What will a financial adviser do for me?

Jon_W wrote: »

1. If I put £ from an inheritance which wasn't liable to IHT (below threshold by some way) is THAT topped-up as being as it wasn't ever taxed? If so is it by my income tax rate (20%)?

It doesn't really matter where you got the money (from an inheritance, a gift from a friend, a loan from a bank, some overtime at work). As long as the gross amount you are putting into your pension doesn't exceed your 'relevant' earnings (employment or self-employed business earnings) for the year in which you're making the contribution, you're fine, and you will get your basic rate relief.

As described earlier the basic relief for you as a 20% taxpayer means that you will get a £12500 gross pension contribution by contributing £10,000, or you could get a £25000 pension contribution by contributing £20,000. You pay over the net amount to the pension company and tell them that you earned at least the gross amount that year, and they claim the tax relief amount from HMRC and add it to the pension account (the £2500 or £5000 in the above example).

If you are trying to put £25,000 gross into your pension for the year (£20,000 cash cost), then as long as you had earnings of at least £25,000, it is fine and doesn't really matter how you funded it in practice. For example you could save every penny from work and use some existing savings to make sure you have £20k available in the bank to make the £20k contribution to the pension. Or you could have a lavish lifestyle and hardly save anything from work over the year, but then take a loan or get an inheritance to give you the requisite £20k in the bank to be able to make the £20k contribution to the pension.

2. This sounds good, the pension, because in effect I am getting the tax back on it (I hope) and then can avoid income tax liability on it in future by keeping withdrawals at a limit where I am still within my income tax personal allowance. The downside of this is that I will probably need to still be working into my old age so if that employment is full time, it'l be taxed

Yes, if you are still earning more than the £11k a year personal allowance (or whatever it has risen to by that point), there will be some tax on the money coming out of the pension - only a tax free lump of 25% is properly tax free and the other three quarters is taxable.

3. I should ask the same about the LISA instead of just assuming. From what we know so far will I still get the income tax 'back' on the investment of £10k into the LISA as being as it has come to me from a source which is not liable to income tax?

You don't get any income tax 'back' by contributing to a LISA. You can put £4k into a LISA each year and they will give you a fixed bonus of 25% which is £1k. That bonus is the same percentage as you get as basic rate tax relief on a personal pension, but it doesn't depend on your personal tax rate and is nothing to do with how you sourced the money (whether from taxed salary, taxed or untaxed inheritance, gift from a friend, loan from a bank, whatever).

The tax advantage on a LISA compared to investing outside an ISA is simply that there is no tax on any interest, dividend, investment income, capital gain generated inside it as you go through the years of making investment profits. That tax advantage combined with a bonus is nice, but forget about 'getting income tax back on the investment of £10k due to the source it came from'. You are mixing the concepts up.

The pension is the one that gives you income tax back on the investment of £10k (instead of a bonus) and also has no tax on interest, dividend, investment income, capital gains as you go along; but is (potentially) taxable in retirement depending on your personal circumstances at that time.

4. Not being able to access the pension money is something I see as a bonus. I have not been careful with money in the past so I think it would be a blessing and I would have other accessible investments if I needed to get £.

Fine

5. If I throw the £10k into a pension can I choose WHERE and WHAT it is invested? That is, say "I want £8k to be on Tracker Fund x and £2k on Bond Fund y,"?

Yes, you can direct what your pension contributions are invested into and switch funds from time to time based on what you or your adviser think that you should do.

If you use a 'self invested personal pension' or (SIPP) you will have access to all the investments you can get in ISAs or LISAs. If you use a simpler personal pension from a traditional insurance company pension provider you will have fewer choices but there will still be a whole variety of choices for you to pick between and allocate your money as you wish.

6. If the answer to 5 is no, what rates of growth can one expect to achieve, over 25 years? I know we don't have a crystal ball. But what sort of returns would be a reasonable expectation?

n/a because the answer is not no.

7. STOOPID Q: if creditors can't go after the pension and it is ringfenced, if the debts in question still exist by the time I'm drawing on that pension (both as the 25% lump sum and as an income), does the protection still apply? Or can they access either or both of the 25% lump sum or the income from it?

This can get complicated but certainly if you draw a big 25% into your bank account that bit would definitely be assets that your creditors can go after, or be considered by people who are wondering whether they should give you means-tested benefits.

And if you have ongoing income from a pension, then just like a salary, that's something that is up for grabs by people to whom you owe money, and something that can reduce means tested benefits if you were saying you didn't have much income.

8.All things being equal, if I don't expect to be in the higher tax bracket, the LISA is the better option overall isn't it?

There are pros and cons as described throughout the thread. As illustrated above, the 25% bonus is the same size as the 25% uplift that comes from tax relief on a personal pension contribution by a 20% taxpayer. And income and gains as the years go by are not subject to tax in either LISA or pension. The amount you can stuff into a pension each year is much larger than the amount you can stuff into a LISA each year. The downside is that the pension is only completely tax free when you draw it if you have spare allowances at that time.

But as you've said you have no existing pension assets, and your retirement might last from your 60s for forty years, it sounds like at some point you are going to get plenty of space to draw pension money out well within your annual allowances. £4k a year into a LISA for the next decade is not going to get you a massive pot of assets to fall back on so it will definitely make sense to make large pension contributions as well.

Jon_W wrote: »

When I've got my head around the info in this thread I think a sheet of A4 for each listing its features and pros/cons would be in order.

Yes you could do that by going back through the thread and writing them down (as many of them have been laid out above, or are implicit from what has been laid out above), or using google to search for pros and cons of the different options.

At least then I have something to go on when it comes to meeting an IFA.

Why do you need to list in advance the pros and cons of the different options? The IFA will already know the pros and cons of the different options, so you don't have to teach him what they are. He can tell you in the meeting what the pros and cons are, and ask you which ones you consider most important, to help you establish what is best for you to do.

.Because at the moment, the answer to the Q "How can I help?" would be, "Er...I'm not sure!".

Wouldn't the answer be "I don't have any provision for my retirement, and would like some assistance understanding the options available to me and putting a plan in place using the money I have available and new money coming available to me in the future, which would result in me building up a portfolio of suitable investment funds using appropriate tax wrappers to meet my objectives."

Then the IFA's question would be "So what are those objectives then", to which you will probably say something inane like "I want money in retirement but not sure when or how much, but as much as possible please, that costs me as little as possible now". Then the IFA will say OK that's what everyone wants but let's explore more about your needs and objectives and what might be realistic and what the priorities are and how we could best accomplish that.

None of that requires you to know what all the different wrappers are. You can just say "I have heard of pensions and ISAs and now LISAs but I'm afraid I don't remember the pros and cons of each or how they might best be used in my plan, but hopefully you understand them don't you Mr or Ms IFA?" And he/she will say that first we need to work out what the objectives are and then we can decide broadly the types of assets which might be used to meet them and what if any of the major tax planning opportunities we should use to get there.

Then just the fund picking to get on with...

Once you've decided what the objectives are. If you are going to an IFA they will walk you through the process and advise on the funds and tax wrappers. You only need to do the structuring and fund picking yourself on a DIY basis if you want to do it DIY and not advised.

If you are going to decide your structure and tax wrappers and funds for yourself then you won't need an IFA because you will have already found the answers yourself. Of course, if you're not confident that the answers you found are the right ones you can meet an IFA and do a full fact find and pay the IFA to work with you to come up with the plan of how they would have done it, which will either help validate that your choice was OK or give you an alternate path to follow if you are more convinced by their plan than yours.