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 If I were to open a S&S ISA instead is that basically as tax efficient because it is taxed at source but can be withdrawn tax-free?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!

@IKnowWhatImHereFor Yes, I'll have to do a self assessment to get the other 20% wont I? I assumed it would be £3000 +£600 (20%) added to the fund and then reclaim a further 20% as a tax refund?

I have 20-25yrs, so even if I play it safe I'll hopefully have some nice compound growth👏

@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😑

My DB pension was also reduced by taking it so early but I had always intended retiring at 60 anyway and when I checked the figures (our scheme had a calculator so you could compare TFLS & annual pension amounts, retirement dates, AVC's etc) and there was so little difference by taking it at 57 that it did not make sense to stay another 3yrs.

Yes, of course the pension will be more the longer you are working, adding service & paying in but I was also very aware of what those 10yrs could be like for us (OH & me). Luckily my pension was very good (in part due to the additional payments I had been making from my early 40's) so I was in a position to do this.

By thinking about it now, you are also in a very good position due to your age and awareness that YOU need to make decisions for YOUR future.👍

@Nourishinghandcream yes, certainly food for thought. I have read there's a kind of sweet spot (like you mention) where it makes sense to get out of there and take the payment, rather than keep paying in all those years or deferring it. I guess that could become more apparent to me over time and as I learn more. I find it all very interesting and glad I've figured some of it out now, so I can keep my options open.

You're in an excellent position, well done!

Firstly put what you need to into a Sipp to get the 40% tax relief. That extra relief Vs. 20% basic rate tax relief is huge and you should take the free money.

Secondly I would strongly advise you keep a portion of your savings in an ISA, it will give you options as you get older. Retirement is still 20 years away for you and a lot can change in that time. It will be good to have the ISA for:
Kids
Buying a home
Up sizing a home
Renovationg a home
The holiday of a lifetime
Private health procedure if you cant get what you need from the NHS.
Sending kids to uni
Sending kids to private school
Contributing to a house for kids
Helping to find a decent care home for an elderly parent

Also consider what retirement means to you. Is it giving up work entirely? In which case you need to fund a comfortavke lifestyle purely from pension and ISA.
Or is it downsizing your career? Eg consulting 2 days a week, or moving to a fun job part time hours only ?

Remember you are likely to be retired for at least 30 years and you have to keep yourself occupied somehow!

Again, having both Sipp and ISA gives you options when you "retire" early.

When I looked into this, for a basic rate tax payer the SIPP would have ended up giving you back 6.25% more overall as you got 25% added going in (put in £80 and you get £20 tax relief added) and taxed at 20% coming out after you take your tax free lump sum. But you are restricted because you can’t take it until 57, which will probably continue to rise in line with state pension age (tracking 10 years below state pension) and also it might push you into the higher rate tax bracket if you take it while still earning some income from other sources.

I’m in my 40’s but I made the decision to split my investments for retirement in favour of S&S ISA, putting double into my S&S ISA compared to what I put in my SIPP. I also will have a DB pension, similar to the NHS pension.

I use Hargreaves Lansdown because I like having separate drawdown and Sipp pots rather than the notional split used by most companies. I have different investments in each. Only HL and Fidelity use separate pots.
DH has an AJ bell Sipp,
they do use notional split but when he takes his 25% tax free sum in one go it won’t matter because the remainder will be fully crystalised and he’s no longer contributing to that Sipp.

I’m in the fortunate position of being able to empty my Sipp completely Tax free over the next 7 years and reinvest the cash in my S+S ISA.