LISA vs additional workplace pension contribution?

Mac7

I currently pay in 8% to workplace pension via salary sacrifice which my employer matches (8% is the maximum employer contribution)

I’m 32 and lower rate tax payer, circa 30k salary, and I’m looking to increase my pension contributions (as currently overpaying mortgage to maximum without penalty)

Is is better to increase workplace pension to say 12% (employer contribution will stay at 8%), or put the additional money over 8% into a S&S LISA?

The benefit of the workplace pension is salary sacrifice saves on tax, NI (& student loan?)

The benefit of the LISA is there will be no tax to pay on withdrawal at age 60

Does the workplace pension still win when there is no matched employer contribution (ie over 8%)? I guess it also depends on what the tax rate will be in 30 odd years?

Norwooder

hi there

Are you sure the workplace pension is salary sacrifice? Unless someone has told you that it is, it probably isn't.

Mac7

Hi, yes it’s salary sacrifice - it is paid before tax

Paul_Herring

Mac7 wrote: »

Hi, yes it’s salary sacrifice - it is paid before tax

If you're salary sacrificing, you're avoiding 20% income tax and 12% NI being deducted.

If you pay into a LISA, you'll only be (effectively) avoiding the 20% income tax, because you'll be paying the NI.

Salary sacrifice is better than the LISA, if you're using it for your pension because of that extra 12% saving.

However the LISA is better if you want to access that money before the age of (I'm guessing here) 58 (i.e. for your first house,) because that'll be the earliest (at the moment) you can access your pension.

Haffertee

I went through the same thought process a short while ago and ended up opting for the LISA, but my workplace pension is not salary sacrifice, otherwise I’d almost certainly have increased my pension contributions instead.

Longer term considerations are if additional contributions to the pension might take you over the lifetime allowance and conversely the LISA is part of your estate for IHT while the pension wouldn’t be, but they may or may not be factors for you!

grnglide

Just because it is "paid before tax" does not make is salary sacrifice.


A net pay arrangement is paid before tax as well.


Salary sacrifice treats all pension contributions as employers contributions. Salary sacrifice normally has a "reference salary" or similar which is what you would have got without the sacrifice.

Norwooder

grnglide wrote: »

Just because it is "paid before tax" does not make is salary sacrifice.


A net pay arrangement is paid before tax as well.


Salary sacrifice treats all pension contributions as employers contributions. Salary sacrifice normally has a "reference salary" or similar which is what you would have got without the sacrifice.

Precisely. There is a good example payslip in this thread:

https://forums.moneysavingexpert.com/discussion/5785078/higher-rate-tax-relief-for-pension-contribution

Mac7

Thanks for the replies. I’ve checked and my employer definitively operates salary sacrifice and the whole contribution is shown as the employer contribution on my pension statements.
Sounds like increasing this workplace pension is better than the LISA so will go for that option.

Zorillo

Increasing pension payments via salary sacrifice is better than LISA, if you are absolutely certain you will never need access to the money before 55.

Personally I am not that certain, so I opted for LISA on top of my 11% pension contributions. I also aim to increase my pension by 1% each year (I'm 36).

LISA should offer additional flexibility from 60 onwards, too.

Paul_Herring

Increasing pension payments via salary sacrifice is slightly better than LISA, if you are absolutely certain you will never need access to the money before 55.

Only if you think £15 difference (on £30K) out of every £100 earned is considered 'slight.' On the marginal rates at that salary:

Neither: Earn £100, IT £20, NI £12, net £68.
SS: Earn £100, £100 goes into pension.
LISA: Earn £100, net £68, pay that into LISA will get 25% making it £85.

Zorillo

Yes, good point Paul. My 'plan', such as it is and dependent on prevailing tax incentives, involves ultimately depositing my LISA money into a pension, which earns back the difference whilst still affording access if my plan comes unstuck.

I have no delusions that I'll be retiring before 60.