The 4% rule and tax efficient investment wrappers

Sounds like a lot right?! Well, not as much as you might think. If you were putting in £1000/month into an index fund, with average annualised returns of 6% (a conservative figure by most funds) and annual costs of 0.2%, it would take roughly 21 years to get to this number.

If this plan was implemented at any point before you turned 44, you could retire before the state pension age. Start it in your mid 20s and this could cut your pension age to your mid 40s!


In the UK, there are a number of tax friendly portfolio options. Stocks & Shares individual Savings Accounts, (S&S ISA for short) and Self-invested personal pensions (SIPP). These aren’t the only types of investment wrappers, but they appear to be the most popular in the UK, for those looking to FIRE.

An S&S ISA is similar to other types of ISAs, where you can save up to the yearly limit, tax free. This year’s limit is £20,000 and runs from 6th April 2019 to 5th April 2020. The only difference between this and other types of ISA is the freedom to choose the type of investments, including low cost index funds.

With a SIPP, it’s similar to a private pension from a company. Anything you contribute to the pension, will have tax relief on it, equal to the tax bracket for your income. For example, if you’re a lower earner, you’re taxed at 20% on your earnings. This means a 20% bonus is applied by the government; so if you put in £800, the government would add £200 to this, pushing it to £1000.

For a higher earner being taxed at 40% on their earnings, you can get the initial 20% relief added to your contribution, the same as a lower earner. In addition, you can claim another 20% back on your tax return on whatever you contribute. This effectively means you could put in £600 and get the same £1000 investment.

Which one to choose?!

This is a tough choice, as it entirely depends on your circumstances. You might think that a SIPP is the obvious choice, given the extra boost to you at no extra cost. But it’s worth taking into account you can only withdraw from your SIPP at the age of 55, and even then only 25% of this is tax free. For the ISA, so long as you remain within the contribution limit each year, you can take it all, tax free and there’s no age limit to when you take it out.

If you’re likely to be putting in enough in an ISA to retire before the age of 55 then this might be your better option, given the flexibility.

For those looking to work up to and beyond 55, the SIPP might be a better option.

For some, the option to do both might be available. My suggestion, if this is an option for you, is to max out the ISA first, then focus on getting any tax relief from the SIPP. This will give the best flexibility, Then, if your circumstances change in the future and you want to retire earlier, you have the flexibility of the ISA already.


For the ISA, if you died, the executor of your estate can transfer all of the value of the ISA to a spouse or civil partner, at no Capital Gains or Income tax. However, this will form part of your inheritance tax threshold.

For the SIPP, a beneficiary can be nominated to take the pension as a lump sum or leaving it invested.

If you died before the age of 75, your beneficiary will receive the investment tax free. If you died on or after this age, an individual beneficiary will pay tax, as if it’s part of their income; so at 20%, 40% or 45%.

So in summary, by choosing some tax efficient portfolio options combined with a goal of 25 times you’re annual net expenses, you should be able to FIRE.

It all sounds daunting, but wherever you start, I truly believe it’s never too late or too early to think about retirement. Ultimately, this is about taking control our financial lives, and gaining choices to our lives that we might not have had before.

Happy investing!

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