Traditional Plan
Deposit Order
(drag to reorder)
Stocks & Shares ISA
SIPP
Lifetime ISA
General Investment Account
Withdrawal Order
(drag to reorder)
General Investment Account
SIPP Drawdown
Stocks & Shares ISA
Lifetime ISA
The Traditional or 'Rule of Thumb' Approach
The Traditional or "Rule of Thumb" approach is a widely used, conventional strategy followed by many big banks and financial planners. It applies a generalized, one-size-fits-all method for managing contributions to and withdrawals from various types of investment accounts, without tailoring the strategy to an individual's unique circumstances like tax situation, goals, or specific assets.
Here's the typical contribution order used in this traditional method:
1
Workplace Pension – Contribute at least enough to capture your full employer match, the simplest tax-relieved boost available.
2
Lifetime ISA (LISA) – For those eligible, contribute up to £4,000/year and receive a 25% government bonus.
3
Stocks & Shares ISA – Contribute up to your £20,000 annual ISA allowance for tax-free growth and tax-free withdrawals.
4
SIPP – Top up your pension with additional tax relief at your marginal rate, mindful of the annual allowance and tapering.
5
General Investment Account (GIA) – Once tax-advantaged wrappers are full, surplus savings go to a GIA, where income and gains are taxable.
When it comes time to access your funds, the typical withdrawal order is also fixed:
1
General Investment Account (GIA) – Drawn first to use up the dividend, savings, and capital gains allowances.
2
Defined Benefit / State Pension – Guaranteed income is taken at its scheduled start age.
3
SIPP / Workplace Pension – Drawdown begins next, often via the 25% Pension Commencement Lump Sum (subject to the Lump Sum Allowance) and taxable income afterwards.
4
Lifetime ISA / Stocks & Shares ISA – Drawn last so that tax-free growth compounds for as long as possible.
Why It's Suboptimal
While straightforward, this Rule of Thumb method doesn't account for individual factors like varying tax brackets, lifestyle preferences, or changing financial goals. It may lead to higher taxes over a lifetime or missed growth opportunities, as it does not optimize the timing or sequence of withdrawals and contributions based on each user's situation.
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