retirement, SIPP and ISA

Just started working and need to get straight some stuff about saving for eventual retirement, Besides the basic state pension, it appears to be required to also have a second source of savings for retirements--it can be a second state pension, company scheme or a private pension plan--my choice is the latter, more precisely SIPP. Are you allowed to put your pension savings in an ISA instead of an SIPP? I understand that either an ISA or an SIPP will let you manage your own investments if you wish, and they differ mainly in how they're treated for taxation. Am I correct that:
-with an SIPP, the *total* sum will be taxed (at your rate when you retire) when you draw on it for your pension, and 25% of it will be tax free?
-with an ISA, all money paid in will already have been taxed at your current income tax rate; and all interest earned on that sum afterwards are tax free?
I think I just got it clear but I'm not sure. In any case if it's required to have an SIPP that means I must save at least some in an SIPP? Otherwise to me an ISA seems simpler.
Seb
Reply to
silicono2

Hmm - a (very) simple view to start with:
An ISA can be self select - where you pick the investements or it can be a unit/investment trust where a manager makes the detailed decisions for you (and charges you), you have to pick a vague area to invest in.
Pension savings - can be self select - SIPP or via a fund. (pretty much as above).
The future tax treatment of both ISA's and pensions is not guaranteed (especially not the tax-free lump sum).
Pensions you cannot get to until you are 55 (50 currently rising til 2010) ISA's you can cash in tomorrow and blow the lot on a nice young lady. (pro's and con's to both)
ISA's are taxed on the way in Pensions are taxed on the way out.
Pensions win if you pay 40% income tax (IMO) otherwise the decision is not so clear cut.
Reply to
Miss L. Toe
In message , Miss L. Toe writes
on the way in but expect to pay a lower rate on the way out, the trouble is once you have committed to the pension it cant be got out even if you end up paying 40% on the way out. Additionally, income from a pension counts against age allowance (increasing the tax penalty) and other benefits.
I reckon by maximising ISA allowances your post retirement wont be 'income' as far as the govt is concerned and you can draw as much or as little as you want. In addition it wont count towards the lifetime limit.
I would max out the ISA and only use the pension as your secondary defence (IMO) .
Wholeheartedly agree!
Reply to
John Boyle
[snip]
Sort of what I'd been thinking, But not sure if you're actually required to have some sort of pension account, or are you allowed to use only your ISA for your pensions savings?
Seb
Reply to
silicono2
In message , " snipped-for-privacy@yahoo.com" writes
no
no.
Go for an ISA and use it for what you want, just remember its up to you to fund your income in retirement.
Reply to
John Boyle
Or if you dont trust yourself not to dig into it - then put it in a pension fund and be thankful to yourself when you get to 55 that you can retire a few years earlier than you otherwise might.
Reply to
Miss L. Toe
In message , Miss L. Toe writes
Not efficient tax wise if the marginal rate paid is constant and has the added risk of unknown interest raters in the future. Id take the risk of succumbing to temptation.
Reply to
John Boyle
wrote:
The SIPPS that are regularly mentioned as being about the best are Sippdeal, Hargreaves Lansdown and Cavendish Online -
Daytona
Reply to
Daytona

Correct - if you have no other pension you will automatically be in the second state pension (assuming you pay class 1 NI).
Yes but if you don't "contract out" of the second state pension into a recognised company/personal pension scheme then you'll pay the higher NI rate and remain in the SSP.
Yes. Subject to (quite high) annual and lifetime limits.
At the moment...
I'm not sure if you can contract out into a SIPP. However the proposal in the recent white paper was to abolish all contracting out except for salary related company schemes.
Reply to
Andy Pandy

You're very unlikely to pay 40% on the way out unless you paid 40% on the way in also.
True.
Pension age benefits are affected by capital too - so that's unlikely to be a factor.
And if you have ISA savings and become unemployed during your working life, you'll be expected to live off your ISA savings rather than claims means tested benefits. Anything in a proper pension scheme is safe (at least until the age you can draw it - probably 55 if you're under 40 now).
Which at about 1.5 million (IIRC) and increasing with inflation, won't trouble too many people!
Reply to
Andy Pandy

You are required to pay towards the second state pension (through employee/employer NI) if you are an employee (and earn over 5000), unless you "contract out".
Reply to
Andy Pandy
[snip]
That's exactly what I was worried about. With the state pension being the mess it is, I'd rather go out on my own--and I'm reasonably financially literate and have few expensive habits. I'll contract out into an SIPP and try to keep it that was as long as I can...
Seb
Reply to
silicono2
In message , Andy Pandy writes
Thats right.
Thats true, but I would still take my chances with the ISA and at least live to a reasonable standard. If you always took the potential loss of means tested benefits into account you wouldnt save a penny. On the ohter hand it is always worthwhile ensuring your investment is cproperly protected against taxation.
Again true, but if you take into account the nominalised value of an occupational pension scheme in a reasonably well paying job then you get quite close. Take a Hospital consultant for example earning, say £100k NHS salary who works for almost 40 years. Say he has a private practice as well earning, say £100k-£150k. If he took the old Allied Dunbar salesmans advice and maxed out his pensions contributions he would be well over the limit.
Reply to
John Boyle

You can do that by saving via a pension, and also having a flexible mortgage which you pay down. Then you have a buffer of "savings" (which is really a credit line so shouldn't disqualify you from benefits), which you can use to top up benefits.
Taking benefits & tax credits into account when planning finances is just as important as taking tax into account, sometimes more so. But people hardly ever seem to.
Reply to
Andy Pandy
In message , Andy Pandy writes
No, you dont have the same access to a pension as you do an ISA.
That I agree.
Agreed, but maximising the qualification for the benefits often clouds otherwise wise judgement.
Reply to
John Boyle
Andy Pandy wrote
That is very true! I have State pension plus SERPS (which increases it by nearly 70%), and a fairly modest Company Pension, which was fully funded before GB got at dividend tax relief. The S.P. is more than my Company Pension, but I also escaped before Thatcher started devaluing SERPS.
Regarding qualification for means tested benefits, mentioned elsewhere, this implies living a pretty grim existence in retirement. :-(
A worse situation however, is to have just enough income to raise you above the qualification level....
Reply to
Gordon

A good plan may be to pay the flexible mortgage down first, only using a pension to get 40% tax relief during that time, then once the mortgage is paid off, save in a pension. Then you get the best of all worlds.
That gives you a buffer of cash (mortgage overpayments), which you can draw on when you like, which can top up benefits (not disqualify you from them) if you lose your job, and which you don't pay tax on (you save interest instead of earning it). And you get the tax advantages of the pension.
Same with tax - but both should be considered carefully when making investment decisions. Often people make decisions without even looking into the benefits implications.
Reply to
Andy Pandy

pensions...
You are affected by same factors - eg investment performance, changes in tax treatment (eg Gordon's first act - to stop tax credits on dividends for pension funds). Of course if you can do better than the "professionals" (minus their charges), go for it!
Reply to
Andy Pandy

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