Pension & Lifetime ISA?

jamesd

The lack of use of personal allowance is a benefit but at retirement it's usually easy enough to use state pension deferring and/or VCT purchase to eliminate the income tax anyway, funding the five year holding time with lump sum money.

For anyone prepared to use VCTs the whole of a pension pot is effectively tax free in retirement. Barring things like a desire to take large amounts out in the 40% tax band, sufficient to overcome the 10% tax gain on the basic rate band. That's something over 70k of pension income a year with no net income tax on it, increasing as the basic rate band increases, or shrinking as it decreases.

The person using the LISA can't benefit from this at pension taking time but could at LISA contributing time. Catch being that when paying in people are less likely to have the spare money for the VCT five year holding time available, so it's more practical at the retirement end, or after substantial enough money to cover that has been accumulated.

Aretnap

mania112 wrote: »

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

The age at which you can withdraw a traditional pension is increasing in any event. For anyone under 40 it will be at least 58, and quite posdibly even later. So the pension has little, perhaps no, advantage over the LISA in that respect at least.

robin61

Aretnap wrote: »

The age at which you can withdraw a traditional pension is increasing in any event. For anyone under 40 it will be at least 58, and quite posdibly even later. So the pension has little, perhaps no, advantage over the LISA in that respect at least.

Assuming they wouldn' t muck about with the age you can get at the LiSA. Maybe it' s me being cynical ?

RickyB2000

jamesd wrote: »

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

Did you ever run these calculations? I would be interested in the outcome.

As I understand the LISA is also even with pensions for HRT if you are outside of personal allowance.

zagfles

RickyB2000 wrote: »

Did you ever run these calculations? I would be interested in the outcome.

As I understand the LISA is also even with pensions for HRT if you are outside of personal allowance.

Not if you pay basic rate tax when you take it out.

There's so many different scenarios. It's fairly easy to work out - you need to divide the net % you get when taking out by the net % you pay when putting in. Net % is 100 minus the tax paid or tax/NI relief.

For instance for a pension, on the way in if you get higher rate relief the net % in is 60% (100-40). If you're going to pay basic rate on the way out, the net % out is 85% (since a quarter is tax free, so you pay 20% tax on 75% of it, 100 - 20*0.75 = 85).

So the net gain is 85/60 = 1.42 = 142%

The LISA will give you 125%, so it's worse.

But if you pay higher rate tax, it'll be 70/60 = 117% which is worse than the LISA. Plus if you pay HRT on the way out you could well be over the lifetime allowance.

If you're using sal sac then include this in the calculation. For instance with sal sac, basic rate on way in and out:
net on way in = 100 - 20 -12 = 68, way out = 85 as above, 85/68 = 1.25 = 125% ie the same as a LISA.

Of course what you pay on the way out is an educated guess - tax rates could change, thresholds could change, your investments might do better of worse than you expect. And of course you may go across tax bands, eg some may use some of the personal allowance so it'll be a combination of rates on the way out.

RickyB2000

zagfles wrote: »

Not if you pay basic rate tax when you take it out.

There's so many different scenarios. It's fairly easy to work out - you need to divide the net % you get when taking out by the net % you pay when putting in. Net % is 100 minus the tax paid or tax/NI relief.

For instance for a pension, on the way in if you get higher rate relief the net % in is 60% (100-40). If you're going to pay basic rate on the way out, the net % out is 85% (since a quarter is tax free, so you pay 20% tax on 75% of it, 100 - 20*0.75 = 85).

So the net gain is 85/60 = 1.42 = 142%

The LISA will give you 125%, so it's worse.

But if you pay higher rate tax, it'll be 70/60 = 117% which is worse than the LISA. Plus if you pay HRT on the way out you could well be over the lifetime allowance.

If you're using sal sac then include this in the calculation. For instance with sal sac, basic rate on way in and out:
net on way in = 100 - 20 -12 = 68, way out = 85 as above, 85/68 = 1.25 = 125% ie the same as a LISA.

Of course what you pay on the way out is an educated guess - tax rates could change, thresholds could change, your investments might do better of worse than you expect. And of course you may go across tax bands, eg some may use some of the personal allowance so it'll be a combination of rates on the way out.

Ah, the 25% tax free. Forgot that. I do worry about fiscal drag on the 40% bracket when I reach retirement....

jamesd

RickyB2000 wrote: »

Did you ever run these calculations? I would be interested in the outcome.

As I understand the LISA is also even with pensions for HRT if you are outside of personal allowance.

Not yet and probably won't before the end of the tax year.

It's relatively easy at present to avoid paying much income tax on pensions so much of it depends on whether you choose to pay income tax or instead to use say VCTs to eliminate it or not.

Ignoring that, the pension income won't all be taxed at say 40%. Some will be at nil, 20%, 40% and potentially 45% depending on how high the total income is and the reliefs used. Even at 40% in and 40% out, much of the 40% in is likely to be taxed at 20% or nil on the way out.

RickyB2000

jamesd wrote: »

Not yet and probably won't before the end of the tax year.

It's relatively easy at present to avoid paying much income tax on pensions so much of it depends on whether you choose to pay income tax or instead to use say VCTs to eliminate it or not.

Ignoring that, the pension income won't all be taxed at say 40%. Some will be at nil, 20%, 40% and potentially 45% depending on how high the total income is and the reliefs used. Even at 40% in and 40% out, much of the 40% in is likely to be taxed at 20% or nil on the way out.

By today's rules. No guarentee that when I come to retire in 30 odd years it will be the same. Maybe I will be ahead but it could swing the other way - which with the state of the world seems the more likely option.