Lifetime Isa vs. company-matched pension

Istuart1

Hi all!

I'm looking for some advice with my retirement planning. I'm trying to decide whether to max my company-matched pension contributions (currently £91 a month that is being matched)

The pension is with Standard life and is being invested into multiple medium risk funds across multiple countries and sectors, so it's diversified. The only problem is that none of these funds offer dividend payments (which I would have liked to have reinvested). So I would just be buying £182 of diversified funds every month essentially. As far as I'm aware, 75% of your pension is taxed.

Now the Lifetime ISA I understand is not taxed. Say I pay in the same amount of money myself (£91) every month I'd get 25% topped up by the government. With the LISA I can choose funds which DO HAVE DIVIDENDS. I'd like to auto reinvest these dividends.

I'd just like to get some advice on whether £182 (including company's contribution) into a pension where dividends aren't available would beat a LISA where £113 (including government contribution) is being invested with dividend reinvestment.

Let's assume investments get a 7% positive return each year on average for both products.

Any help or advice would be much appreciated!

Thanks!
Ian

dunstonh

The only problem is that none of these funds offer dividend payments (which I would have liked to have reinvested).

That is not a problem. They are acc units by default. So, dividends are being reinvested internally and reflected in the unit price. You are not losing dividends with acc units.

Now the Lifetime ISA I understand is not taxed. Say I pay in the same amount of money myself (£91) every month I'd get 25% topped up by the government. With the LISA I can choose funds which DO HAVE DIVIDENDS. I'd like to auto reinvest these dividends.

you also get accumulation versions of funds just like the pension.

There is no difference in the return between acc and inc units. insured pension funds are acc by default as you are investing in a pension and historically, you dont need inc units in the accumulation stage.

I'd just like to get some advice on whether £182 (including company's contribution) into a pension where dividends aren't available would beat a LISA where £113 (including government contribution) is being invested with dividend reinvestment.

Free money from the employer vs no free money from the employer. Obviously free money wins.

Your misconception about acc units is the failure point here.

AnotherJoe

This is a no-brainer. Company matched wins by so far its not even funny.
And there are so many misapprehensions in your comments, thats also not funny.
Two points*
Forget the dividends, its a complete red herring
Forget the dividends, its a complete red herring
There will be "dividends" they just are automatically reinvested within the fund, raising the price of the units and saving you money in transaction costs. Look up the difference between accumulation and income funds.
And because of that misunderstanding, you think its better to put £113 in rather than £182 of which £91 is FREE MONEY YOU ARE THROWING AWAY and get less out long term, because you are THROWING AWAY FREE MONEY.
On what planet, irrespective of tax treatments (which come out as a wash**) does £113 seem better than £182 when half of the £182 is free money?

Your complete misunderstanding about dividends has somehow massively blinded you to the utter stupidity of not doubling your money at no cost to you.

By all means, after you've maxxed out the employers matched money, you can debate til the cows come home the merits of pension vs LISA. Before that point, it shouldn't even be a consideration.

* "I realise that technically thats just one thing, but i thought its so important it was worth mentioning twice"

** one is tax before one is tax after. No massive difference though on balance tax after wins since it is less

ffacoffipawb

AnotherJoe wrote: »

On what planet, irrespective of tax treatments (which come out as a wash**) does £113 seem better than £182 when half of the £182 is free money?

Where you are a higher rate taxpayer, expect to remain so, and expect to exceed 100% LTA even without these pension contributions.

jkwer521

Where you are a higher rate taxpayer, expect to remain so, and expect to exceed 100% LTA even without these pension contributions.

The comparison between £113 and £182 is not valid in this case, since one is gross and one is net. The actual comparison would be £182 (gross contribution) vs £68 (£91, taxed at 40% (ignoring NI) with 25% added on for the LISA bonus). In this case, even if you exceed the LTA and remain a higher rate taxpayer in retirement, it would still be worth taking the pension option as you would be taxed at 55% and receive the equivalent of £82, which is still better than £68.

ffacoffipawb

jkwer521 wrote: »

The comparison between £113 and £182 is not valid in this case, since one is gross and one is net. The actual comparison would be £182 (gross contribution) vs £68 (£91, taxed at 40% (ignoring NI) with 25% added on for the LISA bonus). In this case, even if you exceed the LTA and remain a higher rate taxpayer in retirement, it would still be worth taking the pension option as you would be taxed at 55% and receive the equivalent of £82, which is still better than £68.

Ok, and you have exceeded the annual allowance as well.

Very unlikely I know.

sandsy

Hello Ian

It's obvious you're read up on the LISA but you need to do a bit more reading up on pensions

Pensions also get a 25% top up from the government in exactly the same way as ISAs so there is no difference there. And if you become a higher rate taxpayer, the top up on the pension gets bigger whereas it stays the same on a LISA.

The funds available to put within a pension and a LISA are also typically the same. And in both cases, you can choose funds where the dividends are automatically reinvested for you. In a workplace pension, it's likely that they'll only offer this type of fund as there is no need not to reinvest the dividends.

Whilst the LISA proceeds are tax free, the pension proceeds give you 25% tax free and then any income you take is only taxable once you exceed your personal allowance.

The downside to the LISA are the limitations on contributions (£4000pa including the top up) whereas with pensions, you can contribute as much as you want (although the goverment top up will stop once the total going in each year reaches £40,000pa). Remember too that you have to stop making LISA contributions at 50 whereas pension contributions can carry on to 75.

And with a LISA, apart from the house purchase element, you can't draw out money for your retirement until you reach 60 where as it's currently 55 for pensions.

What makes the pension the real winner here though is the extra contribution from your employer. Your pension is part of your remuneration package. If they tried to remove £91 a month of it, you woudn't be happy - so why choose to lose it voluntarily?

Triumph13

ffacoffipawb wrote: »

Where you are a higher rate taxpayer, expect to remain so, and expect to exceed 100% LTA even without these pension contributions.

That gave me lots of fun working it out! The only even vaguely believable scenario I can find where the LISA wins is where someone retires (voluntarily or through ill health) very early from a highly paid career with so much stuffed into their pension they are over LTA and will be a 40% tax payer when they take their pension - probably talking about a DB scheme with huge salary.
They retire in their 40s, living off ISA savings until 55, and take a part time job or go work in a much lower paid field that interests them leaving them a basic rate taxpayer.
The £182 in the pension would only be worth £81.90 after tax and LTA charge. The LISA would be worth £91 if they are currently a basic rate tax payer (pay 20% tax, get it added back in the LISA).
Of course if you were in that position what you'd really do is neither as £72.80 now probably has a lot more utility than £91 when you're 60 as you know you'll already be a higher rate taxpayer then!