LISA as additional retirement fund

Southend1

Hi all. Can I just run something by the collective wisdom of MSE?

I’m 36, earning £30k pensionable salary and approx £3k non pensionable earnings. This will increase to around £33k plus £3k over the next 3 years.

I am lucky enough to be a member of USS DB scheme. I pay 8% normal contributions plus the 1% matched D.C. and an additional 1% unmatched D.C. contribution.

Thinking ahead to retirement I have 9 years USS service currently and a D.C. pot from a previous job which is currently worth approx £48k. I will probably want to retire a few years before state pension age.

Am I right in thinking in this situation a LISA is a good option for funding the few years before state pension age, in combination with the D.C. pot from the previous job? My thinking is that I could take £10k a year from the D.C. pot and supplement it with money from the LISA to avoid paying any income tax in those years. Then at state pension age I would start drawing the USS pension.

The only issue I can think of is that USS D.C. funds have no fees because the employers subsidise them, whereas funds held in a LISA are subject to an annual fee.

Thoughts welcome!

Thanks

Southend1

Just to add that my employer seems to allow salary sacrifice on the matches D.C. contributions but not on additional unmatched contributions to USS.

IanSt

At what age are you thinking you would like to take early retirement?

I'd personally prefer an ISA to a LISA for retirement purposes because of the flexibility it gives to retire in your fifties, but if at least 60 then a LISA could give you some additional options to retire at that age.

Alexland

Once you have harvested your max employer matched pension contribution then LISAs give about the same benefit as pensions for 20% taxpayers with salary sacrifice.

If you are a 40% taxpayer pension contributions win every time.

If you are a 20% taxpayer without salary sacrifice then once you have collected your employer matching contributions any further DC contributions are better in a LISA.

Even better you can under current rules recycle your LISA money into your DC scheme between the ages 60 and 75 for additional 25% tax free benefit.

Make sure you check all the other aspects of LISA investing before making your decision. Having no fees on your DC scheme is very advantageous. LISA fees would compound at around 0.5% per year.

So in your position.... You are a 20% taxpayer and the additional DC would not be salary sacrifice so a LISA is normally better. DC is normally worse as you may need to pay 15% tax on withdrawal (75% at 20% tax) but the no fees over enough years as you are young might make up that difference so.... it's marginal!

You can take out more than £10k per year from the DC tax free before SP age as you have the full tax free allowance plus the 25% tax free on top. In addition if you have a low income partner you could use marriage allowance.

As such I would stick the extra into the DC (hoping to avoid paying much tax on withdrawal and the tax I would pay might be offset by lower fees) but still open a small LISA before 40 to keep your options open.

Unless there is any possibility you will be a 40% taxpayer in retirement...

Alex

Southend1

IanSt wrote: »

At what age are you thinking you would like to take early retirement?

I'd personally prefer an ISA to a LISA for retirement purposes because of the flexibility it gives to retire in your fifties, but if at least 60 then a LISA could give you some additional options to retire at that age.

Probably around 60. I doubt I could afford to retire any earlier as I will need to have enough saved to make up the £8k annual shortfall until state pension age.

Southend1

Alexland wrote: »

Once you have harvested your max employer matched pension contribution then LISAs give about the same benefit as pensions for 20% taxpayers with salary sacrifice.

If you are a 40% taxpayer pension contributions win every time.

If you are a 20% taxpayer without salary sacrifice then once you have collected your employer matching contributions any further DC contributions are better in a LISA.

Even better you can under current rules recycle your LISA money into your DC scheme between the ages 60 and 75 for additional 25% tax free benefit.

Make sure you check all the other aspects of LISA investing before making your decision. Having no fees on your DC scheme is very advantageous. LISA fees would compound at around 0.5% per year.

So in your position.... You are a 20% taxpayer and the additional DC would not be salary sacrifice so a LISA is normally better. DC is normally worse as you may need to pay 15% tax on withdrawal (75% at 20% tax) but the no fees over enough years as you are young might make up that difference so.... it's marginal!

You can take out more than £10k per year from the DC tax free before SP age as you have the full tax free allowance plus the 25% tax free on top. In addition if you have a low income partner you could use marriage allowance.

As such I would stick the extra into the DC (hoping to avoid paying much tax on withdrawal and the tax I would pay might be offset by lower fees) but still open a small LISA before 40 to keep your options open.

Unless there is any possibility you will be a 40% taxpayer in retirement...

Alex

Thanks, that pretty much validates the conclusion I was coming to myself. I have recently opened a S&S LISA with £500 in case I decide it would be beneficial to pay into that in future. In the meantime I will use annual pay increments to increase the percentage I’m paying into the D.C. section of USS. That way I avoid the charges in the LISA and it also seems simpler to me, from the point of view of keeping track of everything.

Alexland

Another consideration is that the LISA is outside the LTA limit...

kidmugsy

Many people are going to find themselves comfortably off from age 68 or so (DB pension + State Retirement Pension) but short of funds earlier if they retire at about 60. Maybe people should keep their eyes open for financial products designed to fill that gap. Perhaps, if nothing else, they could plan to increase their mortgage loan before they retire, then retire and draw on that capital plus the income it will generate, and then expect to pay the mortgage down after age 68.

Southend1

kidmugsy wrote: »

Many people are going to find themselves comfortably off from age 68 or so (DB pension + State Retirement Pension) but short of funds earlier if they retire at about 60. Maybe people should keep their eyes open for financial products designed to fill that gap. Perhaps, if nothing else, they could plan to increase their mortgage loan before they retire, then retire and draw on that capital plus the income it will generate, and then expect to pay the mortgage down after age 68.

Good idea but in my own case I anticipate that my pension will be just enough to live on from 68, hence looking to fund a few years to retire before then. I don’t think my income after 68 will support mortgage payments as well as living costs.

Southend1

Alexland wrote: »

Another consideration is that the LISA is outside the LTA limit...

I don’t anticipate the value of my pensions being anywhere close to £1m, although I suppose the LTA could be reduced over the years. I guess another reason to have the LISA open and contribute to it in future years if it looks like the LTA might be below £500k by the time I’m 68. Although of course I can’t contribute to the LISA beyond 50. Maybe there’s a case to start paying into the LISA now, to mitigate against future LTA reductions affecting me.

kidmugsy

Southend1 wrote: »

... a D.C. pot from a previous job which is currently worth approx £48k. I will probably want to retire a few years before state pension age.

Am I right in thinking in this situation a LISA is a good option for funding the few years before state pension age, in combination with the D.C. pot from the previous job? My thinking is that I could take £10k a year from the D.C. pot and supplement it with money from the LISA to avoid paying any income tax in those years. Then at state pension age I would start drawing the USS pension.

I think your scheme is pretty good. Assume that in real terms your £48k + USS DC grows to £80k. Take £20k tax-free and draw down the other £60k at £12k p.a. for 5 years. There's your personal allowance used up. Then you'd want the LISA to cover you for the extra income you need, also tax-free.

I wouldn't be at all surprised if USS goes through more turmoil and closes the DB section to new accruals, switching entirely to DC for new contributions. I don't see any reason why that would necessarily change your plan. Perhaps if higher rate tax relief were swept away, and everyone got the same relief at more than basic rate, that might incline you to contribute more to a pension and less to a LISA.

A LISA is available in an emergency albeit with a penalty. The DC money would be available in an emergency but only once you are 55 (or whatever the magic age is by then). So there is a case for saving into the LISA now rather than making the unmatched DC contribution, expecting to move to further DC contributions in your 50s.

Happily, whichever you opt for is attractive and you can change your mind as the situation changes. My own instinct might be to go for the more flexible option (LISA) to begin with. Why not wait for this month's Budget and then grasp the nettle?