LISA or Pension?

James145

[FONT=&quot]As more providers start offering the Lifetime ISA (LISA), people are starting to question whether they should save into a defined contribution (otherwise known as money purchase) pension or a LISA for later life.[/FONT][FONT=&quot]
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[FONT=&quot]When comparing the two, there are three things to consider[FONT=&quot].[/FONT] [FONT=&quot]I[/FONT]ncome tax, inheritance tax (IHT) and employer contributions.[/FONT]

[FONT=&quot]Income tax

[/FONT] [FONT=&quot]With a LISA, contributions are paid into the account with no tax relief, but a 25% government bonus is paid at the end of each month on any contributions during the month. When the money is withdrawn for retirement, it is completely tax-free.[/FONT][FONT=&quot]
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[FONT=&quot]With a pension, contributions are paid into the account with tax relief at your marginal rate of tax (20% for basic rate). When the pension is put into drawdown (in simple terms, when you start taking money), you receive 25% of the balance tax-free, then the remainder is taxed at your marginal rate of tax.

[/FONT] [FONT=&quot][FONT=&quot]I have shown[/FONT] how a £4,000 contribution into each would be treated below (for a basic-rate taxpayer with no remaining tax-free personal allowance).[/FONT]
[FONT=&quot]
[/FONT][FONT=&quot]LISA Contribution[/FONT][FONT=&quot] - [/FONT][FONT=&quot][FONT=&quot]£4,000 [/FONT][/FONT][FONT=&quot]With tax relief/bonus[/FONT][FONT=&quot] - [/FONT][FONT=&quot]£5,000 [/FONT][FONT=&quot]Amount withdrawn (before tax)[/FONT][FONT=&quot] - [/FONT][FONT=&quot][FONT=&quot]£5,000[/FONT][/FONT][FONT=&quot] Amount withdrawn (after tax[FONT=&quot]) - [/FONT][/FONT][FONT=&quot][FONT=&quot]£5,000
[/FONT][/FONT][FONT=&quot][FONT=&quot]Pension[/FONT] Contribution[/FONT][FONT=&quot] - [/FONT][FONT=&quot][FONT=&quot]£4,000 [/FONT][/FONT][FONT=&quot]With tax relief/bonus[/FONT][FONT=&quot] - [/FONT][FONT=&quot]£5,000 [/FONT][FONT=&quot]Amount withdrawn (before tax)[/FONT][FONT=&quot] - [/FONT][FONT=&quot][FONT=&quot]£5,000[/FONT][/FONT][FONT=&quot] Amount withdrawn (after tax[FONT=&quot]) - [/FONT][/FONT][FONT=&quot][FONT=&quot]£[FONT=&quot]4[/FONT],[FONT=&quot]25[/FONT]0[/FONT][/FONT][FONT=&quot]
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[FONT=&quot]If the taxpayer did have their full personal allowance of £11,850 for the 2018/2019 tax year, they would pay no income tax on the pension payment, so the LISA and pension would pay the same amount. However, as the current State Pension of approximately £8,450 per year uses up most of the personal allowance, it is unlikely that a pensioner will have much, if any, personal allowance left for other income.[/FONT]

[FONT=&quot]As you can see from the above, if you are a basic-rate taxpayer with no personal allowance, from an income tax perspective it is better to save into a LISA. However, bear in mind the maximum amount you can contribute into a LISA in the 2018/2019 tax year is £4,000, whereas it is the lower of your earnings or £40,000 for a pension (if you have not retired).[/FONT][FONT=&quot]
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[FONT=&quot]Employer contributions[/FONT]

[FONT=&quot]The most notable difference between LISAs and pensions are employer contributions. An employer may, to an extent, match your contributions into a pension, to encourage you to save. The employer pays their contributions free of income tax and NICs, as it is not classed as income by HMRC. Employers will not do this for LISAs, as they have to pay it to the employee first, which may give rise to income tax and NICs for both the employee and employer.[/FONT]

[FONT=&quot][FONT=&quot]I have shown[/FONT] how a £4,000 contribution into a LISA and pension would be treated below (for a basic-rate taxpayer with no remaining tax-free personal allowance), if the employer matches the member contributions to an extent:[/FONT]
[FONT=&quot]
LISA Member contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£4,000[/FONT][FONT=&quot]With tax relief/bonus and employer contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£5,000[/FONT][FONT=&quot] Amount withdrawn (before tax)[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£5,000[/FONT][FONT=&quot] Amount withdrawn (after tax) - [/FONT][FONT=&quot]£5,000

[/FONT][FONT=&quot][FONT=&quot]Pension [/FONT]Member contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£4,000[/FONT][FONT=&quot] Employer contribution (as % of member)[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot][FONT=&quot]22.1% [/FONT][/FONT][FONT=&quot]With tax relief/bonus and employer contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£5[FONT=&quot],884[/FONT][/FONT][FONT=&quot] Amount withdrawn (before tax)[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£5,[FONT=&quot]884[/FONT][/FONT][FONT=&quot] Amount withdrawn (after tax) - [/FONT][FONT=&quot]£5,[FONT=&quot]001.40

[/FONT][/FONT][FONT=&quot][FONT=&quot]Pension [/FONT]Member contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£4,000[/FONT][FONT=&quot] Employer contribution (as % of member)[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot][FONT=&quot]2[FONT=&quot]5[/FONT]%[FONT=&quot][/FONT][/FONT][/FONT][FONT=&quot]With tax relief/bonus and employer contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£[FONT=&quot]6,000[/FONT][/FONT][FONT=&quot] Amount withdrawn (before tax)[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£[FONT=&quot]6,000[/FONT][/FONT][FONT=&quot] Amount withdrawn (after tax) - [/FONT][FONT=&quot]£5,[FONT=&quot]100
[/FONT][/FONT]
[FONT=&quot][FONT=&quot][FONT=&quot][FONT=&quot]Pension [/FONT]Member contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£4,000[/FONT][FONT=&quot] Employer contribution (as % of member)[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot][FONT=&quot][FONT=&quot]50[/FONT]%[/FONT][/FONT][FONT=&quot] With tax relief/bonus and employer contribution[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£[FONT=&quot][FONT=&quot]7[/FONT],000[/FONT][/FONT][FONT=&quot] Amount withdrawn (before tax)[/FONT][FONT=&quot][FONT=&quot] - [/FONT][/FONT][FONT=&quot]£[FONT=&quot][FONT=&quot]7[/FONT],000[/FONT][/FONT][FONT=&quot] Amount withdrawn (after tax) - [/FONT][FONT=&quot]£5,[FONT=&quot][FONT=&quot]95[/FONT]0[/FONT][/FONT]
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[FONT=&quot]Inheritance tax (IHT)[/FONT]

[FONT=&quot]The final difference between LISAs and pensions is how they are treated for IHT purposes.[/FONT]

[FONT=&quot]When the holder of a LISA dies, the LISA reverts to a normal cash/investment account, so IHT may be due (subject to the nil-rate band of £325,000, below which no IHT is due). No IHT is due if the proceeds are transferred to a spouse.[/FONT][FONT=&quot]
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[FONT=&quot]With most defined contribution pension schemes, death benefits are paid on a discretionary basis. This means the member nominates beneficiaries for their pension, but the scheme makes the final decision on where the benefits are paid (most of the time, it is to the nominated beneficiaries). The advantage of this is the pension does not form part of the deceased!!!8217;s estate so, if the deceased was under 75 when he died, the beneficiaries receive the pension completely free of both income tax and IHT. If the deceased was over 75, the pension is still free of IHT, but they have to pay income tax on any income from the pension.[/FONT]

[FONT=&quot]The notable exception is the National Employment Savings Trust (NEST), which pays non-discretionary benefits. This means the pension forms part of the deceased!!!8217;s estate, so may be subject to IHT.[/FONT]

[FONT=&quot]Overall, a LISA is best for a basic-rate taxpayer who expects to have no personal allowance in retirement and whose employer does not match their contributions by 22.1% or more, as long as they do not expect their estate to exceed the nil-rate band upon death.[/FONT]

[FONT=&quot]If you expect to have a remaining personal allowance that you do not expect to exceed in retirement and your employer does not match your contributions at all, LISAs and pensions are equally beneficial from an income tax perspective. Therefore, due to the IHT advantages of a pension that is likely to be the better option.[/FONT]

cloud_dog

Almost a fair summary but...

1. PP/SIPP currently has slightly more flexibilty on drawing the money (55 against 60 but that may equalise over time)
2. Your basic premise of only drawing the money at the same time as the SP is in a number of cases not going to be accurate, i.e. draw pension (or LISA) before SRA.
3. Consideration on plusses / minusses regarding the benefits situation
4. Ignores the option of SS as an enhancer to pension contributions
5. Can start contributing to a pension sooner than a LISA and for longer

kidmugsy

If you plan to retire at (say) 65, there's a case for opening a LISA and then withdrawing funds at age 60 to add to a pension until age 65.

Oliver1191

Personally, i like the idea of contributing to both (and an isa) on a monthly basis.

This keeps my options open for the future. I like the idea of having a range of options at that.

I'm currently putting the lion's share of my monthly investments into my isa as i have set certain goals that i am trying to achieve. Probably from Christmas or Easter onwards i will turn my attention to my lisa again.

I'm 35 now. My thinking is that from say 45 onwards, all being well, i could use the growth / income generated in my isa and transfer it to my lisa to get the 25% bonus. Virtually all my monthly investments could then flow towards my sipp.

This is a long way off, though...hence spreading my money a bit.