SIPP or LISA? any difference for me?

Scrimps

Hi All,

Im hoping you can help as Im trying to discern the difference between a SIPP or a LISA for my husband and I. Ive looked around and most threads/news articles are an either/or question, not as something to bridge between until our proper pensions kick in. Most of our pension will start at 68, neither of us want to work that long, happily move down to semi-retirement somewhere around 55-60. We're not wealthy, ideally we want our mortgage paid off by retirement so we can just take a pension and earnings below the tax threshold and live quite nicely. It certainly wont be an extravagant retirement but if we both got £12k a year in todays money that would be pretty good for us.

Own house (mortgaged)
Both have previous DC pensions pots (< 50k)
Both in the NHS CARE scheme
Both between 35 and 40
Both earn <£30k
Both should have worked long enough for state pension but we're trying to start a family
Have a cash pot of 3 months of joint outgoings.

Even with the starting a family (fingers crossed) issue, we just want to start saving extra for our retirement. Somewhere around 200 a month each with the view of bumping it up as much as we can, dont see it being more than £350 a month each for a few years yet anyway.

In those circumstances, would you pick a SIPP or a new LISA. Does it even make that much difference to us? I am thinking that a plain S&S ISA may be the way to go for flexibility and suffers from less meddling than pensions but loathe to lose the tax break on savings that really are for retirement before the SP and NHS pension age. Im so hung up on the best option....Im just doing nothing! I want to get this sorted in April.

Thanks in advance for any insight you could offer.

PeacefulWaters

I'd be tempted to open a S&S LISA with a modest amount each. But only as a back up plan just in case investing in it in future becomes more advantageous. The age 60 thing is the biggest drawback.

Hence tax relief into a SIPP or other private pension giving you flexibility at 55/57 (subject to tampering) would be my preference. Or does CARE offer an AVC option with salary sacrifice? That would almost certainly be best bet.

Scrimps

CARE seem to offer ERBO (early years buy) but it seemed really expensive.

The other thing, if things stay equal...with a LISA I could take it all at 60 if it suited me, with a SIPP only 25%, not sure how much difference it makes.

I should also add in case its usefull. We usually would have about £1200 a month leftover between us but Im factoring some works we're having to have done on the house this year and loss of earnings hopefully due to a kid next year. The £200pcm each should still be doable once we have a child.

justme111

It does offer some additional pension options but as normal retirement age is a sp age I would not think it would be good for op.

Scrimps

Ive given it some more thought. I think we will do a combination of S&S ISA and either SIPP or LISA with the majority going to the SIPP/LISA to get the tax breaks n the way into the investment.

Im not certain which will be better between the SIPP or LISA, im erring on the side of a SIPP each(vanguard lifestyle or tgt retirnement thorugh Cavendish online) unless anyone has anything that should contradict this?

hugheskevi

Contribute £160 to a SIPP, get basic rate tax relief of £40 applied, £200 goes into the SIPP. On the way out you get 25% tax free lump sum, and the rest is taxed at either 0% or 20% (based on current rates). That is a total out of £200 or £170. Currently restricted to age 55 and above, but announced that policy intent is to increase to age 58 (State Pension age minus 10)

Contribute £160 to a LISA, get boost up to £200. No tax on way out, so get out £200. Currently restricted to age 60 and above.

So you would appear to need some form of non-LISA ISA for the period 55-58, SIPP for 58-60 and LISA looks good for period 60-68 (or 60-65 if you decided to buy ERBO).

CARE seem to offer ERBO (early years buy) but it seemed really expensive.

How are you evaluating the cost? It is priced acturially, with an assumed rate of return (discount rate_ of CPI+2.8% (possibly CPI+3%). Whilst a return of 5% is nothing special, it is far better than any other options without any investment risk.. Added Pension has similar characteristics.

If you will be in receipt of Tax Credits/Universal Credits when you start a family, pension contributions would increase those.

Personally I can't see much attraction of a SIPP over LISA here. You are not getting anything special from a SIPP (no higher/additional rate relief, no salary sacrifice, no higher means-tested benefits) so I would not be using that until at least one of those things apply. If you really wanted a SIPP, you could just put the money into a S+S ISA, and move it into a SIPP at a later date - getting the flexibility/access of S+S ISA and the possibility of more favourable conditions when you contribute to a pension at a later date (higher rate relief, Tax Credit/Universal Credit boost, etc).

I think you should consider ERBO more, that may well have a role to play, especially if you are risk-averse. Although like with a SIPP you aren't getting anything particularly special so maybe something for the future.

Scrimps

hugheskevi wrote: »

If you really wanted a SIPP, you could just put the money into a S+S ISA, and move it into a SIPP at a later date - getting the flexibility/access of S+S ISA and the possibility of more favourable conditions when you contribute to a pension at a later date (higher rate relief, Tax Credit/Universal Credit boost, etc).

I think you should consider ERBO more, that may well have a role to play, especially if you are risk-averse. Although like with a SIPP you aren't getting anything particularly special so maybe something for the future.

Thank you, seems so obvious now you have said it, It didnt occur to me before to do this. I would potentially lose any investment gained on that tax relief but its not a huge amount and means I can delay the commitment but still start an investment.

Re the ERBO, it was just looking at the cost of buying an early 3 years seemed rather high. I need to do more than back of a fag packet calc. However, also Im really not convinced I will want to stay in the NHS all that time, or for another 10 years TBH so that was probably rather a large factor in my thinking.

I will do some proper calcs, sit down and figure it out with my OH this weekend.

hugheskevi

Thank you, seems so obvious now you have said it, It didnt occur to me before to do this. I would potentially lose any investment gained on that tax relief but its not a huge amount and means I can delay the commitment but still start an investment.

You don't even lose investment gains on the initial tax relief you would have got in a SIPP, as you get tax relief on the investment gains in the ISA when you move it into the SIPP. So assuming that returns and charges are the same in the S+S ISA as the SIPP, the outcome is neutral (with a few small losses possible as a result of transfer, the usual buy/sell fees, etc).

Im really not convinced I will want to stay in the NHS all that time, or for another 10 years TBH so that was probably rather a large factor in my thinking.

Whether you stay or not doesn't really make a difference, at least not in value terms, as the value is the same whether you stay or go but obviously the total amount is lower if you leave early. In some ways it may be of more value the less time you stay, as in your next role you would probably not have access to that type of investment, but could still use SIPP, LISA and S+S ISA, so from a diversification of risks perspective ERBO might be valuable to get whilst you can. But that is all pretty minor stuff.

Enjoy the calcs this weekend...I'm looking forward to a couple of weeks when I update spreadsheets for end of 2016/17, always a pleasant weekend