2016 Budget - ISA changes

zagfles

masonic wrote: »

I should point out I made a mistake in my earlier post regarding salary sacrifice. Since this avoids a total tax (income + NI) take of 32%, it's equivalent to a 48% bonus on the income after tax+NI at the basic rate. So that's considerably better than the 25% bonus offered in the LISA scheme.

No it isn't as you've not accounted for the tax paid on the way out with a pension. With a LISA what you take out is tax free, with a pension 75% of what you take out is taxable. You're only right if the entire amount you withdraw will be within your personal allowance.

If you're a basic rate taxpayer and will be paying basic rate when withdrawing, then they are actually equivalent, as we've been discussing on the pensions board.

Obviously stuff like matching employer contributions, making sure the PA is used up, early access rules, shielding from means tested benefits capital tests etc will swing the equation one way or the other. But there's no reason not to have both - eg use workplace pension to get max employer conts and use a LISA for anything above that.

If the govt want to market the LISA as a retirement savings vehicle they really need to specifically exclude it from capital rules in all means tested benefits, otherwise it's pretty useless as someone might be forced to spend their "retirement savings" supporting themselves through a period of unemployment.

jamesd

zagfles wrote: »

You're only right if the entire amount you withdraw will be within your personal allowance.

£1480 gross in the pension. 25% tax free and 75% taxed at basic rate is £1258 net.
£1000 net plus 25% is £1250.

Higher outcome from the pension and it's a lot safer than the LISA.

That's before the common sharing of some of the saved employer NI.

zagfles wrote: »

If you're a basic rate taxpayer and will be paying basic rate when withdrawing, then they are actually equivalent

It's not hard to pay 0% on pension income. Just do the sensible thing and defer the state pension for a sensible time and you can get out more than £40k tax free on top of the 25% tax free lump sum. Some VCT buying can take care of the rest.

zagfles

jamesd wrote: »

£1480 gross in the pension. 25% tax free and 75% taxed at basic rate is £1258 net.
£1000 net plus 25% is £1250.

The 48% quoted by the PP was slightly too high, it's actually just a bit over 47%.

Sal sac gets you 32% tax plus NI relief, ie divide by 0.68, £1000 net cost gets you £1470.59 in the pension. £1470.59 taxed at 85% (75% at 20%, 25% at 0%) is £1250. Identical outcomes.

Or looking at it another way, £68 plus 25% is £85, £85 in a LISA is the same as £100 in a pension if BR tax on way in and out.

That's before the common sharing of some of the saved employer NI.

Indeed, that will obviously change the equation.

It's not hard to pay 0% on pension income.

It is if you already have a DB pension which uses up the allowance, or enough potential pension income already to use up the allowance every year if drawn down.

The LISA could have other advantages eg the ability to invest in a wider range of products, whereas sal sac into an employers scheme is likely to be limited to a small number of investments. The big disadvantage is if the LISA doesn't offer protection against means tested benefit capital tests.

But the choice for a BR taxpayer who doesn't have the option of sal sac is different. They could be much better off with the LISA.

masonic

zagfles wrote: »

No it isn't as you've not accounted for the tax paid on the way out with a pension. With a LISA what you take out is tax free, with a pension 75% of what you take out is taxable. You're only right if the entire amount you withdraw will be within your personal allowance.

Not accounting for other variables does not make a statement I made specifically about one variable incorrect. If you want to make an inference based on what I have said and then point out that your inference is incorrect, please feel free.

So your inference, if I understand correctly, is that the equivalent initial bonus is the only thing that should be considered when weighing up options. I'm more than happy to agree with you that it isn't.

I haven't accounted for it in my statement about the bonus top-up because it is impossible to account for. 75% is taxable, but anywhere from 0% to 75% might be taxed. Some people will pay no tax, while others might have to pay higher rate tax. Personally, I intend to withdraw funds up to my personal allowance each year from when I'm able to access my pension, but not take out any more than that.

Edit: Actually I did account for it in my original statement with the underestimate of salary sacrifice that I was subsequently correcting, which stated:

masonic wrote: »

For the first part of your retirement savings above the state pension (if you still qualify for that at the time ), a pension may be better as it may fall within your personal allowance.

For those with a lot of pension savings, the LISA may work out a better deal overall.

zagfles wrote: »

The 48% quoted by the PP was slightly too high, it's actually just a bit over 47%.

I'm happy to defer to your more precise calculation.

zagfles

masonic wrote: »

Not accounting for other variables does not make a statement I made specifically about one variable incorrect. If you want to make an inference based on what I have said and then point out that your inference is incorrect, please feel free.

Sorry there's too many double negatives there, but I think we're probably agreeing...

So your inference, if I understand correctly, is that the equivalent initial bonus is the only thing that should be considered when weighing up options. I'm more than happy to agree with you that it isn't.

Not enough negatives there. I think you're missing a "not" in the first sentence...

I haven't accounted for it in my statement about the bonus top-up because it is impossible to account for. 75% is taxable, but anywhere from 0% to 75% might be taxed. Some people will pay no tax, while others might have to pay higher rate tax. Personally, I intend to withdraw funds up to my personal allowance each year from when I'm able to access my pension, but not take out any more than that.

Edit: Actually I did account for it in my original statement with the underestimate of salary sacrifice that I was subsequently correcting, which stated:

I'm happy to defer to your more precise calculation.

OK...

masonic

zagfles wrote: »

Sorry there's too many double negatives there, but I think we're probably agreeing...

In other words, and without the negatives (this was actually quite tricky to formulate), a statement made specifically about one aspect of an product can be held as true independent of other distinct aspects of the same product.

Not enough negatives there. I think you're missing a "not" in the first sentence...

If I put a not in the first sentence then you wouldn't have made an inference that you could have disagreed with.

tara747

Colesy93 wrote: »

Any update on this? I have had help to buy is a since December 2015 could I Carry on paying the 200PM up to March 2018 then open
Ifetime isa and transfer my help to buy isa into it and deposit £4000 and then £4000 the following month new financial year and then get £2000 bonus from deposits from life time isa and 25% from the money transferred from the help to buy isa into this account - potential to have a bonus off £3400 by April 2018? But due to needing account open for year get that bonus in April 2019

I'm wondering this too!

zagfles wrote: »

No it isn't as you've not accounted for the tax paid on the way out with a pension. With a LISA what you take out is tax free, with a pension 75% of what you take out is taxable. You're only right if the entire amount you withdraw will be within your personal allowance.

If you're a basic rate taxpayer and will be paying basic rate when withdrawing, then they are actually equivalent, as we've been discussing on the pensions board.

Obviously stuff like matching employer contributions, making sure the PA is used up, early access rules, shielding from means tested benefits capital tests etc will swing the equation one way or the other. But there's no reason not to have both - eg use workplace pension to get max employer conts and use a LISA for anything above that.

If the govt want to market the LISA as a retirement savings vehicle they really need to specifically exclude it from capital rules in all means tested benefits, otherwise it's pretty useless as someone might be forced to spend their "retirement savings" supporting themselves through a period of unemployment.

And paying a 5% penalty to access the money!


This definitely needs to be clarified.

Garethgrew

When does it start?

jamesd

When does what start? Some ISA changes have happened already, some like the Lifetime ISA will start in April 2017. Can't really say when something starts without knowing which something you mean.

nicky-evans

Hi, if i open a LISA in April 2017 and deposit £4000 I will receive the £1000 bonus the following April. I have read that the bonus is then paid monthly from then on. So could I then deposit another £4000 in May and receive the £1000 bonus in June? So then I would have £10,000 in total?

I have searched for the answer but can not seem to find anything.
Thanks