SIPP or Stocks and Shares ISA for retiring a bit earlier

[StickOrTwisto]

SIPP or S&S ISA...

I earn £56,515/yr and pay 10.9% into my NHS pension. This brings me back close to the basic rate tax bracket.

I have a second income around £2000-3000/yr. I'd like to save or invest this each year to allow me to retire a little earlier that SPA.

Anyhow, on to my Q. Contributions to a SIPP will give me basic rate tax relief on my second income. But I can't access the money until 57 earliest. If I were to open a S&S ISA instead is that basically as tax efficient because it is taxed at source but can be withdrawn tax-free? Whereas I can only access the SIPP funds 25% tax free... grateful for any opinions!

Personally I would contribute enough into a pension first to get you below the 40% tax bracket, after that add to stocks and shares ISA. If this is for retirement, I wouldn't worry about the age point.

How old are you? If you’re under 40 I would set up an S&S LISA while you still can and get a 25% bonus added from the government. Caveats that you can only contribute to it til age 50, and only access the money from age 60. But will be entirely tax free on withdrawal too.

Also depends how much earlier you want to retire. The SIPP is likely the better financial choice, as the tax relief you’ll get will also compound for however many years until you want to take it out, but ISA would have more flexibility.

Oh yes, forgot to mention that. I'll be saving the max £4k into a S&S LISA as well. I'm 34 now.

I'd love to retire at 55. 57 might be more realistic. But either way I'd need a not of accessible cash to get me to SPA 😅

It's an interesting conundrum. I've just plugged some figures into excel, £3k/year, tax rate 20%, growth 5%, tax free. It looks like the sipp would be the better option but not by much, approx £9k after 25 years, I've not factored in continuing growth after 25 years, assuming you're not taking it all out at once. I've made a lot of assumptions (and I'm not sure I've got it right) but it does show the wonder of compound interest, if you get more than 5% the sipp is definitely better, but as you know the restrictions on when you can access the money are a limitation.

Are you not a higher tax rate payer?

You should be paying 40% on your extra income (2-3k), so it would make more financial sense to put it in a SIPP so you can claim the 40% tax back.

You'll need some in an Isa too if you want to retire at 55. How much you put in each depends on if you expect to pay less tax in retirement.

No, an ISA isn’t the same as a SIPP if you want to use it to fund the years between 57 and retirement. You’ll be able to use your personal tax allowance when you withdraw it, so that’s a significant amount that will be tax free - not just the 25%.

Under current tax rules you can withdraw £16,760 tax free each year. That’s £4190 tax free because you get 25% tax free, and the remaining £12,750 tax free because it’s your personal allowance.

It’s a difficult one and interesting that in pp calcs the SIPP isn’t hugely better. Also important to note that they could change the 25% tax free amount at any point and the age it can be taken. ISA more
flexible.

Hi OP

Surely if you are 34 your SPA is 68, so you wouldn't be able to access a Sipp until 58? A S&S ISA in addition to your Sipp is a good idea and will give you additional flexibility. £3k into a S&S ISA for 20 years with average returns would give you (real terms) about £100k, which would presumably help bridge the gap.

That said, surely your additional income is going to be taxable at higher rate rather than basic rate?

Thank you all. This is very helpful. I really just wanted a sounding board to help me make up my mind, so this is all really useful.

I haven't been a higher rate tax payer until this year, with my pay increase. That's why I'm figuring out the best way to use my taz allowances. I don't want to be paying 40% tax on my side job if it can be helped.

I'm leaning towards the SIPP for the tax relief element... but does anyone know, do I get the 40% relief or basic rate? I am unsure as my 10.9% paid into my NHS pension brings me right down to the basic rate threshold. And the SIPP would be deducted from a figure around the £50,270 mark (hope that makes sense).

Not familiar with the NHS pension but can you increase your pension contributions or pay AVC's at source to bring you down into the lower tax bracket?
I did this for years and it really worked for me.

After that, I am team pension and would set up a private scheme which will also have tax benefits.

@nourishinghandcream you can buy additional pension or AVCs but I have decided against them as they're linked to SPA and I want to go earlier. Please weigh in if I've overlooked something in that avenue.

@4yearstogo yes I see SIPP access is rising to 57 in 2028. I suspect it will jump another few years by the time I'm ready to retire, so something else to think about. I mean I could probably work part time to get me to 60 if I have to 😅Also, yes I want to avoid 40% tax on my additional income. So want to balance the figures and make it worthwhile.

Sipp wins every time.
When retired ( before State pension kicks in) you can draw your whole personal allowance PLUS tax free income on the top.
At the moment that equates to almost £17k a year Tax Free.
I (60) currently draw down my available personal allowance of just under £5k ( I earn £7k pt time) plus a tax free lump sum of £1500 which all goes into an ISA.
I also put my salary into my Sipp, £5600 gets made up to £7000 with the tax relief. A 40% tax payer would also get a £1400 tax refund.
Once I stop being employed next year I will continue to pay £2880 into my Sipp to get £750 tax relief on top.

That's fantastic @BorgQueen

What SIPP providers are people using now? I see Investengine is fee free.. what's the catch? 🤔

Are you planning on not declaring your extra income. This is taxable at the higher rate:

Salary: £56,515 + £3,000 = £59,515
Pension (10.9%) to £56,515 = ~£6,160

• £59,515 − £6,160 ≈ £53,355 taxable income

Compare to threshold

• Higher-rate threshold: £50,270
• Amount above it: ~£3,085

State Pension age review - GOV.UK

68 is already on the cards.

Sipp wins every time.

Not if you're 55 and can't access it! OP needs to think about flexibility, not just tax efficiency. Ideally she'd have both.

@iknowwhatimherefor of course I'm declaring it. Hence needing to work this out.

Sorry, just a bit confused by this:

'And the SIPP would be deducted from a figure around the £50,270 mark (hope that makes sense).'

I retired from the NHS at 59, as a dentist we had our own version of NHS pension which has always been CARE which is the same as the current 2015 but with the benefit of lump sum and retirement at 50 ( with reduction).
I still work one day a week in the private sector which puts me into the 40%. Most of my private earnings are going into a SIPP. I have a large chunk of savings so effectively I’m just transferring into a more tax effective way of saving but you can only do this if you are working.
I plan to give up totally in a couple of years, when DS finishes uni. Then bridge the gap to when I can claim SP using a draw down pension.
Currently the SIPP is returning about 7%.
DH has a small draw down pension that has been performing well since he retired. Despite drawing down his tax free allowance annually (£12570) his invested pot hasn’t changed much. So the investment is covering the pension he is drawing down. Again, he is using it until he hits SP age in 3 yrs then will probably just leave it to pass on to DS in inheritance.
My NHS pension provides a comfortable income and with SP it will take me into 40% tax band, so we really don’t need for DH to draw more than SP but he will have his SIPP in case we need a lump sum in the future for emergencies. It will be a decent deposit for a house if DS needs it. Or for care in our old age.
SIPPs may lock in your money but you could split your extra income between an ISA and SIPPs to allow you to retire early and then have two sources of income.

One thing to point out if you take your NHS pension early it will be reduced and it could be significant if you go at 57. My retirement age was 60 and I took pension 10 months early. My pension was reduced by 3% . You need to see an independent financial advisor who is knowledgeable about NHS pensions. They can work out the optimal age of retirement where the reduction means you are not losing out.

A lot of NHS staff are currently taking advantage of the changes to the NHS pension scheme, many can take full pension at 55 because they have special status. To have special status you would have needed to have started working for NHS before 1995. It doesn’t apply to the 2015 pension scheme.

Retiring at 57 would mean your pension will be reduced by 40% to account for the extra 10yrs it will be paid to you.

@iknowwhatimherefor the 10.9% only applies to my NHS wage of £56,515 and once that's deducted I'm down to £50,355 taxable pay plus my extra income.

I can see what you mean though... I'm above the £50,270 threshold even after my NHS pension is deuducted, so should attract the 40% tax relief on my extra income when added to a SIPP.

you can buy additional pension or AVCs but I have decided against them as they're linked to SPA and I want to go earlier. Please weigh in if I've overlooked something in that avenue.

That's a shame.☹️
I bought them to increase the value of my (non-NHS) DB pension and I used them to increase my pension benefits when I took my pension at 57.

Yes!
Any money you add to your SIPP will attract 40% tax relief. It's a very attractive offer. There are limits to how much you can add though, and your nhs pension is part of this contribution.

I add the maximum amount to my SIPP each year (my overall pension allowance is 60k for me, yours will be ~ 53k). Because my nhs pension contributions are part of this 60k i have to request my PIA from nhs pensions each year and deduct this from my 60k allowance. I then go online and claim the extra 20% tax relief back from hmrc each year - Claim tax relief on your private pension payments - GOV.UK.

If you are only paying small amounts into your SIPP you should be fine and won't need your PIA from nhs pensions which, based on mine, I would estimate to be about 20k ish per annum. So you still have 33k to play with, that's after the 20% tax relief has been added. So, if you want to add more than your extra income into you SIPP you should/can.

I just stick mine in a global fund with Vanguard. There's probably a cheaper platform, but I'm used to the interface to manage my SIPP, ISA and GIA.

@crwysmam that's great- love to see people doing well.

@Nourishinghandcream I mean I could still do this route, but I'd have to take a hit with the actuarial reduction if I left at 55-57😑

I also looked at increasing my nhs pension contributions but decided against it for the same reason as you.

@iknowwhatimherefor thank you for these real figures- so helpful. I had read about pension input amounts and wasn't sure what kind of ballpark wages people would be on/ contributions they'd be making to their workplace pensions to trigger that threshold. I think I'd be well within the limits by annually adding £3000+ tax relief.

Be aware that higher rate relief is something you get, it is not automatically added to the fund like the basic rate relief. So the amount of money you've got goes up, but if you put £3k in the fund, it is still only increased by £750. I think the real answer is dependent on what access you have to other funds, if your circumstances change, but full marks and a gold star for thinking about pension planning when you're still young enough for it to make a difference.