Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@. Skimlinks & other affiliated links are turned on

Search
  • FIRST POST
    • fonsde
    • By fonsde 14th Feb 18, 12:55 PM
    • 73Posts
    • 5Thanks
    fonsde
    LISA vs Pension
    • #1
    • 14th Feb 18, 12:55 PM
    LISA vs Pension 14th Feb 18 at 12:55 PM
    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.
Page 1
    • kidmugsy
    • By kidmugsy 14th Feb 18, 1:04 PM
    • 10,188 Posts
    • 6,911 Thanks
    kidmugsy
    • #2
    • 14th Feb 18, 1:04 PM
    • #2
    • 14th Feb 18, 1:04 PM
    Does your employer allow pension contributions by salary sacrifice? If not then I'd seriously consider the LISA.
    Free the dunston one next time too.
    • eskbanker
    • By eskbanker 14th Feb 18, 1:43 PM
    • 6,272 Posts
    • 6,346 Thanks
    eskbanker
    • #3
    • 14th Feb 18, 1:43 PM
    • #3
    • 14th Feb 18, 1:43 PM
    On longer horizon which one does better? Cause with Pensions I would need to pay income tax when i receive it.
    Originally posted by fonsde
    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
    • By kidmugsy 14th Feb 18, 2:43 PM
    • 10,188 Posts
    • 6,911 Thanks
    kidmugsy
    • #4
    • 14th Feb 18, 2:43 PM
    • #4
    • 14th Feb 18, 2:43 PM
    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).
    Free the dunston one next time too.
    • fonsde
    • By fonsde 15th Feb 18, 12:37 PM
    • 73 Posts
    • 5 Thanks
    fonsde
    • #5
    • 15th Feb 18, 12:37 PM
    • #5
    • 15th Feb 18, 12:37 PM
    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
    • By Lungboy 15th Feb 18, 12:49 PM
    • 1,204 Posts
    • 1,118 Thanks
    Lungboy
    • #6
    • 15th Feb 18, 12:49 PM
    • #6
    • 15th Feb 18, 12:49 PM
    Pension --> 1 - grows at x%, but then you get taxed when you take it out

    I am right?
    Originally posted by fonsde
    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
    • By fonsde 15th Feb 18, 12:54 PM
    • 73 Posts
    • 5 Thanks
    fonsde
    • #7
    • 15th Feb 18, 12:54 PM
    • #7
    • 15th Feb 18, 12:54 PM
    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
    • By Drp8713 15th Feb 18, 12:58 PM
    • 775 Posts
    • 642 Thanks
    Drp8713
    • #8
    • 15th Feb 18, 12:58 PM
    • #8
    • 15th Feb 18, 12:58 PM
    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
    Originally posted by fonsde
    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
    • By bowlhead99 15th Feb 18, 2:05 PM
    • 7,287 Posts
    • 13,305 Thanks
    bowlhead99
    • #9
    • 15th Feb 18, 2:05 PM
    • #9
    • 15th Feb 18, 2:05 PM
    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
    Originally posted by fonsde
    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.
    Originally posted by Drp8713
    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.
    Last edited by bowlhead99; 15-02-2018 at 2:10 PM.
    • grey gym sock
    • By grey gym sock 15th Feb 18, 4:23 PM
    • 4,178 Posts
    • 3,686 Thanks
    grey gym sock
    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
    • By Thrugelmir 15th Feb 18, 5:23 PM
    • 57,453 Posts
    • 50,745 Thanks
    Thrugelmir
    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.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • kidmugsy
    • By kidmugsy 15th Feb 18, 9:45 PM
    • 10,188 Posts
    • 6,911 Thanks
    kidmugsy
    Pension ... Tax free up to annual personal allowance plus drawdown on tax free sum....
    Pension isn't considered as savings when claiming benefits.
    Pension pot can be passed on tax free on death.
    Originally posted by Thrugelmir
    All true but we don't know what the basic rate of tax will be when the pension is drawn. It was over 30% when I was young. The LISA 'freezes" the current low basic rate of income tax, the pension doesn't. Still, I'd think that salary sacrifice tilts the choice towards the pension. Salary sacrifice should probably be used while it's still available.
    Free the dunston one next time too.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

4,560Posts Today

10,253Users online

Martin's Twitter