Pension & Lifetime ISA?

Willdabeast

I have read a a few threads since the budget, discussing the lifetime ISA vs Pensions. it seems that for a lower rate tax payer they offer a good alternative, but would you say there is any benefit for a higher rate tax payer?

I understand that the pension offers higher gains in tax savings over the 25% government bonus, but didn't know if it might be a good option to run alongside a pension for some diversification? My only logic is not having all your eggs in one basket . .

Has anybody else had any thoughts on this?

Thanks

RickyB2000

Aren't they just wrappers? So the only diversification it offers is to the company that is offering the wrappers. So no real diversification as there are multiple pension companies out there.

Is there any part of the ISA that appeals, such as being able to get the cash out in a hurrying or buying a house that makes it worth it? Don't forget that the ISA is probably more 'exposed' than a pension for things like benefits and bankruptcy.

Willdabeast

Very true! There aren't any other real advantages as far as I can see, the house purchasing was only first time buyers unless I'm mistaken.

The not paying tax on the way out element seems appealing, but I've read that doesn't outweigh saving HRT on a pension contribution and then paying LRT on it during retirement.

MDMD

Actually even for BR taxpayers the end result is identical between a salary sacrifice pension and the tax free LISA:

https://forums.moneysavingexpert.com/discussion/comment/70328814#Comment_70328814

jamesd

MDMD wrote: »

Actually even for BR taxpayers the end result is identical between a salary sacrifice pension and the tax free LISA:

https://forums.moneysavingexpert.com/discussion/comment/70328814#Comment_70328814

Wrong. The pension has the 25% tax free lump sum and people have a personal allowance that is higher than their state pension. Both mean that for part of the pension there is more tax relief paid on the way in than tax taken on the way out even when salary sacrifice is not used.

When salary sacrifice is used the pension is better for the whole amount because the national insurance is saved in the pension and not paid when taken out, while the LISA doesn't get this benefit at all.

The pension pot is also protected against benefit means tests until Pension Credit age is reached and against bankruptcy until it can be taken at normal age, at least. The whole LISA pot is always vulnerable to both.

LISA wins for first home purchase at typical ages because it gives access when needed for that. It doesn't win for first home purchase where the buyer is going to be 55 or older, a relatively small case.

LISA also wins vs pension until age 55 because the money is accessible with loss of bonus and penalty at any age, but the caveat about benefits is a significant corollary for this. This means that a standard ISA beats the LISA for emergency access money because that doesn't have the penalty on withdrawing.

RickyB2000

Plus you may get some or all employer NI payed in as well to the pension, squeezing a few more % out. And you can access it earlier - though by the time those under 40 come to get their pension they will probably be aligned.....

jamesd

Right. In my case for some of my income I'm receiving 58.9% combined income tax and NI gain on pension contributions. Higher rate income tax, basic rate band NI (the higher rate income is outside work in this range), my own saved employee NI and half of my employer's saved NI. LISA would pay only 25% and on pre-taxed money, a far worse deal given that some of what I pay into the pension - at least the 25% - is tax free on the way out.

zagfles

jamesd wrote: »

Wrong. The pension has the 25% tax free lump sum and people have a personal allowance that is higher than their state pension. Both mean that for part of the pension there is more tax relief paid on the way in than tax taken on the way out even when salary sacrifice is not used.

Yes but the LISA has 100% TFLS on the way out! See the other thread linked above.

jamesd

Yes, I'll update later with a range of calculations for different combinations of circumstances.

mania112

Seems to me that LISA is what pensions will become in the future if the current government have their way.

LISA seems a complete rip off to me if you want to withdraw it before age 60 (except to buy a residential property) you lose the tax relief, you lose the interest, and you are charged 5%.

So for retirement - you're left with a 'pension' that you can't draw until 5 years later than a traditional pension!

RickyB2000

The main benefit of the LISA is that it won't contribute to your taxable income in retirement. So you get more personal rate band to play with for other income. For high earners, it can allow you to manage your marginal rate better - keeping more in 20% bracket. This may be worth more than the few extra percent you may get in a pension due to employer NI etc

This will also be useful for those in a DB pension that is below the LTA but will make them a 40% tax payer