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  • FIRST POST
    • MonkeyDr
    • By MonkeyDr 17th Mar 17, 4:11 PM
    • 87Posts
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    MonkeyDr
    LISA for higher-rate tax payer, home-owner?
    • #1
    • 17th Mar 17, 4:11 PM
    LISA for higher-rate tax payer, home-owner? 17th Mar 17 at 4:11 PM
    Hi,

    I would welcome your thoughts on whether I should open a LISA or not. Let's assume I am happy to lock some money away long-term.

    - 30s
    - home-owner
    - higher-rate tax payer (probably, income a little variable at present and on the cusp)

    So the benefit would be the 25%, although on the face of it I would get greater benefit (tax relief) putting the money in a pension.

    However I am lucky enough to have a defined benefits occupational pension. I don't know if the notional 'pot' will reach the limit for tax-free contributions before I retire or not - it is feasible, but depends on the direction my career takes and how long I am part-time / full-time etc. I also appreciate that this limit might increase / decrease / disappear in the future. Also worth considering is that to get my best DB pension I shouldn't take it until I am 67 ish, and I'm pretty sure I'd like to retire before then.

    So I am thinking that having a LISA with the aim to use it as tax-free income in my early 60s sounds reasonable. I guess I could still open a private pension much nearer the time if the option is available to me, and still benefit from the tax-relief on contributions.

    Have I missed something?

    Thank you
Page 1
    • Rich2808
    • By Rich2808 17th Mar 17, 5:15 PM
    • 445 Posts
    • 379 Thanks
    Rich2808
    • #2
    • 17th Mar 17, 5:15 PM
    • #2
    • 17th Mar 17, 5:15 PM
    Overall the pension route would normally be better.

    However given you have a defined benefit pension is there a risk you could exceed the annual allowance (e.g. if you get a pay rise) or the lifetime allowance (i.e. your final pension pot exceeds £1 million – i.e. your pension x 20 plus your lump sum exceeds £1m). The lifetime allowance is not subject to those limits – and is tax free when you take the proceeds at 60.

    I would see it as a good pension supplement – an isa with a guaranteed 25% uplift and tax free. And of course unlike a pension you can access the funds before 55 – albeit for a 25% penalty (given you are a homeowner you can’t obviously withdraw it to buy a home).
    • dunstonh
    • By dunstonh 17th Mar 17, 5:37 PM
    • 88,110 Posts
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    dunstonh
    • #3
    • 17th Mar 17, 5:37 PM
    • #3
    • 17th Mar 17, 5:37 PM
    Pension would appear to trump the LISA due to higher rate relief. (if you have children and earn over £50k, the pension could increase the child benefit payable as well)

    and I'm pretty sure I'd like to retire before then.
    Pension is still viable for that as long as its not before 57.

    So I am thinking that having a LISA with the aim to use it as tax-free income in my early 60s sounds reasonable.
    Pension seems a better fit.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • bowlhead99
    • By bowlhead99 17th Mar 17, 6:12 PM
    • 6,407 Posts
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    bowlhead99
    • #4
    • 17th Mar 17, 6:12 PM
    • #4
    • 17th Mar 17, 6:12 PM
    If you are only "on the cusp" of high rate tax then contributions into a personal pension are only getting you high rate tax relief to the extent it takes your effective gross pay back down towards, but not actually as low as, the band where your earnings are taxed at basic rate and therefore the point where money in a pension can only get basic rate relief and not higher because you're not a high rate taxpayer any more.

    So for example if you were exactly £1200 into the high rate band then you could effectively pay £100pm gross /£60 net into a personal pension, and save £480 of tax. £480 tax saved is a nice boost on the net contributions of £720. If you can draw that all out in one of the years before your state and work pensions kick in, so it easily fits in your annual personal allowance, it's all tax free. So the £720 getting £480 on top is a 67% boost and considerably better than the LISA 25% bonus. You just have to work around your available limits in retirement to get as much as possible tax free or at a low average rate of tax.

    However, if you were only £1200 above the high rate threshold, you are only saving high rate tax on that first £100 gross per month. On the next £1200 and the £1200 after that and the £1200 after that, you are only saving basic rate tax which at £80 cost for a £100 contribution is only a 25% boost, akin to what you'd get in a LISA and with the extra uncertainty of whether you'd be able to get it out completely tax free within your annual income planning in retirement.

    So, there is a case for using LISA once you've burnt through the higher rate relief, especially given LISA allows you to get money out in a dire emergency (if you find yourself in a situation where you've planned everything really badly and need access pre 60 on pain of giving up the bonus and paying a further penalty).

    However- that accessibility is a double edged sword as money in a LISA is part of your assets for purposes of means tested benefits and if you have debt collectors and bankruptcy assessors coming after you, and also part of your estate for IHT. And if you want that accessibility you have to suffer the expensive penalty.

    So after you do a bit of pension (to use up high rate band) and a bit of LISA for some lower rate bonus that's very flexible to access at 60+, you might find that you don't want to use the entire LISA allowance that's available to you.

    Missing out on any kind of bonus for your long term investment money (ie don't use basic tax relieved pension *or* all the LISA allowance) might seem counter-intuitive. However, consider the fact that you are only in your 30s and on the cusp of high rate already. Give it five or more years and you might be more firmly into the high rate band with more high rate tax relief available to you than you feel you can afford to use given the pressures you have to spend your salary on "life stuff" at that point.

    So, it would be useful to have thrown a few grand into "normal" S&S ISAs as part of your retirement planning, which will have been growing tax free and could be used to make larger personal pension contributions during those years, getting high rate not basic rate relief at that point.

    And of course there are medium to long term things to invest for in S&S ISAs too, assuming you have some intermediate goals between short term cash savings and 60+ retirement phase.
    • MonkeyDr
    • By MonkeyDr 17th Mar 17, 10:35 PM
    • 87 Posts
    • 117 Thanks
    MonkeyDr
    • #5
    • 17th Mar 17, 10:35 PM
    • #5
    • 17th Mar 17, 10:35 PM
    Thanks for the useful and interesting comments.

    I guess that I have to make a couple of decisions:
    1. am I happy to lock money away until I am 60? If so, then (assuming not pension) LISA would be better than normal S&S ISA, although for practical reasons maybe a combo of the 2 would be more useful and allow me the option of earlier withdrawals as needed.
    2. Would private pension be better? This seems to boil down to how likely I think I am to hit my lifetime allowance with my DB one. (+/- whether I think the lifetime allowance will change in future). I don't think this is clear cut as I am considering a sideways career move at present, but it is certainly possible.

    The child benefit issue is also potentially pertinent, so I'll keep an eye on it.

    Obviously I hope that means-tested benefits / bankruptcy issue won't be so pertinent.

    Best wishes
    • ThinkingOutLoud
    • By ThinkingOutLoud 17th Mar 17, 11:09 PM
    • 1,251 Posts
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    ThinkingOutLoud
    • #6
    • 17th Mar 17, 11:09 PM
    • #6
    • 17th Mar 17, 11:09 PM
    You are right you might need to watch LTA if you save heavily into your pension - but you can always adjust your pension saving downwards in future years, if you can see it might be breached - putting the extra money into a LISA or ISA or whatever

    The current approach seems to be that it will be adjusted from £1M by the CPI.

    Check out how much you would have to save from age 30 to have a pot of £1M at 57. You don't say how big pension pot is already.

    Also, remember LISA has a £4k+free1k input limit. And the bonus stops at 50 - so from age 30 you'd have a maximum of 20 years with 5k a year = 100k input plus growth.

    At a matching 5k a year into your pension - you would not hit the LTA as it stands even, unless you have a big pot now.
    I am just thinking out loud - nothing I say should be relied upon!
    I do however reserve the right to be correct by accident.
    • MonkeyDr
    • By MonkeyDr 18th Mar 17, 10:08 AM
    • 87 Posts
    • 117 Thanks
    MonkeyDr
    • #7
    • 18th Mar 17, 10:08 AM
    • #7
    • 18th Mar 17, 10:08 AM
    Thanks TOL.

    I think the difficulty is that my pension is a defined benefits one and not a pot as such. I accrue a certain amount each year based on my salary, and the number of years that I am in the scheme also affects the end pension, of course. Fwiw, at present if I never contributed to it again I could probably expect an annual pension of £7,000 when I reach retirement age.

    There are a certain amount of unknowns, but were I to continue working full time and climbing the career ladder as I have done to date and assuming salaries stay as they are and rise with inflation, I would probably hit the lifetime allowance limit (which I am assuming is equivalent to an annual pension of £50k?). I would not want to withdraw from the scheme at any point because time in it is a significant factor, and I don't think adjusting my contributions downwards is an option.

    But I might go part-time, alter my direction a little bit (to something very close with same employer that I enjoy but has lower pay), etc etc.

    I hadn't thought about the CPI thing too.

    Would there be anything to stop me putting my LISA withdrawals into a private pension at age 60 ish (and living off other savings) so as to get the benefits of both options if I haven't hit my pension lifetime allowance limits? I guess the yearly contribution limits for tax relief might be a factor. Hmm. All a bit complicated.
    • ThinkingOutLoud
    • By ThinkingOutLoud 18th Mar 17, 10:45 AM
    • 1,251 Posts
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    ThinkingOutLoud
    • #8
    • 18th Mar 17, 10:45 AM
    • #8
    • 18th Mar 17, 10:45 AM
    Agreed. I didn't mean withdraw from a scheme. I meant any extra you are putting in.

    The current multiplier for lta and db's is 20. So you are right 50k pension gets you there.

    I don't know how likely it is your DB scheme will be running in the 30 years or so or if you will still be with the same employer. It is as likely you won't and / or your next pension could be DC, I guess.

    What is simple and true is that the more you put in earlier - the more choice you have in later life.

    It will also be highly beneficial to put any higher rate taxed earnings into pension if you can afford it (when you earn more)
    I am just thinking out loud - nothing I say should be relied upon!
    I do however reserve the right to be correct by accident.
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