Pension vs LISA

TheShape

TheShape wrote: »

Just so I'm sure of the answer. If someone is earning £46351 so paying 40% tax on £1 of earnings, do they only receive higher rate tax relief on £1 of pension contributions with any additional contributions only receiving 20% tax relief?

Thanks

kidmugsy wrote: »

Correct. You get tax relief on a £ at the rate you paid tax on that £ (except at the low end where you can get tax relief on money that never did pay any tax).

I was sure that was the case but I've seen so many threads here where someone has asked the question re pension vs LISA and the answer has been that pension is better for higher rate taxpayers that I was beginning to doubt myself.

It's going to be important to ask not only whether someone is a higher rate taxpayer but also to ask their income for any answer to be at all meaningful.

john987

Thanks for the replies. It appears I was missing that the LISA tax relief is only 20% and the fact the higher rate tax relief on the pension contribution means the total pension contribution is higher and therefore the overall pot will be higher at the end.


For info salary around £60k and currently making contributions of 20% + 5% employer so 25%. The employee contributions are therefore all saving tax at 40%. If I took out a LISA I would probably reduce the workplace pension contribution to compensate. Would be looking to retire around 60.


The only other benefit I can see with a LISA is I can choose my own investments compared with the funds offered by the workplace pension.

Bimbly

Salary: £60k
Current pension contrib.: £12k (20% from salary, not including employer contrib.)
Gross salary after pension: £48k
Higher rate tax threshold: £46,350
Remaining salary attracting 40% tax: £1,650 (2.75% of 60k)

So, if you want to put more money away into retirement, then it makes sense to put that amount of salary attracting 40% income tax into your pension. So, an extra 3% (I rounded up).

After that, it seems that money into a LISA would be a good move as, as you say, it would not be taxable on withdrawal. If you're happy to wait for your money until age 60 (although you could take it out early with penalty which is another possible benefit). You're likely to be able to get at other pensions at age 58.

Do others agree?

kidmugsy

Bimbly wrote: »

money into a LISA ... you could take it out early with penalty which is another possible benefit

Another benefit of a pension is that if the contributor has the decency to die before age 75 then his widow (or whomever he has nominated) gets the lot free of tax.

I agree that the LISA is more flexible: the penalty for withdrawing money early would sting but it's not draconian.

Someone here made a good point a while back: money from a LISA becomes available at about the age when you might want it to help children with their first house purchase, or clearing student debt, or whatever.

Alexland

john987 wrote: »

If I took out a LISA I would probably reduce the workplace pension contribution to compensate.

That would be nuts - while you are paying higher rate tax on your salary, bonuses, taxable benefits, etc then additional pension contributions will generally be better.

If/when you get down to basic rate then a LISA is better unless your employer operates salary sacrifice (to save NI on pension contributions) in which case its about the same.

My LISA is generally to be gifted to my son with some being recycled into my younger wife's pension for a few years until her LISA becomes available for recycling at 60.

Alex

dunstonh

The only other benefit I can see with a LISA is I can choose my own investments compared with the funds offered by the workplace pension.

No difference because you could always use an individual pension which has exactly the same funds available as the LISA at the same cost.

BTW, if the workplace pension is salary sacrifice then its even better as you make NI savings with the pension as well.

jkwer521

There may be a situation in which LISA would be better. If you expect to hit the lifetime allowance, then the benefit of the higher rate tax relief would be wiped out. Also, if as a result of expecting to hit the lifetime allowance, you reduce your contributions in future so that you no longer receive your employer's matching contributions, then you would also lose out.

I would not discount the possibility of reaching the lifetime allowance or of paying higher rate tax in retirement, given your age and salary. I don't know what industry you are in and what your expectations of salary are, but for example if you continued to contribute 25%, had real wage growth of 3.5% per year and real investment growth of 5% per year then you would expect to reach the lifetime allowance by around age 58. Also, if you did have a pot of that size, you might expect to pay higher rate tax at some point.