week wrote:

Happiness is a complicated topic because when you ask people what they want out of life the answers typically involve career achievements, financial goalposts, or status.

A good job or a high salary or a certain level of fame are easy to quantify and define. Relationships are not.

Money has a value you can attach to it. It’s impossible to quantify the value of strong relationships in your life.

Or with Indeedably, and his sombre reflections from a palliative care unit:

Over the weeks spent visiting the ward, I got to know some of the patients. Lending a sympathetic ear or supportive hand to those in need of a diversion, while the person I was there to see slept.

None reminisced about the jobs they had performed. The nappies changed, houses built, essays marked, budgets prepared, businesses founded, or lines of code written. Beyond their former professions being a token of identity, they barely rated a mention at all.

None reflected on the things they had bought or experiences they had purchased. Cars. Holidays. Houses. Concerts given or attended. Sporting events witnessed or participated in. All irrelevant.

It must be something in the water?

(Middle) class warriors

I do sometimes wonder if I’ll look back on all the effort I’ve put into saving, stock picking, and even running this investing blog over the years as a bit of a tawdry exercise.

I long ago gave up believing Monevator will make many poor people less poor. If we’re doing our job properly, then we help make ‘are or soon will be well-off’ people a little bit more well-off.

Which isn’t nothing, but it’s hardly God’s work.

I’m not looking for sympathy or anything like that. I’m proud of this site!

I just wonder now and then if I should have been writing poems, or helping out at a care home.

The feeling passes, and I’m grateful for the autonomy my decisions have given me. But I’m also left wondering at the counterfactual shadows. Flitting around, just out of sight.

Have a great weekend.

[continue reading…]

1. At least after a hard-to-endure 12 months for those who got rich very quickly, before they get over themselves… [↩]