AVC or LISA ?

Cmdr_Bond

I've just had my annual statement through for my company pension. One of my colleagues has as well.

He is questioning it's worth, and while explaining to him that if he saved the same amount he was putting into his pension into an ISA (his probable choice), while gaining the benefits of the ISA (tax free interest and any other bonuses) he would be losing the additional money the company contributes + the tax relief.

I don't know what the rules are for employer contributions, but currently my employer adds 6% for my 3%.

With the tax relief on my contribution, that's an additional £2.20 for every £1.00 I save.

If the employer contributions get tax relief - we're a sizeable company so there is a good chance they are being offset against corporation tax, then that's even more.

I worked out that if £10 a week was being deducted with only employee tax relief, it would take a lifetime ISA 18 years to overtake the pension pot.

But then I had a brain ripple - AVC's

These are not matched by the company, so will only get the 20% tax relief. With the LISA getting a 25% cumulative bonus on contributions AND being tax free - would it be more prudent to move my AVC's into a LISA.

Additional benefits are that I can take it with me wherever I go (other companies may not take on my existing pension scheme) and I can adjust the contributions more easily (not having to go through HR).

What do you guys think?

MK62

The tax relief on pension contributions is the same as the bonus on a LISA......it's just the way they are quoted which might make them seem different (assuming you are a BR taxpayer....higher rates attract more relief for pension contributions)

A LISA has the benefit of being entirely tax free on withdrawal, assuming you don't draw it before 60, unless buying your first home, but is limited to £4000pa net contribution.

It depends on exactly what you mean by AVC, as to the advantages these can offer.

The two are not mutually exclusive though, so you can combine them to make the most of your circumstances.

Brynsam

Cmdr_Bond wrote: »

If the employer contributions get tax relief - we're a sizeable company so there is a good chance they are being offset against corporation tax, then that's even more.

Employer contributions are paid gross to your pension scheme. The employer claims these as a deduction against corporation tax, which lowers the company's tax bill but doesn't have any impact on the amount your 'pot' receives.

The important question here is what you are saving for/whether you might need to access your savings before the age of 55. Tax breaks are always welcome but shouldn't be the only driver of your choices.

Cmdr_Bond

MK62 wrote: »

The tax relief on pension contributions is the same as the bonus on a LISA......it's just the way they are quoted which might make them seem different (assuming you are a BR taxpayer....higher rates attract more relief for pension contributions)

A LISA has the benefit of being entirely tax free on withdrawal, assuming you don't draw it before 60, unless buying your first home, but is limited to £4000pa net contribution.

It depends on exactly what you mean by AVC, as to the advantages these can offer.

The two are not mutually exclusive though, so you can combine them to make the most of your circumstances.

Please excuse my ignorance, but how does 20% tax relief now = the 25% bonus?

Also, if I'm right, I'm paying the tax now, which then gets added to my pot, do if I choose to put my AVC elsewhere, my bottom line would remain unchanged, with the only difference then that the LISA is tax free and the Pension will be taxed (if I go over my personal allowance).

Brynsam wrote: »

Employer contributions are paid gross to your pension scheme. The employer claims these as a deduction against corporation tax, which lowers the company's tax bill but doesn't have any impact on the amount your 'pot' receives.

The important question here is what you are saving for/whether you might need to access your savings before the age of 55. Tax breaks are always welcome but shouldn't be the only driver of your choices.

Indeed. What I'm looking at here is the best return for my investment.

I don't plan to stop my pension.

But currently my contributions are 3% + 6% AVC with the company putting in 6% of my basic wage.

It's that additional 6% AVC in looking at to see if it would be worth moving to the LISA.

Most likely I would only be looking at the cash LISA, although the investment LISAs may have the potential to be more profitable.

MK62

If you add £4000 to a LISA, the government adds 25% or £1000, so total £5000.

If you add £5000 to a pension, the govt gives you 20% tax relief, or £1000, so your net contribution is the same £4000.

End result is the same (at least from that perspective)
It's just that LISA quotes 25% bonus on your net contribution, whereas pension quotes 20% on your gross contribution.

If you pay your AVCs outside of any sacrifice scheme, and so don't save NI on them, then up to £4000 net contribution pa, a LISA has the advantage of it being entirely tax free vs the pensions 25% (though some AVCs can be 100% tax free too) - though you can't draw it until 60 (unless buying your first house) or you will end up paying a 25% charge.

Possible disadvantages are that you can only contribute until you are 50, and LISA contributions count against your annual ISA allowance.

greatkingrat

If you put £4000 net into a LISA, you get a £1000 bonus from the government. This gives you a total of £5000 (plus any growth) tax-free to spend when you reach 60.

If you put £4000 net into a pension, you get £1000 tax relief from the government. This gives you a pension pot of £5000 (plus any growth). This may seem the same as the LISA, but the difference is it is mostly taxable. If you take 25% tax-free (£1250), then pay 20% tax on the remaining £3750, you end up with £4250, which is less than the LISA.

kidmugsy

If your pension lets you contribute by salary sacrifice the AVC will be more profitable than the LISA.

Cmdr_Bond

Thank you both for explaining how the 20% and 25% balance out.

However, what is leaning me towards the LISA is this:

https://www.moneysavingexpert.com/savings/lifetime-ISAs

You get a 25% bonus each tax year on everything you put in
Man handing over moneyYou can save up to £4,000 a year in a LISA as a lump sum or by putting in cash when you can. The state will then add a 25% bonus on top. So if you save £1,000, you'll have £1,250 and if you save the full £4,000, you'll have £5,000. And that's before interest or growth.

• The bonus is paid every year until you hit age 50.
• The first year's bonus will be added to your account in May 2018. But in this tax year, the bonus is paid monthly (if you've contributed that month).
• Once in your account the bonus counts as money, so you'll get interest on it too (or investment growth/loss).
• You only get the bonus on contributions, not interest or stocks and shares growth/loss.
• The max bonus is £33,000 if you open it at 18, and max it out until you hit 50 (unless you're born on 6 April, when the max is £32,000).

Am I wrong?

I'm reading it as a max £1,000 bonus in the first year, £2,000 in the second, £3,000 in the third and so on.

Or is it really just max £1,000 a year totaling the max £32,000/£33,000 over the lifetime?

Cmdr_Bond

kidmugsy wrote: »

If your pension lets you contribute by salary sacrifice the AVC will be more profitable than the LISA.

I don't think it does. But I will check.

I'm already paying an AVC so if I could turn this into an SS AVC it might be worthwhile.

MK62

Its max £1000pa

It would be nice if it was the other....;)

timodell

Cmdr_Bond wrote: »

Thank you both for explaining how the 20% and 25% balance out.

However, what is leaning me towards the LISA is this:

https://www.moneysavingexpert.com/savings/lifetime-ISAs



Am I wrong?

I'm reading it as a max £1,000 bonus in the first year, £2,000 in the second, £3,000 in the third and so on.

Or is it really just max £1,000 a year totaling the max £32,000/£33,000 over the lifetime?

You are reading this wrong: the maximum bonus each year is £1,000 and you only get this if you invest a further £4,000. There is no bonus paid on the existing pot invested in previous years I am afraid...