LISA v Pension

Muhren

So I know this question has been brought up before but I just wanted some clarification on my situation.

I'm 34 years and a basic rate tax payer where I currently pay in 6% to my works pension with my employer paying in 9%, with their contribution rising to 12% in September. This is done via salary sacrifice, I have checked and they do not pass on any of the savings they make from the reduced tax they pay.

I have recently opened a s&s ISA where I am paying in £350 a month, I was going to continue doing this whilst opening a LISA. From the views that I have read so far, from a a bottom line perspective I would be better off diverting that £350 in my pension.

I just wanted peoples thoughts on this, should I go down the pensions route 100% or split the money between pension and LISA or go 100% LISA?

kidmugsy

Muhren wrote: »

I'm 34 years and a basic rate tax payer where I currently pay in 6% to my works pension with my employer paying in 9%, with their contribution rising to 12% in September. This is done via salary sacrifice, I have checked and they do not pass on any of the savings they make from the reduced tax they pay.

That will be 'they do not pass on any of the savings they make from the reduced National Insurance they pay'. Now, for your proposed contribution beyond the 6%: you avoid your 20% tax and 12% national insurance. So for every £68 you forgo in take-home pay you get £100 in your pension. Whereas for every £68 you subscribe to a LISA you get £85 there, which you expect to be able to draw tax-free at 60.

But you have only deferred tax with your pension. When you eventually draw the money out of the pension then you (we hope) get 25% tax-free. The rest will be at your tax rate at that point in the future - which is a complete unknown. Assuming it to be 20%, then your average tax rate on withdrawal would be 0.25 x 0% + 0.75 x 20% = 15%. So the £100 in the pension would be worth £85.

Quite close, eh?

Maybe your decision could rest on secondary considerations e.g. (i) contribute to the pension while sal sac survives for pensions, or (ii) defer contributing to the pension until the tax relief for basic rate taxpayers is increased from 20%.

Since the public finances are still in much the same poor state that Gordon Brown left them in, I'd incline to (i).

There's also (iii) defer contributing more to a pension until you are a higher rate taxpayer. That assumes that higher rate taxpayers will continue to receive 40% relief, and that you will become a higher rate taxpayer. The later might happen by (a) your getting higher pay, or (b) the threshold for higher rate tax being reduced - which has happened in the not too distant past.

Or there's (iv) subscribe to your LISA until you are fifty with the expectation of swapping to contributing to a pension then. After all, at fifty the money in the pension will be inaccessible for only another five or so years.