SIPP vs LISA - am I missing anything?

Haffertee

I am starting a new job in a week or so and am therefore reviewing my retirement planning. I shall be contributing enough to my new workplace pension to maximise employer contributions, which will also take me below the higher rate tax threshold. The scheme is relief at source, so I don't think there is any benefit to making any further contributions beyond that.

I'm planning to consolidate several previous workplace pensions into a SIPP to broaden my investment options and also have a S&S LISA to which I haven't yet contributed this tax year.

In these circumstances, I think if I want to put aside a little extra each month for retirement, I am better off contributing it to the LISA, not the SIPP, since the government contribution will be equivalent to the tax relief I would get in the pension and it won't be taxed when I come to withdraw it.

I realise there is the other consideration that I can only access the LISA at 60 (already a home owner) instead of 55 (or 58, I think, if the government change things as planned?) for the pension, but is there anything else I'm missing which I should consider?

AnotherJoe

I think you are missing that the SIPP money might not be taxed at the full 20% when you take it out and so in that case its not equal tax treatment to a LISA.

I'm currently taking out the personal allowance and so not paying any tax on that. That will continue for a few more years. There are people here doing that for 10+ years, so that's more than £120k you can take out (if you retired age 55) without paying any tax on it.

cloud_dog

OP does your company pay via salary sacrifice?

If it does you would save an additional 2% of NI contributions as a HRT payer and 12% NI reduction on your contributions at 20% taxation.

Haffertee

Thanks, I hadn’t thought about the Personal Allowance. Current calculations suggest I’ll need a retirement income above that so some retirement savings outside a pension would be a plus, but definitely something to ponder.

Sadly my new employer does not offer salary sacrifice - the scheme is relief at source. Once I’ve been there a little while I might see if I can persuade them of the mutual benefits of salary sacrifice!

AnotherJoe

don't forget there's also the 25% TFLS. So you can combine that with the PA. If you take it all or enough to get through the gap to other pensions then you can add drawdown within PA as well. That's doing me ok plus more from other investments.
To make the numbers simple supposed you had £400k and ten years to bridge
Take 25% TFLS so that's £100k = £10k a year. Add on another £12.5k year PA. that's £225k tax free out of the SIPP. If you only had SP at say £8.5k then you would also be taking another £4K a year out without tax as well. And 20% of all that would be free money.

Albermarle

I'm planning to consolidate several previous workplace pensions into a SIPP to broaden my investment options

You should consider a couple of points before going ahead with this plan:
1) With some workplace pensions , the employer will often have been able to negotiate a low charge regime , which you probably still benefit from even if you have left that employment .
2) Although you will get more choice of investment options with a SIPP , some workplace pensions can offer the choice of >300 funds . So you need to be sure if you really need more than that .
So what I am saying is that consolidating into one of your existing pensions is also a possibility , and may be a better option ( or maybe not)

dunstonh

Pensions are outside of the estate. LISA is within the estate. So, if IHT is likely in later life, you need to take that into account.

Haffertee

Thanks, everyone. I don’t have any particular plans to retire before SPA so I don’t think I’d be doing the kind of bridging income you describe. I might be fed up of work after another couple of decades though, so never say never!

When I’ve previously investigated switching funds inside workplace pensions I’ve found that the specially negotiated low fees only apply to the default funds and as soon as you go outside those, the fees are much higher. However I don’t think I’ve checked all my providers so I should do some more investigation before committing to a SIPP. Thanks for making the point.

I don’t think I was aware of the IHT implications, thanks and I’m probably not as far away from that being an issue as I think. Pension LTA is currently a long way off but not impossible and I guess the two together would drive one to try to find the perfect balance!

More thinking to be done, thanks!

dunstonh

Do remember that pension fund AMCs equate to unit trust/OEIC OCFs. And that with pension funds, that is the total cost. There is usually no platform/provider charge to add on (caveats apply).