Pension savings vs Lifetime ISA

webangel

Hi all,
Just reading Martin's overview of this and he says that it's best to save into a Workplace pension if possible because the benefits are the same (he says you get £1 tax relief on every £4 if you're a lower rate tax payer at 20%). Surely that is 25% though and is that because of having to pay National Insurance too? Sorry to ask a really obvious question, but is National Insurance taken out of gross income, and if so, does tax at 20% plus National Insurance rate = 25% altogether?
Thanks!

PensionTech

The 20% vs 25% thing is just down to how the tax relief is defined. You are taxed on your gross earnings so tax relief is on your gross contribution. Say the gross contribution is £100 - if you were to receive that as pay, it would be taxed at 20% and you would receive £80. Tax relief means they don't take away that 20%. So yes, the amount of tax saved is £20, which is 25% of the net cost to you of £80, but it's 20% of the total contribution. It's described in that way because it's linked to the rate of tax you pay.

The LISA, on the other hand, is described as a bonus based on how much you pay in. So if you pay in £80, the government will pay £20, which is your 25% and gives you a total of £100 - same as the pension - but because they're described in different ways, the figure comes out different. They are in fact the same thing.

National Insurance doesn't factor into those figures. In fact, if NI is taken into account, the relief on the pension looks much better than that (32% total relief if described as a percentage of gross contribution; 47% if described as a percentage of net contribution).

Having said this, the obvious point is that the LISA is not taxable when you withdraw it, whereas 75% of the pension is. This means that it's not quite as simple as looking at the 20%/25% thing. But pensions will still work out the same, or better, in many cases, particularly if you save into a pension via salary sacrifice (therefore saving on NI) and if you save into a workplace pension where your employer contributes on your behalf as well.

sandsy

LISA: costs £80 of net income to end up with £100 tax free. So effectively an uplift of 25%.

Pension with Salary sacrifice: costs £68 of net income to end up with £100 of which £25 is tax free and £75 is taxed at 20%, I.e. £85. So effectively an uplift of 25%.

Pension without salary sacrifice: costs £80 of net income to end up with £85. An uplift of 6.25%.

Assumes basic rate taxpayer. Ignores investment returns.

michaels

sandsy wrote: »

LISA: costs £80 of net income to end up with £100 tax free. So effectively an uplift of 25%.

Pension with Salary sacrifice: costs £68 of net income to end up with £100 of which £25 is tax free and £75 is taxed at 20%, I.e. £85. So effectively an uplift of 25%.

Pension without salary sacrifice: costs £80 of net income to end up with £85. An uplift of 6.25%.

Assumes basic rate taxpayer. Ignores investment returns.

Assumes basic rate tax paid on all pension income above the 25% - if you get full state pension will that put you into basic rate tax for all private pension income?

Also lisa is not accessible to 60 and no top up for contributions after 50 whereas minimum retirement age is currently below 60 for most?

Against which lisa money is available sooner in an emergency (such as a sudden change in the rules whereas pension money is locked in whatever the chancellor of the day decides to do).

Against which lisa money may disqualify you from capital assessed benefits?