Keeping ahead of inflation with bonuses

dqnet

I know this is not the correct strategy so ignore the stupidity of it but for the sake of knowledge;


Let's say one was 35 years old and kept topping up their LISA until the maximum 15 years so 60k goes in and 15k comes as a bonus. Then say one also puts their yearly SIPP maximum (£2880 - non tax payer for 20 years until 55) for this example and gets the bonus topping up to £3600.


So if my maths serves me right one has put £60k over 15 years (until 50) and £2880 for 20 years (until 55) That makes it £57,600. After adding the 25% bonuses for each you would be at £147,000


So for the £60k + £57,600 = £117,600 you put in you got £29,400 free.


I was just wondering and finding it really difficult to work out how many years one has kept up with inflation without the erosion of any money or investing a penny with that £29,400? [from 35 years of age - compounded inflation]?



I asked a similar question a while back but forgot to include the SIPP bonuses.
Before the why would you do that comments - I'm just curios that's all.




Cheers!

eskbanker

dqnet wrote: »

I was just wondering and finding it really difficult to work out how many years one has kept up with inflation without the erosion of any money or investing a penny with that £29,400? [from 35 years of age - compounded inflation]?

Perhaps I'm missing what you're really getting at, but at the risk of stating the obvious, it all depends what the future inflation rates are! Obviously there could also be changes to SIPP tax relief and even LISA bonus rates too but inflation is inherently variable from month to month....

dqnet

Yep, I should have made those 2 points clear. Assuming the LISA remains at the 4k for 1k and the SIPP remains at £2,880 for £3600. Inflation I guess is following a trend of 2.5%.


I guess what I am trying to ask is how many years will that 'free' £29,400 keep you ahead of the game before you will need to dive into the principle amount you put in..?


Hope that help!

eskbanker

In simple terms, annual inflation at 2.5% will catch up with a 25% one-off bonus after just over 9 years.

However, as the £29,400 is built up over the entire 15-20 year period (in that the contributions and bonuses are being added annually), a new 9-year period effectively starts each year for that year's money, so for example the bonus on the last £4K you'd pay into a LISA just before you turn 50 wouldn't be eroded by inflation until you were about 59.

Obviously anyone using SIPPs and LISAs (assuming S&S version for long-term planning) will be expecting to benefit from investment growth some way above inflation anyway, so the calculation of an arbitrary figure from incomplete and estimated data is pretty meaningless!

masonic

You may as well assume both products allow access at 60, because that's the likely position for a SIPP after the state pension age has risen to 70.

For the LISA, the average contribution will have been sat around for 17.5 years after having grown by the Government bonus of 25%, so without any other growth would have achieved a return of about 1.3% per year.

For the SIPP, the average contribution will have been sat around for 20 years and achieved about 1.1% per year just from the tax relief.

Long term historic inflation has run at around 3%, some estimates put it at 2.5% going forward, so you can see the tax relief / bonus are unlikely to fully compensate you for inflation over the investment period and probably only offset it for ~10 years.

This is why long term money is invested in high growth assets.

MaxiRobriguez

Surely you're doing something with the original capital and the 25% bonus rather than just leaving it in cash each year?

dqnet

Totally understood - thanks.


The money is being invested but I was just curios as to how long these bonuses cover you for if one was to just sit back and leave them to accumulate year after year once you no longer get them.


So with those bonuses and full contribution one is looking at around 10 years from the day they start if they complete the 15 year[LISA] / 20 year[SIPP] term.



Wow £29,400 is eroded in just 10 years! It sounds crazy when you think about it!

eskbanker

dqnet wrote: »

Wow £29,400 is eroded in just 10 years! It sounds crazy when you think about it!

....but not as crazy as your rather odd and selective hypothetical scenario, which bears little or no resemblance to how one should plan the accumulation of funds for retirement in the real world, which should of course be targeting portfolio growth that outperforms inflation (and by a decent margin) rather than flatlining!

dqnet

eskbanker wrote: »

....but not as crazy as your rather odd and selective hypothetical scenario, which bears little or no resemblance to how one should plan the accumulation of funds for retirement in the real world, which should of course be targeting portfolio growth that outperforms inflation (and by a decent margin) rather than flatlining!

It was only a curiosity question for a study project. Relax buddy, the world isn't as bright as you are!

eskbanker

dqnet wrote: »

It was only a curiosity question for a study project. Relax buddy, the world isn't as bright as you are!

I'm quite relaxed thanks, and wasn't seeking to belittle or condescend if that's what you thought, but was simply highlighting that your query doesn't represent a realistic or meaningful scenario in your stated context of SIPPS and LISAs (assuming S&S) but would seem closer to the effect of inflation on cash deposits....