Lost tax benefit on LISA?

Mr.Saver

Long story short, I was expected to be in the 20% tax band, so I've contributed into both my LISA and pension. But things have changed in the middle of the year where a bonus and pay raise made me into the higher rate tax band.

Now for the same £100 net contribution, if paid into LISA, it ends up with £125 in the LISA, but if paid into a pension, it ends up £125 in the pension plus 20% tax relief on the £125 gross contribution, this gives me £25 extra.

What can I do with the money I've paid into the LISA before I know that I'll get the bonus and pay raise? Did I just lost 20% on all the gross I've paid into my LISA? For the full £4,000 contributions I'd have lost £1,000, this is not money-saving at all.

For those who are curious. I've paid into both LISA and pension because I intended to use the LISA as a supplement to my pension. I will be able to get lump sum from LISA without being taxed as income in my 60s. This was suppose to be a win-win if my tax rate stayed at 20%, because their cost were the same and I will pay less tax on my pension "income" in the future.

eskbanker

Mr.Saver wrote: »

What can I do with the money I've paid into the LISA before I know that I'll get the bonus and pay raise? Did I just lost 20% on all the gross I've paid into my LISA? For the full £4,000 contributions I'd have lost £1,000, this is not money-saving at all.

No, if you've paid £4K into your LISA then the government bonus of £1K takes it up to £5K and if you withdrew it all then you'd pay a 25% penalty of the amount withdrawn, so you'd get £3,750 back.

In your shoes I'd just leave it in the LISA until you're 60 even if you don't pay any more in - as you suggest the other factor to bear in mind when comparing LISA versus pension is that you won't pay any income tax when taking that money out of the LISA in retirement, whereas you'd struggle to avoid income tax when drawing the 75% of your pension that you can't take tax-free, so removing money from the LISA at this stage, and being penalised for doing so, doesn't seem to stack up to me....

Alexland

I pay enough into my workplace pension using additional voluntary contributions to avoid paying any higher rate tax and then contribute to my LISA from my remaining income which was then only taxed at basic rate. It also means we get child benefit when my income would otherwise be over the limit.

Can you put this payrise and bonus into your pension?

If so you would no longer be a higher rate taxpayer and the LISA would still be effective.

Alex.

Zorillo

You can still get the "lost" tax relief - when you're 60!

I'm struggling to see the issue here, your circumstances have changed for the better. Hindsight is wonderful.

Congratulations on the pay rise.

Mr.Saver

eskbanker wrote: »

No, if you've paid £4K into your LISA then the government bonus of £1K takes it up to £5K and if you withdrew it all then you'd pay a 25% penalty of the amount withdrawn, so you'd get £3,750 back.

In your shoes I'd just leave it in the LISA until you're 60 even if you don't pay any more in - as you suggest the other factor to bear in mind when comparing LISA versus pension is that you won't pay any income tax when taking that money out of the LISA in retirement, whereas you'd struggle to avoid income tax when drawing the 75% of your pension that you can't take tax-free, so removing money from the LISA at this stage, and being penalised for doing so, doesn't seem to stack up to me....

When I said "lost £1,000", I meant lost the 20% tax relief if I've made the same amount contribution into a pension instead. I don't intend to withdraw from the LISA early, unless the penalty is removed before I'm 60.

All I was saying is, being a higher rate tax payer, LISA isn't attractive anymore comparing to a pension. I can't do anything to reduce the loss of 20% tax relief after I was made aware of the tax band change.

Mr.Saver

Alexland wrote: »

I pay enough into my workplace pension using additional voluntary contributions to avoid paying any higher rate tax and then contribute to my LISA from my remaining income which was then only taxed at basic rate. It also means we get child benefit when my income would otherwise be over the limit.

Can you put this payrise and bonus into your pension?

If so you would no longer be a higher rate taxpayer and the LISA would still be effective.

Alex.

Well, that means I would have to contribute a shockingly five figures into my pension. I could afford it, but is this over reacting?

Mr.Saver

Zorillo wrote: »

You can still get the "lost" tax relief - when you're 60!

I'm struggling to see the issue here, your circumstances have changed for the better. Hindsight is wonderful.

Congratulations on the pay rise.

Thanks. I can see I get the "lost" tax relief when I'm 60, but I'd have lost the growth of the tax relief over the 30ish years. Assuming a growth rate of 6%, 1K in 30 years would be able to generate more than 4K capital gains, add a 3% inflation on that, the 4K "interest" still worth more than 1K in today's money.

Okay, I've gone too far. But now I'll certainly suggest contribute to a pension at the beginning of a tax year, and only save into LISA at nearly the end of the tax year if anyone plans to use LISA to get a tax free lump sum for their retirement.

Alexland

Mr.Saver wrote: »

Well, that means I would have to contribute a shockingly five figures into my pension. I could afford it, but is this over reacting?

Up to you depending on your current spending requirements, pension provision and desired retirement date/income.

Personally I also don't need the income so have been contributing five figures into my pension to avoid 40% tax for a few years now.

Alex

Mr.Saver

Alexland wrote: »

Up to you depending on your current spending requirements, pension provision and desired retirement date/income.

Personally I also don't need the income so have been contributing five figures into my pension to avoid 40% tax for a few years now.

Alex

Thanks Alex.

I'm saving for my first home too. It's hard to decide between pension and home.

I will try to calm down and think carefully before I make the decision.

Alexland

Mr.Saver wrote: »

I'm saving for my first home too. It's hard to decide between pension and home.

I will try to calm down and think carefully before I make the decision.

It's tricky as you will need to balance your current needs against the opportunity to be tax efficient. At the very least it's worth making high enough pension contributions to get the maximum employer matching.

Alex

Wildsound

If you're saving for your first home, I would argue the LISA is still better than gaining a higher tax relief in the pension:

1) You'll be able to have more money for your deposit = less mortgage to payback, therefore less interest over the term to pay, so this will make up partially for this "loss" in tax relief you would have got now.
2) You have no idea what government position on pensions will be when you retire (given you're under 40). Whilst it might look favourable for the pension now, who knows what the tax rates/policies will be on your pension when you come to retire.