AVC or LISA ?

greatkingrat

Cmdr_Bond wrote: »

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

Cash LISAs are almost always a bad idea (unless they are being used for short/medium term property saving). Over the 20+ years until you are able to access the money you are guaranteed to lose value due to inflation.

Presumably your existing pension / AVCs is invested and not just left as cash, so why would you want the LISA in cash?

Cmdr_Bond

MK62 wrote: »

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 wrote: »

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.

Sorry, I'm just querying the math here - It's not that I don't believe either of you, I am just having trouble reconciling it in my head

If you put 4,000 into a LISA you get 1,000 bonus - that is simple

It's the next bit I am having a problem with

If you put 4,000 into a pension, you get 20% tax relief, surely that is only £800?

So for the same period the LISA is £200 better off?

Additionally, with the pension you pay income tax on everything over your personal allowance when you get it back where as the LISA is tax free.

Taking the example of 25% tax free and then 20% on the rest that makes the pension = £4,080 to the LISAs £5,000 over the period.

I'm 39 in a month, so that gives me 11 years, that's a difference of about £10,120 by the time I'm 50 - IF my maths is correct.

bolwin1

Cmdr_Bond wrote: »

Sorry, I'm just querying the math here - It's not that I don't believe either of you, I am just having trouble reconciling it in my head

If you put 4,000 into a LISA you get 1,000 bonus - that is simple

It's the next bit I am having a problem with

If you put 4,000 into a pension, you get 20% tax relief, surely that is only £800?

So for the same period the LISA is £200 better off?

Additionally, with the pension you pay income tax on everything over your personal allowance when you get it back where as the LISA is tax free.

Taking the example of 25% tax free and then 20% on the rest that makes the pension = £4,080 to the LISAs £5,000 over the period.

I'm 39 in a month, so that gives me 11 years, that's a difference of about £10,120 by the time I'm 50 - IF my maths is correct.

Not quite. Your sums for the LISA are fine, however for the pension, the tax relief is on the amount net of tax. In this case that works out at £5K. £5K less 20% tax relief means you actually pay £4K. Both options actually cost you £4K in the pocket & you end up with £5K invested.

Cmdr_Bond

Nope, still not getting it.
Let's say my payslip shows a deduction of £10, that is, in effect £12 because it is deducted after tax, but the tax on that amount gets rebated to my pension.

So surely, if my annual deduction from wages is £4,000 it is technically £4,800 - not £5,000 !?

I agree that £5,000 - 20% = £4,000

The issue, unless I am fundamentally misunderstanding how my contribution are deducted, is that I pay the tax and then it gets added to my pension put.

The point is that after all deductions have been taken into account, the bottom line of the paycheck should be the same.

The fact that one part of my contribution is hidden in the tax is irrelevant for the comparison.

And to get to £5,000 I believe my contributions would need to be £4,166.67 + the 20% incur tax.

MK62

Cmdr_Bond wrote: »

Nope, still not getting it.
Let's say my payslip shows a deduction of £10, that is, in effect £12 because it is deducted after tax, but the tax on that amount gets rebated to my pension.

So surely, if my annual deduction from wages is £4,000 it is technically £4,800 - not £5,000 !?

I agree that £5,000 - 20% = £4,000

The issue, unless I am fundamentally misunderstanding how my contribution are deducted, is that I pay the tax and then it gets added to my pension put.

The point is that after all deductions have been taken into account, the bottom line of the paycheck should be the same.

The fact that one part of my contribution is hidden in the tax is irrelevant for the comparison.

And to get to £5,000 I believe my contributions would need to be £4,166.67 + the 20% incur tax.

Nope - you are looking at it from the wrong direction.
I think your confusion stems from not taking into account whether pension contributions are taken from gross pay, or net pay.

It depends on how your works pension scheme is set up as to whether they take contributions from gross or net pay.
Here is a good explanation of the different types of tax relief mechanisms.....

If contributions are taken from gross pay, then the tax relief is in the form of you not actually paying tax on the contribution in the first place.

If taken from net pay, then tax relief always applies to the gross contribution, not the net contribution (and net contribution=the part you actually pay).
To use your example, a gross contribution of £5000 would be made up from your net contribution of £4000 (5000 - 20% tax), plus the tax relief of £1000 (the 20% tax in the previous calculation).

Your example

And to get to £5,000 I believe my contributions would need to be £4,166.67 + the 20% incur tax

assumes that the 20% tax relief applies to the £4166.67....whereas in fact, it actually applies to the £5000 (ie the amount 20% tax was originally deducted from, to leave you £4000 net).


This is all assuming basic rate tax of course!

Cmdr_Bond

Got it!

Thank you

So for every £4000 I see removed £5000 goes into the pot BECAUSE the £4000 is the 80% net result of paying tax...

Now my brain gets it, sorry for any confusion.

jamesd

And 1000 is 25% of 4000, same as the LISA.

Cmdr_Bond

jamesd wrote: »

And 1000 is 25% of 4000, same as the LISA.

Yup, with the difference being tax on the final savings or pension, where the LISA wins, slightly.

However, thanks to the mention of Salary Sacrifice above I have contacted my companies HR department.

It is not something currently available, bit they are looking into it.

Depending on what benefits they offer (personally I'm only interested in additional contributions), may or bay not make it worthwhile

cloud_dog

Cmdr_Bond wrote: »

Yup, with the difference being tax on the final savings or pension, where the LISA wins, slightly.

However, thanks to the mention of Salary Sacrifice above I have contacted my companies HR department.

It is not something currently available, bit they are looking into it.

Depending on what benefits they offer (personally I'm only interested in additional contributions), may or bay not make it worthwhile

If you are a lower rate tax payer then the NI savings is an additional 12%....very worthwhile I think you'll find.

Cmdr_Bond

cloud_dog wrote: »

If you are a lower rate tax payer then the NI savings is an additional 12%....very worthwhile I think you'll find.

Yes, I hadn't thought about them.