LifeTime ISA vs Self-invested personal pension (SIPP)

PingPongSet

I am looking for a comparison between LISA and SIPP.

Below is major difference and similarities

Similarities:
tax relief: same for both on basic rate tax payer and high.
Capital/Income tax: 25% free. This is incorrect for LISA. Please see update below.
Both can be used for cash and investment

Differences:
LISA: can withdraw from 60 ys
SIPP: can withdraw from 55 ys

LISA: can be used for buying house
SIPP: cannot be used for buying house


What else should I be aware of when choosing LISA and SIPP?

moneysavingexpert.com/savings/cheap-sipps

moneysavingexpert.com/savings/lifetime-isas

Update:
Correction:
Capital/Income tax when taking money out:
SIPP: 25% free
LISA: free for all money

Dazed_and_confused

Similarities:
tax relief: same for both on basic rate tax payer and high.
Capital/Income tax: 25% free

Are you sure about both of these?

SIPP: cannot be used for buying house

Why not?

eskbanker

PingPongSet wrote: »

What else should I be aware of when choosing LISA and SIPP?

Tax on the way out: money withdrawn from SIPP is taxable, but LISA money can be withdrawn with no income tax liability....

PingPongSet

eskbanker wrote: »

Tax on the way out: money withdrawn from SIPP is taxable, but LISA money can be withdrawn with no income tax liability....

Thanks. I updated my OP based on your comment.

cjv

PingPongSet wrote: »

LISA: can withdraw from 60 ys

You can withdraw at any time subject to a penalty, if not used for first property purchase, retirement or terminal illness.

Obviously you would hope not to withdraw to avoid the penalty, but it may be something to consider.

Additionally a LISA can affect certain means tested benefits where a SIPP would not. There may also be differences when it comes to inheriting a LISA vs a SIPP but I have not looked into that personally.

dunstonh

tax relief: same for both on basic rate tax payer and high.

Not correct.

Whilst LISAs get a bonus of 25% and pensions get tax relief of 20% (which is the same as 25% on the LISA due to one being a relief and the other a bonus), higher rate taxpayers or highest rate (and dont forget Scottish taxpayers) get higher rate reliefs.

Pensions are not included in means tests prior to retirement and only included as a nominal income in retirement.

Company directors are usually better on pensions (and not specifying SIPPs as stakeholder pensions and personal pensions are all under the same rules). They can avoid corporation tax and NI using pensions. But not with LISAs.

Workplace schemes get employer contributions. So miles better than LISA upto the maximum employer contribution.

Many workplace schemes operate salary sacrifice. So, you can get both tax relief and a reduction in your NI. LISAs do not.

LISA is subject to inheritance tax. Pensions are not (caveat applies in extremely rare cases which would apply to under 1% of pensions)

There are differences in the annual allowance and lifetime allowance which would impact on some people.

PingPongSet

eskbanker wrote: »

Tax on the way out: money withdrawn from SIPP is taxable, but LISA money can be withdrawn with no income tax liability....

If based on the amount of money you can keep, LISA wins. Any disagreement?

PingPongSet

dunstonh wrote: »

Not correct.
Whilst LISAs get a bonus of 25% and pensions get tax relief of 20% (which is the same as 25% on the LISA due to one being a relief and the other a bonus)

Can you elaborate on this or give an example?

dunstonh wrote: »

not specifying SIPPs as stakeholder pensions and personal pensions are all under the same rules

Can you elaborate on this or give an example?

Thanks in advance.

dunstonh

Can you elaborate on this or give an example?

it is just maths. A 25% uplift is the same as a 20% reduction.

LISA £1000 paid in gets £250 bonus which is 25%. £1000 plus 25% (£250) = £1250
Pension £1250 gross paid in gets 20% tax relief of £250 making a net contribution of £1000 Both
Both get £1250 going in after paying £1000.

Pensions can get higher rate relief of 40% or 45% and Scotland has its own tax bands. Pensions can also potentially reinstate the personal allowance for those earning over £100,000k a year but there are reductions for high earners.

Someone in England, Wales & NI in the higher rate band gets 40% tax relief. If they paid into a LISA they would still get the equivalent of 20% relief.

Can you elaborate on this or give an example?

I cant give an example as stakeholder pensions, personal pensions, SIPPs and master trust/occupational money purchase pensions work to the same rules. The differences are mainly at features and investments level.

cloud_dog

PingPongSet wrote: »

If based on the amount of money you can keep, LISA wins. Any disagreement?

Yes, I disagree.

I do not believe anyone can offer any informed opinion on this statement because it completely ignores all the considerations before making such a statement.

Additionally you are completely ignoring the possibility of managing the withdrawal SIPP (pension) money so as to mitigate tax.

You are also ignoring the inherant risk that over your working lifetime you will never need to claim any benefits that are likely to be effected by having LISA/ISA.

Don't misunderstand me, there are pluses/ reasons for using LISA but the pros and cons need to be measured and understood in a holistic context, not just simply and ignoring the other pluses or minuses.

taylornj

dunstonh wrote: »

it is just maths. A 25% uplift is the same as a 20% reduction.

LISA £1000 paid in gets £250 bonus which is 25%. £1000 plus 25% (£250) = £1250
Pension £1250 gross paid in gets 20% tax relief of £250 making a net contribution of £1000 Both
Both get £1250 going in after paying £1000.

To get £1000 to pay into a LISA Income Tax and National Insurance has been paid that is 20% + 13.8% + 12%. Which requires a Gross Salary of £1470.59 with an additional £202.94 in Employers National Insurance making £1673.53. So a LISA you pay in £1000 to get £1250, for a Pension your Employer makes a gross payment of £1673.53 which if taken as a lump sum is £1422.50 taxed at 20%.


However if the lump sum is taken at a point when there is sufficient Personal Allowance the lump sum will be taxed at 0% making £1,673.53 vs the £1,250 from a LISA. But as Pension taken at 55 could be put into a LISA the £1673.53 could be boosted by 25% giving £2091.91.



On inheritance £1,673.53 can be past on in a Pension, allowing others to utilise their Personal Allowances. The LISA the £1,250 could be taxed at 40% passing on only £750.


However at 60 cashing in a LISA the funds could be moved into a Pension gaining (1.-.75*.2)/.8 = 1.0625 providing there is the Pension Allowance available. Boosting the £1250 to £1328.12, and if a non tax payer at 60 the £1250 could be boosted to £1562.5 = £1000/.8/.8 getting two lots of 20% tax relief. There are no recycling rules between LISA and Pensions, I think.


From age 55 you can take from Pension, and put into a LISA boosting the Pension lump sum. The only problems are the limited amounts involved.


For those below 40 who start a LISA, the £2880 into a Pension could become £2880 into Pension and £4000 into a LISA, or £2880 into Pension extract £3600, then up to £3600 into LISA to get 25% on top. some years away from this. Getting the best of both, up to a 56.25% return.


Working out the best is complex there is no one vs the other which is right it depends on the individual.