LISA or Pension to save for my child?

liamcas

Ok, I'm 39 and recently became a Dad. I'll be 60 when my child turns 21 and I want to save around £50k that I can use, at my discretion to help my daughter.

As a 40% tax payer I know that the most tax efficient choice right now is to pay more into my pension pot as it outweighs the 25% gain I'll get from the LISA. The convenience of the LISA is I can take the cash tax free at 60, without touching my pension.

If I use the pension route, when I reach retirement age, can I take the 50k from my pension pot and leave the rest? Would that class as my tax free lump sum?

I don't plan on retiring at 60 but don't want to lose my opportunity to make tax free withdrawals in the future. Can anyone tell me how to efficiently withdraw pension in chunks when I teach retirement age?

Thanks

Alexland

We do both - pay enough into the pension to get down to basic rate and then pay into our LISAs from basic rate income. Our employer operates salary sacrifice so the LISA bonus works out about the same as the tax+NI saving but at least the LISA doesn't count towards my LTA.

In terms of investing for children we will use some of our LISAs to help them with a property deposit and recycle the rest into my younger wife's pension (assuming she is still under the LTA) from when I am 60 untill she is 75.

The problem is that the money won't be available for university costs at age 18 so we are also using JISA and S&S ISAs. Still we are lucky to have a small mortgage so much of our income can be invested.

Alex

liamcas

Hi Alex, thanks.

I still have lots of room to pay into my pension at the 40% rate.

Can we only take one tax free lump sum from the pension when we reach eligible age?

xylophone

Have you opened a JISA for your child?

This would belong to the child who would have the right to access at 18 but you can hope to have instilled sensible savings habits?

https://www.gov.uk/junior-individual-savings-accounts

liamcas

It's either pension or S&S LISA (I know there is a risk there) . This will leave me better off than a JISA from what I understand. I'm happy to be corrected though!

I just need to understand the taxation implications around tapping into my pension pot at around 60 years of age. It may mean I'm better off using the LISA route...

dunstonh

As a 40% tax payer I know that the most tax efficient choice right now is to pay more into my pension pot as it outweighs the 25% gain I'll get from the LISA. The convenience of the LISA is I can take the cash tax free at 60, without touching my pension.

Your pension is accessible at 55.

Being a higher rate taxpayer, the 40% higher rate relief equates to 66.6667% bonus.
So, the pension is almost certainly going to beat LISA.

If I use the pension route, when I reach retirement age, can I take the 50k from my pension pot and leave Ythe rest? Would that class as my tax free lump sum?

You can take what you like. 25% would be tax free. 75% taxable.

Are you being restricted on child benefit? If yes, then the pension can reduce your income and qualify you for higher or full child benefit again.

Alexland

dunstonh wrote: »

Your pension is accessible at 55.

Given the announced increase to 58 and future increases in life expectancy it might be prudent for the OP to expect the pension to be accessible at the same time as the LISA age 60.

Alex

liamcas

So if I pay into my pension instead of the LISA, let's say my pension pot at 60 is £500k

If I want to extract the 50k I've put in for my child, would I need to take my 25% lump sum from the pension? This is the bit that's confusing me because I plan to keep working after I take the 50k out.

I don't want to save 40% now only to be taxed 20% at 60 years of age to take it back. I'd be better taking the LISA option now if that ended up being the case.

dunstonh

If I want to extract the 50k I've put in for my child, would I need to take my 25% lump sum from the pension?

No. The 25% is not required to be accessed all up front. If you wanted £50k out you would crystallise just enough to draw the £50k.

So, crystallise £200k of the pension, draw £50k leaving you £150k crystallised and the rest of the fund uncrystallised.

This is the bit that's confusing me because I plan to keep working after I take the 50k out.

Which is fine as long as you do not access any of the 75% chunk.

I don't want to save 40% now only to be taxed 20% at 60 years of age to take it back. I'd be better taking the LISA option now if that ended up being the case.

You wouldn't be. However, even if you did access the crystallised bit, it would still beat LISA. Plus, do not forget that the pension is outside of the estate. Having £500k at that time may well be an issue if it's within your estate.

liamcas

Thanks but if I took 200k out that would be 40% of the pot. Aren't I only entitled to 25% tax free?

Alexland

You would be crystallising £200k within the pension and drawing out the 25% tax free. The remaining £150k would still be in the pension. Crystallised money is kept separate as you can no longer have a 25% tax free on it.