LISA vs Pension

fonsde · 14 February 2018 at 1:55PM

Not sure what to do.

I am basic tax payer, with work pension where i contribute about 10% (get max benefit from work).

I have more cash available for long term investing. Should I increase my % contribution or put money in a LISA?

On longer horizon which one does better? Cause with Pensions I would need to pay income tax when i receive it.

kidmugsy · 14 February 2018 at 2:04PM

Does your employer allow pension contributions by salary sacrifice? If not then I'd seriously consider the LISA.

eskbanker · 14 February 2018 at 2:43PM

fonsde wrote: »

On longer horizon which one does better? Cause with Pensions I would need to pay income tax when i receive it.

https://www.moneysavingexpert.com/savings/lifetime-ISAs#pension2 addresses this - the tax situation is broadly neutral because pension money is tax-advantageous when being paid in but is (mostly) taxable when taken out, whereas the LISA is the other way round, i.e. funded from income that's already been taxed but tax-free on the way out.

kidmugsy · 14 February 2018 at 3:43PM

You'll lose the ability to subscribe to a LISA when you turn 50 and to a pension only at 75. So there's a case for doing the LISA early. You can always move LISA money into a pension after 60.

Another argument is to defer personal pension contributions until (i) the tax relief for people who pay the basic rate of income tax is increased, or (ii) you become a higher rate payer.

On the other hand the pension money is protected in bankruptcy proceedings and the LISA isn't (or so I've read).

fonsde · 15 February 2018 at 1:37PM

yes; my company supports salary sacrifice. I have also opened a LISA with £10 this year.

But from what I hear, I should prefer increase my salary sacrifice instead of adding to a pension.

However, it feels like LISA is better in terms of tax.

LISA -> 0.80 + 0.20 = 1 - grows at x% and you take everything without tax applied
Pension --> 1 - grows at x%, but then you get taxed when you take it out

I am right?

Lungboy · 15 February 2018 at 1:49PM

fonsde wrote: »

Pension --> 1 - grows at x%, but then you get taxed when you take it out

I am right?

Don't think so, Pension would be 0.8 + 0.2 = 1 if you're a basic rate taxpayer, or 0.6 + 0.4 = 1 if you're higher rate. I think.

fonsde · 15 February 2018 at 1:54PM

same:

LISA -> 0.80 (net) + 0.20 = 1 - grows at x% and you take everything without tax applied
Pension --> 0.8 (net) + 0.20 = 1 - grows at x%, but then you get taxed when you take it out

I guess it becomes more important when you are higher rate

Drp8713 · 15 February 2018 at 1:58PM

fonsde wrote: »

same:

LISA -> 0.80 (net) + 0.20 = 1 - grows at x% and you take everything without tax applied
Pension --> 0.8 (net) + 0.20 = 1 - grows at x%, but then you get taxed when you take it out

I guess it becomes more important when you are higher rate

Dont forget the personal allowance of £11.5k that you can earn tax free and the 25% tax free cash. That is why pension usually wins.

bowlhead99 · 15 February 2018 at 3:05PM

Drp8713 wrote: »

fonsde wrote: »

same:

LISA -> 0.80 (net) + 0.20 = 1 - grows at x% and you take everything without tax applied
Pension --> 0.8 (net) + 0.20 = 1 - grows at x%, but then you get taxed when you take it out

I guess it becomes more important when you are higher rate

Don't forget the personal allowance of £11.5k that you can earn tax free and the 25% tax free cash. That is why pension usually wins.

What?

The post you were replying to says that with Lisa you get £1 growing and no further tax to pay ; while with pension you get £1 growing but have to pay future tax.

The Lisa route is paying zero tax on the proceeds. You can't say, well yes the pension has to pay tax , but don't worry because you only pay tax on 75% on it and you might have some space in your personal allowance, so 'pension usually wins'.

If you happen to have enough space in your personal allowance to take out the entire amount of your pension contributions plus all the growth at a zero percent tax rate, then you have succeeded in getting the tax rate down to zero, but

a) that will require substantial planning and may be impossible if you are already creating a decent pension income through ongoing workplace pension contributions at 10% of salary with an employer match or part match, plus state pension. You would only be able to get your "extra pension" tax free by displacing other pension that was already going to be tax free;

b) the tricky planning job of being able to draw the entire (£1+growth) from a pension without paying tax by only drawing some maximum amount per year is only the same as (as distinct from 'better than') getting your entire (£1+growth) from a LISA tax free which is the standard position with LISAs for any amount of withdrawal per year no planning needed (other than waiting to age 60).

So your reply that effectively says "with pension you won't pay full basic rate tax so pension usually wins" does not make sense as a reply to the person who said Lisa was probably better because it doesn't pay *any* tax.

I agree if you are higher rate tax now and pay less than full basic rate in retirement, then pension can be better, and likewise it can be better if you get salary sacrifice national insurance relief now but only pay less than about 16% on the proceeds in retirement. But maths and projections are needed really, not generalisations which don't mention the scenarios in which they actually work...

A sensible solution to retain flexibility is often "a bit of both". The boost from NI contributions not needing to be paid if you salary sacrifice them into a pension is very welcome, because it means you can afford a bigger pile of investments to draw in retirement and therefore you can afford to pay a bit of tax at that time.

grey_gym_sock · 15 February 2018 at 5:23PM

some arithmetic for LISA vs pension ... using the info that pension contributions can be done via salary sacrifice, and OP is on basic rate for income tax, and employer contributions are already at the max ...

for each £100 of after-tax income that you're prepared to give up now ...

in a LISA: you put in £100 (from your salary after tax), and £25 bonus is added to that, then you get x% growth, and you take out the whole £125 (+ x% growth), tax-free.

in a pension:

if you're prepared to give up £100 of after-tax salary), then you can give up £147.06 of pre-tax salary (because 20% income tax + 12% employee NI on £147.06 comes to £47.06).

then you get the same x% growth.

then you take 25% of the £147.06 (+ growth) out tax-free, and the other 75% is taxable, but at least some of it may be covered by your personal allowance, depending on what other income you have at the time. so you might actually pay 0% or 20% or a mixture of the 2 on that 75% (but not 40%, unless you become a higher-rate taxpayer, which few people do in retirement if they weren't when they were working). 20% of 75% is 15% . so the worst case is probably that after tax you get back 85% of £147.06, which is £125 (+ x% growth). and it could be better, i.e. up to £147.06 (if no tax is due).

so the pension gives you, in the worse case, exactly the same return as the LISA (£125), and perhaps more (up to £147.06). so the pension wins. this is because you have access to salary sacrifice; without that, LISA would win.

Thrugelmir · 15 February 2018 at 6:23PM

Pension could potentially allow you to retire before State Retirement age. Tax free up to annual personal allowance plus drawdown on tax free sum.Remaining money is still invested too.

Pension isn't considered as savings when claiming benefits.

Pension pot can be passed on tax free on death.

LISA vs Pension

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