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Ref: LISA and/or SIPP and/or self-select ISA?

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Ref: LISA and/or SIPP and/or self-select ISA?

edited 30 November -1 at 1:00AM in Savings & Investments
2 replies 310 views
claudiahbclaudiahb Forumite
1 posts
edited 30 November -1 at 1:00AM in Savings & Investments
Hi everyone,

I am:
- a sole trader
- earning just under what would bump me up to the 40% tax bracket - income has been steadily rising but I really do not know if/when I will be pushed up there or not
- able to save £750/£1000 per month
- potentially going to have children in the next few years hence assuming this will have a negative impact on earnings but I don't know by how much and so, even if I do reach the higher tax bracket, I don't know how long I will stay there

I want to plan for retirement and I'm trying to find the best combination between a LISA, SIPP and self-select ISA. It seems to me the best combination would be a stocks and shares LISA combined with either the SIPP or self-select ISA.

I know a SIPP is generally the best option if you are in the higher bracket but I can't be certain about if/when I will get there and how long I might remain there.

I also wonder whether, given I cannot access a LISA until I am 50, it might be smart to combine it with a self-select ISA as then, even though that is not the plan, the money would still be accessible at any time in case of an apocalyptic emergency.

I really am struggling with doing the calculations as to what would be more profitable and logical for me. If anyone could help with some advice, I would be very grateful!

Replies

  • dunstonhdunstonh Forumite
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    I know a SIPP is generally the best option if you are in the higher bracket but I can't be certain about if/when I will get there and how long I might remain there.

    And for using up your personal allowance in retirement. And if your estate is above the IHT threshold. Plus, you can access a pension earlier than a LISA.
    given I cannot access a LISA until I am 50

    probably a typo but its 60
    it might be smart to combine it with a self-select ISA as then, even though that is not the plan, the money would still be accessible at any time in case of an apocalyptic emergency.

    Pension trumps ISA if you can wait until minimum age.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • bowlhead99bowlhead99 Forumite
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    claudiahb wrote: »
    I know a SIPP is generally the best option if you are in the higher bracket but I can't be certain about if/when I will get there and how long I might remain there.

    I also wonder whether, given I cannot access a LISA until I am 50, it might be smart to combine it with a self-select ISA as then, even though that is not the plan, the money would still be accessible at any time in case of an apocalyptic emergency.

    The LISA is fine if you are only worried about your planning being messed up by an 'apocalyptic' unforseen and unlikely emergency.

    Unlike a normal self-select S&S ISA, the S&S LISA gives you a bonus, which is as large as the tax relief 'bonus' received by a basic rate taxpayer contributing to a pension; but like a pension, you are committing to locking your money away to receive that bonus. However, unlike a pension you can give the bonus back and pay a small additional penalty and get your money out if you realise you made a silly screw-up with your planning and are desperate for the money.

    If the money is locked in a pension you can't touch it and might need to borrow, expensively, to get through your apocalypse. There's no option to take the money out temporarily from a pension. Whereas if the money is locked in a LISA there is a financial consequence of accessing it early, but you can decide you want to do it if you feel you need to. And once the apocalypse is over if you build up savings again you can always throw them into a pension.

    Obviously a normal S&S ISA gives you penalty free access to deal with your apocalypse, but you are missing out on any kind of bonus, so if the apocalypse never happens you have missed out on a large amount of free money.

    All of the methods have their pros and cons but the normal S&S ISA is the only one that doesn't give you any sort of bonus while letting you have completely penalty free access. LISA gives you a bonus with penalty for access and pension gives you a bonus with no access. So if you are thinking "might be smart to use a normal self-select S&S ISA as well", beware that this doesn't get you a bonus on that part of the money, so the negative of instant penalty-free access is that you're missing out on free cash which would have been available to you via the other methods.

    As Dunstonh mentions, the access age for LISA is 60. 50 is simply the age limit for making contributions. So if you do need access at age 50, neither LISA nor pension would to be suitable. However, if this is your retirement money (designed to last you from age 50 to age 100+), it is likely that only a relatively small portion would be needed before your late 50s, and so would not be a massive issue locking most of it away.

    You have £8-12k a year to put away and a LISA (which is not a bad product) is a use it or lose it allowance of only £4k per year ; I would do that, and it still leaves a decent amount left over to do something else with. Having said a normal ISA causes you to miss bonuses, the thing that would encourage me to put the majority of the remaining money into an S&S ISA rather than pension for now (aside from easy access in emergency) is that you mention you are on the cusp of high rate tax.

    Presumably as you are under age 40 and already close to high rate tax, it's highly likely you will be on high rate tax at some point in the future before retirement. Therefore, rather than stuffing your pension now and grabbing the (only) basic rate tax relief, you could stick it in an ISA now (well within the annual ISA limit) and then when you find yourself a higher rate taxpayer in future years you will simply be able to raid the ISA pot (penalty free) to help you fund additional pension contributions at high rate relief. Better to get 40% relief later rather than just 20% relief now.

    And if by that point (say five to ten years from now) the govt has changed the rules to stop allowing higher rate tax relief, or your earnings plateau and you don't stay a high rate taxpayer for many years - you could still raid the ISA pot and put the ISA money into a pension anyway and take the basic rate relief, leaving you no worse off than you would be if you'd used pension contributions today and taken the basic rate relief today.
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