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SIPPs vs ISAs: pensions knock ISAs into a cocked hat if you want to retire

It’s become fashionable to rate ISAs ahead of SIPPs as the best place for your retirement savings. Many investors even talk about abandoning personal pensions altogether if that sinister man in 11 Downing Street messes with them one more time.

While this might make for fine, contrarian pub talk – and if you find the pub where they banter about personal finance all night long then please point me to it – in my opinion the vast majority of people are better off storing their retirement funds in a proper pension scheme.1

Tax relief

ISAs and personal pensions both shelter assets from tax on interest, dividends and capital gains – so far, so equal.

But pensions have the edge where tax relief meets tax bands (bear with me).

With ISAs:

  • Savings you put into ISAs have already lost a slice to income tax.
  • Withdrawals from ISAs are not taxed.

So you are taxed on the way in to an ISA but not on the way out.

With pensions:

  • Savings into pensions are not taxed.2 (Income tax relief on pension contributions neutralises the tax chomp.)
  • Withdrawals from pensions are taxed at standard rates of income tax.3

Pensions are therefore taxed on the way out but not on the way in.

If you paid 20% tax on all your income then at first blush it wouldn’t make any difference whether you put your money into an ISA or a pension – they would both receive the same tax holiday.

But part of your income is likely to fall into lower rates of income tax when you retire, in contrast to your earnings when employed.

In other words, a 40% tax-payer can earn 40% tax relief on pension contributions now but may only be taxed at 20% or even 0% when they retire.

That’s an outright gain of 20-40%.

Bear in mind that the personal allowance protects the first £10,600 of your income (and £10,800 from April 2016) from income tax.

A 20% tax-payer is likely to earn 20% tax relief on pension contributions, but a fair wedge of their retirement income may well fall within the personal allowance 0% band.

That means overall they’ll enjoy a 20% boost on their assets that is unmatched by ISAs.

In contrast you’ve already lost 20-45% to income tax on your ISA contributions, before you get the money in there.

The best that can happen is that you don’t lose any more when you pull it out again.

SIPP vs ISA income tax relief

To see how likely you are to benefit, consider that a retirement pot of £262,500 is needed just to earn an income of £10,500, assuming a withdrawal rate of 4%.

You’d need a pot of over £1 million to hit the 40% income tax bracket4 at that 4% withdrawal rate.

That’s a problem few investors will face.

Grow your dough

Choosing a pension over an ISA can make a large difference to the size of your retirement stash as illustrated by the following example.

Imagine Irene Isa pops £8,000 into her ISA every year while Sally Sipp drops the same amount into her personal pension.

So after tax relief at 20%, Sally Sipp puts away £10,000 annually.

Sally and Irene’s investments both grow at an annual compound rate of 4% over the next 20 years.

When the bell dings, Sally Sipp’s pot = £306,888

Meanwhile Irene ISA’s pot = £245,510

The difference is due to the 20% tax relief.

Now they come to draw money from their pension. If Sally’s entire SIPP income was taxed at 20% then it would be the same as Irene’s ISA income.

But Sally doesn’t suffer 20% tax on the entire amount…

Irene ISA’s annual income is £9,820 assuming a withdrawal rate of 4%. She isn’t taxed on any of it as she’s withdrawing money from an ISA.

Sally SIPP’s gross annual income is £12,275. Most of that income comes in under her annual personal allowance, which is £10,500 at the time of writing. She is only taxed on the relatively small portion of her income above this limit.

Sally’s net annual income is £11,920 – after 20% tax on that portion of her annual withdrawal above the £10,500 personal allowance.

So Sally’s net income is 21% larger than Irene’s.

Now I haven’t factored in the State Pension into those calculations because Sally and Irene retired age 55. A State Pension will push you closer to a higher tax band, so if you aren’t planning on retiring until your late 60s then the advantage of pension schemes over ISAs is reduced, although not eliminated.

Also remember that the tax benefits are doubled if you’re part of a couple that maximises your personal allowances and pension schemes.

Finally, there’s the 25% you can withdraw from your pension tax-free.

25% tax-free withdrawals from pensions

This is a straight ace from your pension scheme. You can withdraw 25% of the whole pot and pay no tax whatsoever on that sum when you reach the minimum pension age.

Again, you’ve just made a 20-45% gain above and beyond anything you can achieve with the same investments in an ISA.

That’s not to be sniffed at.

What’s more, pension income recycling enables you to repeat the trick.

  • Withdraw money from your pension and squirrel it away into a new pension scheme. The tax relief on the new pension contribution instantly negates the tax incurred on the withdrawal.
  • You can then crack open the new pot and claw out another 25% of tax-free, lump sum honey.
  • If you’re still working then you can put the lower of your annual earnings or £10,000 into your new pension. If you’re fully retired then you can put in £2,880 every year, which is topped up to £3,600 by HMRC.

To be fair, you can recycle savings from an ISA into a pension, too, but the point is that it’s only pension schemes that offer the 25% tax-free lump sum.

Note, this doesn’t work if you exceed your lifetime allowance or you’re over 75 or if you try to recycle using your 25% tax-free windfall.

Death taxes

The tax shield surrounding your ISA only remains intact if you pass it on to your spouse or civil partner.

Any other beneficiary (for example, the kids if you were divorced) doesn’t benefit from tax-free income and capital gains on the ISA portion of your savings when you exit the stage.

Your ISA holdings would fall into your estate in that instance5 so 40% inheritance tax will be due on any part of your wealth over and above your allowance (usually £325,000) including your house and all other assets.

The situation is much more favourable for pensions although it partly depends on the individual details of your scheme.

Most pensions aren’t liable for inheritance tax and aren’t taxed at all if you die before age 75 no matter who your beneficiary is. If you shuffle off after 75 then the chances are that your remaining pension will only be taxed at your beneficiaries’ marginal income tax rate.

Check out this superb ‘in a nutshell’ table for the full tax rundown.

Salary sacrifice

Most people are aware that they should stash enough into their workplace pension to get the company’s maximum match.

It’s a double-your-money game. For example with some schemes you can put in, say, 5% of your salary to get another 5% from your company. To turn down this opportunity is to turn down free dosh.

What’s less well known is that you also avoid national insurance if your company scheme operates on a salary sacrifice basis.

National insurance is a hefty 12% loss for basic-rate taxpayers so tax relief is effectively 32% in a salary sacrifice scheme versus an ISA. Meanwhile, higher-rate payers take a 2% NI nip and so can earn tax relief of 42%.

You will save national insurance on any amount that you divert into a salary sacrifice scheme. You don’t have to stop once you’ve maxed out the company’s match.


We’re wandering into the weeds now but you can’t keep putting money into ISAs if you move abroad, unless you are a Crown employee.6

But you can keep up your pension contributions from overseas under a wider range of circumstances. (The fiddly details are beyond the scope of this post.)

Also, if you fall upon hard times, ISA assets will affect most mean-tested benefits whereas pre-retirement pensions will not.

Where ISAs win

Accessing your money whenever you damn well please is the inarguable advantage that ISAs have over SIPPs and other forms of pension scheme.

That makes an ISA ideal for all financial objectives short of retirement at the minimum pension age.

Extreme early retirement, mortgages, university fees, emergency funds and so on – I would definitely use an ISA to meet any of these goals.

But it’s a combination of SIPP (or stakeholder pension) and workplace pension all the way if you want to hit retirement at age 55 or beyond.

The long game

The very flexibility of an ISA is a risk in itself when saving for a long-term goal like retirement.

Can you be sure you’ll resist dipping into your funds to relieve some emergency or overwhelming desire along the way?

The temptation is ever present and can set back your retirement by years.

The recent changes to pensions make your pension just as flexible as an ISA when you finally come to generate an income, although that also means there’s some risk of foolish cash splashage by newly minted retirees who don’t know what they’re doing.

Finally, some argue that ISAs are less prone to regulatory meddling than pensions. Historically that’s certainly been the case.

Even now, the current Government is consulting on pushing back the minimum age for private pensions from 55 to 57 by 2028. The plan would then be to peg the private pension age to the State Pension age so that there’s always a 10-year gap between the pair.

Moreover, 40% tax relief is favourite for the chop no matter who wins the next election.

But to my mind neither development destroys the superiority of the personal pension over the ISA when it comes to drafting you towards retirement.

Mix and match your cash

Some like to hedge their bets by investing in ISAs and SIPPs.

A hybrid solution could be just the ticket if you want to retire before the minimum pension age. You could use ISA assets to cover you for a few years before switching to your pension.

But before you decide, work out your financial plan and calculate when you’re likely to retire. If that date is beyond the minimum pension age then you will probably be better off with a pension scheme.

Take it steady,

The Accumulator

Note: This post on pensions versus ISAs was updated in April 2015. Some reader comments below may refer to earlier rules and regulations.

  1. I’m assuming you don’t have access to a defined benefit pension scheme and that you’ll make use of the best defined contribution scheme for your purposes e.g. SIPP, stakeholder pension or work-based pension. []
  2. Assuming you stick within your annual allowance of £40,000 and lifetime allowance of £1.25 million. []
  3. Not including your 25% lump sum – we’ll come back to that. []
  4. £42,386 from April 2015. []
  5. The exception is shares in firms listed on the Alternative Investment Market (AIM) that you’ve held for two years or more. []
  6. Or spouse / civil partner of a Crown employee. []

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{ 108 comments… add one }
  • 51 The Accumulator April 15, 2014, 6:24 pm

    Thanks, Firestarter. You’re quite right, 25% tax free into ISAs is an old classic and even more attractive under the NISA rules. There are a few more tax efficiency ideas here: http://monevator.com/reduce-tax-in-retirement/

  • 52 Paul W April 18, 2014, 12:54 pm

    Having a tax relief on the money going into SIPP does not increase any compounding interest benefit, because both of these operations are multiplication which is commutative. So moving from ISA into SIPP at a later point is absolutely fine, within allowances of course.

  • 53 Paul S April 19, 2014, 3:39 pm

    Really good article and posts! – thanks…

    this has helped me think about the ‘post retirement’ situation a lot more than I had before.

    Although I had dabbled in spreadsheets and shares I have only really got serious about my financial future in the last 6 years…I’m 45 now and saving for retirement just seems so much more tangible and urgent than it did in my 30’s. I often say to my wife (to try to make it real , as she does not give a stuff about financial planning but is very risk adverse …really…) that if we don’t save … a lot …. our weekly treat will be the trip to the co-op to buy a pound of lard….

    In the 00’s there was a especially active thread on Mfool about ISA vs. pension… at that time the consensus was that ISA won because it was inherently more flexible and (the sting) that the savings in an ISA could be re-cycled directly into a pension to achieve the +40% return from tax relief in the few years leading up to retirement…. sound maths at the time, but as the government has significantly ‘fiddled’ since the early 00’s this consensus has now been torpedo’d by contribution limits.

    I believe that I just have to take a chance with the forward view of the regulatory framework.. if tax treatment changes I hope I can adapt, and to use a hybrid strategy that:

    1. Leaves only a rainy day amount of free cash in a bank account
    2. Enough in ISA’s to act as ‘top up’ funds for the post retirement at 55 to state pension age at 67
    3. As much cash as is humanly possible stashed into SIPP’s and company cash purchase schemed between now and 55

    I personally believe that by the time I’m 67 there won’t be any form of state pension that is available if you have a reasonable amount of cash saved, if I’m wrong, it will be a bonus, if I’m right the state pension will be a means tested safety net only and all those years of contributions will be null and void for the greater good.

    Looking back, I wish I had been more knowledgeable (the internet was not available for me until ~1996 and even then had marginal content) and made a plan with some real goals…..I now have a 5yr old son and I have contributed into a SIPP for him over the last few years hoping to provide him with a cushion for his future… I hope that with the right strategy and finding great information such as from this site, that he may be in apposition by the time he starts his working career to not even have to worry about contributing to a pension…. just learning to manage what his old dad set up for him when he was chewing rusks..

    Paul S

  • 54 The Accumulator April 20, 2014, 9:21 am

    @ Paul – Thanks for sharing! I think the advantage a late-starter has is the zeal (powered by impending doom perhaps) to achieve a lot in a small amount of time. I’m probably on a faster trajectory now because I didn’t start until my mid-30s. Though like you am spreading the gospel among the younger generation so hopefully they enjoy a bit more compound interest than we did.

  • 55 Titus Groan May 1, 2014, 11:19 pm

    I think your article ought to include a mention of the antirecycling rules introduced in the Finance Bill of 2006 just in case anyone thinking about recycling their lump sums.

  • 56 The Accumulator May 2, 2014, 6:30 pm

    Yep, that’s mentioned in the last line of the 25% tax free lump sum section. Basically, don’t do it.

  • 57 kc June 19, 2014, 9:59 am

    Is this the most tax efficient way of moving money from the SIPP into ISA and then into living expense account when in retirement? Note the SIPP is closed to further input to preserve threshold.
    Each year crystallise enough of the SIPP into 25% tax free sum to feed ISA contribution limit(£11800). Top up state and defined benefit pension from ISA dividend income or sale of stock.

    The reasoning behind this is to reduce income tax as pension income is taxable but ISA income is not. This method may not be as tax efficient if IHT is involved as ISA is part of estate but SIPP is not. So should the ISA be run down and not deplete uncrystallised SIPP? Then, only when ISA is empty, start taking SIPP tax free , and then when all is crystallised start drawdown.

  • 58 LangJohnnyMore July 16, 2014, 3:15 pm

    Re SIPP versus ISA: I agree with some of the comments above, that if you are a higher rate tax payer at present and (like the vast majority of higher rate payers) will not be paying higher tax in retirement then a SIPP seems like a no brainer.

    One way to look at it would be from the perspective of the LOSS-AVERSE. That is, how much would the market have to fall before you had lost money (in the examples that follow I am keeping things simple i,e., ignoring inflation, dividends etc).

    For example, if you have put 10K into a SIPP then it has cost you 6K. Only if the market falls by 30% would you have lost money. That is, if the value of your investment fell to £7050 then, if you took that money as pension, you get back your original 6K after paying 15% tax (not 20% tax as you have 25% tax free). Of course if someone is loss-averse then they wouldn’t have all the 10K in equities in any case. If they had 50% in gilts then you can assume that portion is safe. The equity market can fall by 60% (!!) before you start to lose your initial investment (and in both scenarios if there is a big drop you can hopefully wait a year or two for it to recover). In contrast, with an ISA, if there is ANY drop in the market you have lost money.

    In other words the SIPP gives the loss-averse the opportunity to invest and hopefully see growth with very little anxious hand-wringing?

  • 59 Sam February 19, 2015, 5:20 pm

    @mraccumulator I’m 24 and new to investing and your site has been extremely helpful in helping me get started. I’ve recently opened a stocks and shares isa and have been thinking of starting a sipp, but I’m aware that only one can be tax free. Would it make sense to have both or am I better off just sticking to what I have now?

  • 60 The Accumulator February 19, 2015, 5:49 pm

    Hi Sam, they both contain some element of tax shielding. You’ll already have paid income tax on contributions to your ISA but it will then grow without further clawbacks from the taxman. A SIPP contribution will attract tax relief and grow without interference but you’ll be liable for income tax on it when you finally drawdown. A SIPP is the superior vehicle if you intend to retire at a relatively conventional time of life. But at your age you might value being able to access funds for big-ticket items like house purchases?

  • 61 novision March 11, 2015, 11:57 am

    When you put money into a SIPP doesn’t the provider credit you with the 20% tax whilst you get the higher rate back through your tax return refund? So that is tax free cash that you don’t actually have to invest? (Though of course in that case you would not have the 6k grossed up to a 10k pot only 7.5k)

  • 62 The Accumulator March 12, 2015, 1:39 pm

    Hi, in both cases it is credited to you as cash and needs investing. You still get to decide where the money goes. At least that’s my experience.

  • 63 Finance Zombie April 14, 2015, 3:08 pm

    Thanks for the update. Very comprehensive 🙂

    I think the IHT implications are something that are easily overlooked.

    The suspicious part of me will invest in both ISA and pension vehicles, a paranoid diversification if you will. 🙂 The fear of retirement age being raised to 65+ is too strong!

    Also, I hope to retire before 55 so need something in an ISA to ‘bridge the gap’. But like you mention in the article, the temptation to take money out will always be there.

    I think that the pension vehicle wins hands down from a purely financial point of view post ‘retirement age’ but the ISA for flexibility.

    Mr Z

  • 64 TT April 14, 2015, 5:39 pm

    As someone who maxes out both ISA and SIPP but already has more than £262500 in a SIPP I am skeptical of the utility of adding to it. As a limited company owner/contractor making 200k/year I can pay myself additional monies at 28% net tax (20% CT then 10% remainder through ER). With the 25% TFLS The net benefit is a 18% relief but at the risk of negative pension changes between now and when I die which could be 50 years. My situation isn’t as uncommon as you may think. For me the key question is what premium I place on locking my money up for decades and it’s probably just about 15%. So pretty much any change to pension legislation on the downside would see me not contributing any further.

  • 65 The Investor April 14, 2015, 7:16 pm

    @TT — Thanks for sharing your comments. 🙂 However I must say I am not a huge fan of the all-pervasive use of undeclared initials that we see in the personal finance community. For the benefit of other readers, CT=corporation tax I believe, and TFLS = tax free lump sum. I have no idea what ER is, but I may be being slow.

    Lock-ups and restrictions have always been the downside of pensions, but I’d say things have got dramatically better in the past few years. Of course that may have just set the stage for a reversal!

    Very high earners are likely to need to get more creative in the years ahead anyway, with even the Conservatives talking about limiting relief further for the highest rate taxpayers.

  • 66 Steve R April 14, 2015, 8:27 pm

    ER=Early Retirement, surely?

  • 67 Steve R April 14, 2015, 8:28 pm

    But obviously not in this context. Sorry.

  • 68 Steve R April 14, 2015, 8:35 pm

    And to actually make a more relevant comment…

    I’m a higher rate taxpayer but I intend to retire in my early 40s so I’m trying to strike a balance between SIPP, ISA contributions and mortgage repayments. I’ve been doing what I can to get funds into my SIPP before the reliefs are cut; when/if they go, I’ll probably redirect more funds away from the SIPP and towards the mortgage repayments (I’m already maxing out the ISA). While it would sting, I’d much rather lose the 25% tax-free lump sum than the higher rate tax relief, as with a bit of ISA-derived income I expect my annual SIPP drawdown to be no more than the tax free personal allowance anyway. I guess that’s not on the cards though; I suspect axing the TFLS would be political suicide, whereas the higher rate relief can be portrayed as taking tax breaks away from the higher earners who aren’t currently “paying their share” (TM)(R). But I probably should try to be more optimistic, and at the very least not worry about it, since it’s outside my circle of control…

  • 69 TT April 14, 2015, 9:42 pm

    ER == Entrepreneurs Relief. Sorry!
    And great article.

  • 70 dearieme April 14, 2015, 10:01 pm

    Is the basic rate of income tax going to stay as low as 20% indefinitely? If it goes back up then pensions become less attractive. I see that the Conservatives plan to reduce the annual allowance for the seriously well-paid: that suggests to me that they don’t plan to reduce the tax relief from 45% (or 40% either).

    The public finances still have the mark of Brown on them; none of the parties give any sense that they will seriously reduce the size of the state. So taxes will go up.

  • 71 The Investor April 14, 2015, 11:35 pm

    @TT — Cheers for the clarification. However I don’t understand how Entrepreneur’s Relief is factoring in here? As I understand it that’s a special rate of capital gains tax that’s payable on the disposal of shares in a company you own. It’s not an income tax rate (and also it’s 10% not 8%?)

    Are you doing something exotic like capitalizing excess cash every year to expand the shareholder equity and then selling down a percentage of the enlarged capital? (I’m fishing here, I have no idea if that’s possible/workable). Genuinely curious!

  • 72 TT April 15, 2015, 8:10 am

    @TI: Many if not most high earners or providers of in demand services, such as doctors, IT consultants, sportspersons, financial analysts, and architects provide their services through limited companies that they have incorporated and are major shareholders of. They do this for a variety of reasons beyond tax efficiency such as smoothing cash flow through sporadic or volatile demand, building a name or reputation, buyer requirements, family business construction, and hopes of expanding. It’s not just high earners, mom and pop newsagents, grocers, nurses, hairdressers do the same.

    Tax efficiency means that once salary and dividends up to the higher rate of tax have been withdrawn and pension paid to the limit of the day there are retained funds. This is good news as the following years emploment may be fallow. But if times are good you may build up a 6 or 7 figure war chest. Your company will have paid 20% CT on these earnings. One can extract further dividends at an effective 25% tax.

    A time comes when you wish to retire or semi retire, or go back to Working For The Man, or enter into a different field or sector. You may voluntary liquidate the company, or dispose of it in other ways, and be subject to a 10% ER tax on the sum, which is effectively a capital gain. So £100 retained is subject to 20% CT becoming £80 and then 10% ER becoming £72.

    This may seem off topic but the point is that pulling a lever makes the financial machine behave differently yet politicians almost always bank straight linear savings without acknowledging people will move to other tax efficient strategies if one is rendered less efficient through legislation. In this case of pensions, my view is any change will hit middle income earners (40-100k) more than higher earners as they are less well positioned to structure tax efficient withdrawal. It could also push many of those who are high earners from a PAYE perspective into limited company ownership. That’s no bad thing.

  • 73 The Investor April 15, 2015, 8:36 am

    @TT — Got you, thanks for the long explanation. I run a Limited Company myself so am familiar with the basics of tax planning and so forth, but I hadn’t ever considered retaining sufficient funds in place to really consider Entrepreneur’s Relief (which I have had a run-in with in a previous incarnation 🙂 ) as a viable option. I’m still curious as to how HMRC would treat this, especially in the absence of a sale, but no doubt you’ve done your research. Personally I might consider it perhaps if cash was paying any reasonable rate of return, but I think in the current climate I’d rather get the cash out and take the tax hit and get it invested. Investing is my thing though…

    I do wonder whether Entrepreneur’s Relief is any less liable to future fiddling than pension reliefs and so forth?

    Fully agree about the endless short-sighted fiddling with the tax system. I’d realize a six-figure capital gain this year if they’d kept capital gains tax at 10% (and perhaps something closer if taper relief remained in place) but I’m gently defusing instead faced with 28%!

    Cheers again for your input.

  • 74 Lena April 15, 2015, 8:20 pm

    Excellent reminder to keep both ISAs and SIPPs in the pension pot. But I am increasingly worried about the changes to private pension access age proposed in small print, amidst all the other eye-catching ‘pension freedom’ tunes. I am inclined to progressively reduce my SIPP contributions and rake up the ISA bit to maximum possible levels.

  • 75 Naeclue April 15, 2015, 11:23 pm

    Entrepreneur’s Relief is only available for “Trading Companies”. Keep more cash in your ltd co than HMRC thinks is reasonable (typically if more than 20% of assets are non-trading assets) and they will say you are not a trading company – bang goes ER and in comes higher rate corporation tax (probably not relevant any more though now that the main CT rate has dropped to 20%).

  • 76 Steve April 16, 2015, 2:01 pm

    Whilst I agree overwhelmingly that on a purely financial basis pensions make the most sense, the recently published ‘freedoms’ are misleading for anyone aged below 50. This article published this week sets out some pretty frightening scenarios in terms of changes to the permitted age to access retirement funds.


    Many people like myself in their 30s and 40s would favour pensions over ISAs for the reasons given in your excellent article if we knew 100% that we could access the funds at 55 (or even 58 is it will be for me based on current legislation). However if this age threshold starts creeping towards mid-high 60s or (god-forbid) 70, as I believe it is very likely to then this is yet another game changer. Personally, and very frustratingly, the only approach I feel comfortable taking is to use a balance of SIPP and ISA, on the most tax-efficient basis between myself and my wife.

  • 77 misfit April 19, 2015, 10:59 pm

    Lately I have found a couple of good benefits to pensions and in particular stakeholder pensions. I have found that my income is a little more infrequent than it was last year but as I have been in the scheme for longer than 10 years my charges are now capped at 1% and there is no commitment to pay in each month so I can stop paying when I am unable with no extra costs. My pension may be a little more simple and limited compared to a SIPP but for someone in my situation a stakeholder has proven beneficial. I did a little analysis on this as Aegon wanted me to transfer to a SIPP but the charges looked they could mount up and with intermittent income higher charges do not appeal to me so I would rather trade off lower charges with fewer funds to choose from. I would also say if one can afford it a mix of ISA and pension is the best solution but for someone serious about their retirement a pension is still the only way to go in my opinion. No matter how desperate I get I can not dip into my pension so I know in the future there will be some pension for me and that is what counts at a time when many are not even paying into a pension.

  • 78 rob April 27, 2015, 8:10 am

    “Accessing your money whenever you damn well please is the inarguable advantage that ISAs have over SIPPs and other forms of pension scheme.”
    If you like: I was always very bad with money, easily tempted by the best a consumer society had to offer. Over the years, my attempts at saving in ISAs were always eventually over-ruled by the ‘need’ (as I convinced myself at the time) to spend, usually at the BMW shop. The big, big, advantage for me of pensions, is that you cannot – could not – access your money. They save you from your own folly.

  • 79 Tom June 7, 2015, 3:53 am

    “pension income recycling” – Is this still correct (@6/2015)?

    “If you’re still working then you can put the lower of your annual earnings or £10,000 into your new pension. ”

    I work parttime (~8kpa), and have in previous years contributed much of it to a stakeholder pension (and had the contribution grossed up). Shortly I will, additionally, be in receipt of a civil service pension (~9kpa). I have been told by the pension provider that the 9kpa is ‘not pensionable’. So if I reduce the parttime work, as I had intended, I cannot substitute the CS pension money to contribute to the SH and get it grossed up. Hence recycling doesn’t actually work.. or does someone know better?

  • 80 Dan June 16, 2015, 10:54 pm

    I have an Interest only mortgage of about £250,000 and am currently paying capital such that it should be clear when I plan to retire in about 9 years. (I’m 52). I’m thinking of stopping the capital repayments and instead investing in ISA’s for my wife and myself and use this to pay the capital in larger lumps or in total later. This would seem sensible whilst mortgage rates are so low (1.3%)?

    With recent changes to pensions I’m also thinking that it would be more tax efficient (I’m paying 40% tax) to invest the money from mortgage capital repayments into a SIPP saving the 40%. The intention would then be to use draw downs from the SIPP to pay the mortgage capital over say 5 years.

    Assuming the rules don’t change and I can still draw down say £50,000 a year in 9 years time, get 25% of this tax free and then pay income tax (of about 30%) on pension and drawdown from SIPP (£25,000 + £37,500 = £62,500). I think this probably works out more beneficial than an ISA. However my brain hurts! Aside from assuming that I’ll still be able to draw down the money in 9 years am I missing something obvious?

  • 81 Chris July 22, 2015, 2:40 pm

    Hi @Monevator

    Thanks for the blog, I have been reading it since the start of this year and its been really useful. I’m 26 and started to get into investing at the end of last year.

    I have a question which I hope people can help with. I am trying to advise my dad with what to put his money into. He is 56 and has a good public service pension which he has been receiving for the past 4 years. He tops this up with some freelance work which provides a decent annual income, perhaps working 3 days a week for approximately 9 months of the year.

    Should I be recommending him to save into an ISA or a SIPP. I noticed you mention about beyond 75, but wasn’t entirely sure what this was in reference to and if it may impact him?

    Any help would be much appreciated!

  • 82 taccumulator July 22, 2015, 4:04 pm

    Hi Chris,

    Scroll down to the tax-at-a-glance table here to see what happens post-age 75. https://www.pensionwise.gov.uk/when-you-die

    Ultimately, the remainder of the pot is taxed at harsher rates if you die after age 75 than before. I don’t think this should be the main concern at this stage.

    Your Dad’s age means he could pay into a SIPP tomorrow, get tax relief and then cash it in the day after and get at least 25% tax free. So even the flexibility benefits of an ISA aren’t really an advantage here.

    The site I linked to above is very good on the basics and you can also get help here: http://www.pensionsadvisoryservice.org.uk/

  • 83 Jimbo September 30, 2015, 4:28 pm

    Who are the best current Sipp providers?

  • 84 The Accumulator October 3, 2015, 6:50 am
  • 85 John October 8, 2015, 4:41 pm

    I wonder if there are any providers that pay out tax free?
    ie hargreaves will deduct your tax before giving you your money.

    Wonder if there are any that could pay out gross?

    Take out one years money then earn interest on it….


  • 86 gadgetmind October 8, 2015, 5:15 pm

    Pension providers have to pay out via a PAYE system, so what you’re after is verboten.

  • 87 gadgetmind October 8, 2015, 5:17 pm

    As a result, if you take out one year’s money in month one, you’ll be taxed on it assuming the X you’ve taken will mean you’ll be earning 12X during the tax year, meaning you could be hit by 40%/60%/45% tax.

  • 88 kc fin October 8, 2015, 7:19 pm

    Can anyone help me decide whether to take some assets out of a SIPP and put them into an ISA, please? There are many parameters to consider but here are my specific ones. I am retired taking a liveable income from state and defined benefit pension to give enough for flexible drawdown >£20k. I have no need yet to drawdown from Sipp as it is there for care later in life . As it is likely care needs will take me over the 40% tax threshold when drawing from SIPP would it be prudent to start taking out from SIPP now to make my total income up to the 40% tax band? SIPP drawdown is taxable (except the 25% chunk) so designing the most tax efficient method is critical. The ISA fund can then be used to top up income for care effectively tax free over the 40% band .

  • 89 gadgetmind October 9, 2015, 9:25 am

    Yes, pensions are a tax play, so taking as much as you can but avoiding the higher tax bands is worthwhile. I plan to hit my SIPP as hard as I can before state pension kicks in to make best use of personal allowance and 20% band. You probably want to use UFPLS rather than drawdown, and so take chunks with 25% tax free and 75% taxed, as this avoids having a lot of unwrapped money to find a home for. Build up the ISAs and use these ISA funds last.

  • 90 kc fin October 9, 2015, 10:22 am

    About 5 years ago I was advised by my pensions adviser to use up the ISA first as this is part of my estate, whereas the SIPP is not as it is in a trust fund, unless it is crystallised (that is I have taken the 25% or started drawdown). Since I would be subject to IHT if I do not reduce my ISA holding, it is a consideration. The above ruling on IHT still applies, I think. Pension law has changed since that advice, both before and after aged 75, so should I have a different strategy before and after aged 75?

  • 91 gadgetmind October 9, 2015, 10:44 am

    One big change since then is that ISAs can transfer to spouse on death while still in the “wrapper”, which is very handy. I must admit that I haven’t considered using a SIPP as part of my estate planning as we have no DB pensions worth mentioning (2 yr of LGPS for my wife), which means we’ll need to crystalise pretty much immediately. I guess it all depends on how you prioritise between your own needs versus IHT considerations.

  • 92 kc fin October 9, 2015, 11:18 am

    I think the change is not just restricted to spouse, but to any named beneficiary, so could go to children. But is such a transfer of uncrystallised funds still exempt from IHT and outside the estate?
    Even if you do not have enough pension to live on at the moment then whether you use up the ISA first or raid your SIPP still needs to be decided. You also need to think about whether to take all the 25% first or just take small chunks and exhaust each chunk by taking income or a lump sum. Has anyone a spreadsheet which can help? Clearly costs of doing all this will have a bearing since funds will have to be sold and bought and providers will no doubt charge a fee!

  • 93 gadgetmind October 9, 2015, 11:22 am

    I’m pretty sure the “Additional Permitted Subscription” for ISAs is only for spouse or civil partner, but maybe it changed again!

  • 94 kc fin October 9, 2015, 12:20 pm

    The transfer of ISA’s at death using APS is only to spouse/cp so is not subject to IHT anyway, but is then still subject to IHT on death of spouse, although any unsused IHT on first deceased’s death can be claimed.
    My question about IHT is about transfer of pension under the new rules and not about ISA transfer. From HL:
    Prior to April 2015 lump sums were subject to a 55% tax charge if paid from drawdown or after age 75. Pensions are held in trust outside your estate and so continue to be free of inheritance tax (IHT) in most cases. Pension contributions made while in ill health or within two years of death may still be liable to IHT. Tax charges may also apply if you exceed the lifetime allowance and die before age 75.
    Post April 2015 if you die before age 75 the transfer is free of income tax, but with death after age 75 your beneficiary’s lump sum or SIPP income is taxed as income at their marginal band.
    So great news, although the 75 threshold is still there, but it might all change in 2020!
    So with IHT at 40% above £325000 threshold (which I will be way over unless I give half a home away and that is difficult), is it still worth keeping assets wrapped in the SIPP?

  • 95 Jonny January 10, 2016, 2:15 pm

    This is slightly (ok, quite!) off topic, though I’ve now procrastinated over this for a few weeks (erm, months), and so am here in the hope that someone may be able to offer their opinion/thoughts. I’m seriously struggling to make a comparison between the option to make additional contributions to my defined benefit (DB) scheme – for guaranteed extra payments in retirement, or whether to continue contributing the extra to my SIPP (passive, index tracking, Vanguard LifeStrategy). I already contribute to the scheme, so do have some security/certainty at retirement – this is for extra contributions to make up for the fact that I’ve been later than I should have starting to save towards a pension.

    Using approximate figures, the option is to pay £200 gross (so £160 net based on being a basic rate tax payer) per month for the next 31.5 years to receive a guaranteed lump sum of £6,200 and annual payments of £2,100. The monthly payment into the scheme would be fixed (and assumed to last until I’m 65), and the lump sum and annuity payments index linked. There’s also 50% ongoing benefit for my wife once I leave this earth, thrown in for good measure.

    However, plugging the figures into the HL calculator, assuming a (realistic?) 5% annual growth, 1% annual charge, 50% spouse pension, and 3% annual increase to annuity payment (to match the inflation linking), *could* give me a £6,610 lump sum payment, and annual income of £2,440 (or approx 16% more).

    Whilst this seems to make the SIPP more attractive, the HL calculator does assume payments for its calculations will increase 2.5% per annum (which seems to cost me approx £27,000 more over the 30 years). At this point (what with trying to take inflation into account, and trying to look 30 years in the future) I’m starting to get confused!

    Other pros for the SIPP option are:
    I don’t *have* to convert it to an annuity
    I can access it approx 10 years earlier, if early retirement becomes an option (wheras my DB pension will apply actuarial reductions/penalties if retiring earlier – which ultimately I hope to be able to do).

    Though I keep wondering if it’s mad not to be locking in the security of these guaranteed figures that the DB offers.

    Does anyone have any opinions/other ways to consider looking at this, or care to point out anything I may have missed?

  • 96 kc-fin January 10, 2016, 7:48 pm

    Pensions have to be chosen based on your personal circumstances. Any vehicle you choose to provide your pension has risks, both external from legislation and internal from the investment growth and demands on the scheme. Most would choose the DB scheme but that can be affected greatly by the associated company and trustee performance. Companies die and the DB scheme has no earners to pay the pension so trustees can find it difficult to meet pensioners expectations. SIPPs can suffer from all manner of failures such as your meddling, high fees and poor performance of the investments. Can you do better than the professionals running the DB scheme? Personally, and I mean personally, I retired with a good DBP but also had a good SIPP fund. Put your eggs in both baskets. But my success was because of planning my pension goals when I was 50, reviewing every couple of years, prompt action as legislation and personal circumstances changed and doing a lot of research with friends.

  • 97 Teddy July 28, 2016, 4:28 pm

    Hi TA et al,

    OK, I haven’t read all 96 comments above!, so my answer may be there…so apologies if this is the case, but here goes. You state 55 or above as the accessible age for private pensions (SIPP’s?), yet my company pension states the same age as the state pension (67 for me), so:-

    1. Does this mean that I could move additional tax-free salary contributions into a private pension/SIPP rather than my company one (DC part) to get at these contributions/money 12 years earlier?

    2. Would I be allowed 25% of this SIPP tax-free (I assume the other 75% would be taxed at 20% if I wasn’t working?) AND then get 25% of my company pension tax-free when I reach 67?

    3. Is there a minimum time/contributions value per year for SIPP’s…otherwise what would stop people from stashing lots of tax-free contributions say 2-3 years (at 52-53) before early retirement?

    I must have this completely wrong as it sound ‘too good to be true’…if not, any good site/information that I can look at so that I can get this started!

    Thanks for your comments.

  • 98 gadgetmind July 28, 2016, 6:18 pm


    1. As far as I am aware, you can access any DC pension at 55, even a company one. You may need to transfer it elsewhere as some providers are pants. Some providers also get sniffy about you “crystalizing” (official term) your pension and then continuing to contribute.

    You can run another pension alongside (and for historical reasons I do) but make sure you can the max from your employer into your company one, which usually requires some contributions from you.

    2. You can take 25% tax free as a PCLS (Pension Commencement Lump Sum) from a DC pension. You don’t have to take the other 75% at the same time and can go into drawdown while drawing zero every year.

    3. There is no minimum period for a SIPP or Personal Pension though some providers charge higher fees if you exit in one to two years. You also need to watch the “recycling” rules that try and prevent you taking a 25% lump sum and then using this to fund more pension contributions.

    Lots of info around. Perhaps key to understand is that DC pensions, Money Purchase, Personal Pension and SIPPs all work *very* much the same way as do AVCs (but I don’t know much about these). People talk about SIPPs as being something magical, and some do let you hold assets that you can’t hold elsewhere, but the vast majority are just personal pensions in all but name.

  • 99 Teddy July 30, 2016, 1:08 pm

    Thanks Gadgetmind for you thorough reply, it has really helped me to ‘put the jigsaw pieces together’. Just a few additional questions if I may:-

    1. In regard to point 1 above, I am getting a bit confused. My pension has both a DB section and a DC section:-


    Basically it is a DB pension (with a 3x final salary lump sum) and a threshold of £55k where if you go over that % of your salary, it then goes into a DC scheme; this is not the case for me BUT although I am under the £55k I can also choose to put additional contributions into the DC part (and so benefit from its tax-free status), SO

    a) Does this mean that I could access the DC part from 55 if I want to, but have to wait until 67 for the DB part if I don’t want to incur a penalty (4% p each year before 67) …even if I retire early and the pension becomes a deferred pension?

    b) From what I can see, the DC part is the same as an ‘external’ SIPP using a vehicle such as a FTSE100 type index fund, so would I be better just putting contributions in to this rather than setting up another ‘external’ one?…How do the charges compare (see p18) to say what people are currently using?

    2) If I can take the DC part at 55, then will I be able to take 25% of the DC funds (0f my whole pension sum at that time) tax-free AND then take a 25% tax-free sum of the DB/lump-sum payment that I have accrued when I have access to that part at 67?

    Hopefully I have explained this all clearly?

    I would value others thoughts on the pension scheme as well…My view is that although it is not as good as it was (it recently changed by adding the £55k threshold and so limiting the DB on the FS and moving some of that ‘risk’ to those above this threshold by putting these funds into DC), it is still half-decent being partly DB.

    Others thoughts/comments?

  • 100 A Different Richard July 30, 2016, 3:48 pm


    You’re heading towards asking us to give you personal financial advice which we’re not authorised to do. So please don’t treat these comments as if they are such advice.

    From what you’ve said you’re getting DB benefits on your full salary (as you earn less than £55k) but you can put extra contributions (no employer’s matching?) into a DC scheme.

    As I said in the other thread there are quite complex rules about working out what the total contribution is to a live DB scheme and comparing it to the Annual Allowance (£40k, but you can bring forward unused allowances from the past three years). The main valuation tripwire is if you get a good pay rise as the value of your DB scheme will rise significantly and that rise is deemed a contribution to the scheme. If this is / is likely to be the case I’d ask your employer’s pension scheme for advice. Given what you’ve said it’s unlikely to be a problem unless you get a serious pay rise and are also making significant contributions to the DC scheme / SIPP.

    If the DC part of the scheme is totally separate from the DB part (I’ve not read your linked document) then I see no reason why you should not use a SIPP instead for any of these extra contributions. But equally, why bother? That’s slightly rhetorical. If the DC element of the scheme is totally separate then you may wish to derisk and have greater flexibility by opening a standalone SIPP. Charges might be lower.

    Finally when looking at pensions, it might be an idea to see what pension contribution you would have to make to fully extinguish your higher-rate tax liability (if you’re a higher-rate taxpayer). Pensions can still be good for basic rate taxpayers – both for the 25% tax free element and especially if you’re going to retire early and use the pension (post-55, but before your state and DB pensions kick in at 67) as your main source of income as you will have the personal allowance to use up. If you have no other income then you can draw about £15k a year tax free from a DC pension / SIPP. But things are even better if you’re getting 40% tax relief up-front…

    If the DB and DC schemes are totally separate and if the scheme rules (you may wish to check) are “normal” then, yes, you can take your DB lump sum at 67 (or earlier with a reduction) and take 25% tax free from your DC scheme (at 55 or any time later, or bit by bit over a number of years). Some DB scheme insist you have a lump sum. Some allow you to commute between lump sum and annuity, and some have no lump sum at all.

    Pensions are an area where general comments (such as mine) are no substitute for really understanding what your actual pension scheme(s) offer. Your DB scheme should send you an annual statement setting out exactly how it all works. If not, I’d certainly ask them.

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