BR Tax Payer - LISA or Pension

JustAnotherSaver

I remember looking in to LISAs at some point within the past year or so and i came away under the impression that for me a pension was better but after some recent postings & responses to my posts i'm now not so sure so i'm hoping the knowledgable folk here will be able to spare me some time.


***For this thread can we please assume:
- BR tax payer now and in retirement
- No salary sacrifice available in workplace pension
- Workplace pension has been maxed but is at the minimum (employer will only pay the minimum 3% so employee is only paying the 5%)
- when I ask LISA or Pension, i am referring to a SIPP which is in addition to the workplace pension***
As any talk of higher rate tax paying and salary sacrificing etc just doesn't apply to me at all so it'd help if we could stay away from that.


If i contributed more than the £4k max for a LISA then the question would be where do i put the majority of my contribution .... but i don't currently contribute more than £4k per year. I hope to change that but for now i don't hit it.
Also the point people make as a +/- of age will likely be irrelevant in my case. Let's say for arguments sake the age you can access each doesn't change in the next 30 years - i suspect i will be older than both minimums when i'm in a position to look at retiring.



My SIPP is currently with Cavendish Online & the funds i hold are VLS100 and Vanguard Emerging Markets, though in a recent thread i mentioned changing this to something like VLS80/HSBC Dynamic (I was just waiting on discussing this topic first). Cavendish fees are 0.20% platform charge and 0.05% ongoing fee. I currently pay in £200pm. I'm looking at increasing this as imo it's not enough, but for now that's what I can afford.




So if i'm investing in the same fund or funds whether it's a LISA or Pension (SIPP) then long term what is the best approach, what is going to give me the most money in the pocket in the end?
I could understand someone saying don't put your eggs in one basket - use both - i could understand that if i was contributing more than £4k/yr for example, but as i'm not then one must be better than the other in my scenario, no?


The books i've read on investing have all had a common theme - keep fees low. In comparison to Cavendish Online, Hargreaves Lansdown for example charge 0.45%, so nearly double.
Though i suspect fees are important but not the be all and end all. I also wonder whether the difference between 0.45% and 0.20%+0.05% is significant enough to even worry about at this level........
....but then i don't know enough about this to form much of a worthwhile opinion, hence why i'm asking you guys for advice.


Sorry for the long post but i tried to give as much relevant info as i could. If you need to know any more then just ask.

Brynsam

JustAnotherSaver wrote: »

So if i'm investing in the same fund or funds whether it's a LISA or Pension (SIPP) then long term what is the best approach, what is going to give me the most money in the pocket in the end?
I could understand someone saying don't put your eggs in one basket - use both - i could understand that if i was contributing more than £4k/yr for example, but as i'm not then one must be better than the other in my scenario, no?
[/B]

Not necessarily. Depends how well the funds perform as well as what the charges are - and also whether you are taking into account the fact you'd need to pay 25% more into a LISA to make the funds 'equal' at the point of starting (the LISA provider can't claim basic rate tax and pay it into your LISA in the way a pension provider can). Also depends how you intend to access the cash to minimise tax on any pension.

Why are you not paying more to your workplace pension - just because your employer won't pay more because you do doesn't make it a bad idea if costs and fund choices are better than your SIPP.

How old are you now and when do you hope to retire?

bowlhead99

Brynsam wrote: »

and also whether you are taking into account the fact you'd need to pay 25% more into a LISA to make the funds 'equal' at the point of starting (the LISA provider can't claim basic rate tax and pay it into your LISA in the way a pension provider can).

Maybe you misunderstand the difference between a LISA and a 'normal' ISA.

The LISA doesn't need you to pay 25% more into it at the start, because the government gives you a 25% bonus on your LISA contributions, which you only lose (with penalty) if you take the money back before age 60 for something other than a qualifying reason (such as first time property purchase).

So with LISA you get 25% bonus (which is same as the 25% boost from basic rate tax relief on a non-salary-sacrifice pension), and can withdraw tax free later, while with pension the money is not fully tax-free later. Under current rules, only a quarter of the pension can be taken tax free and the rest would be taxable - so for that taxable element you could expect to get some of it tax-free within your personal allowances, but you would have to carefully manage withdrawals to avoid paying tax in any one tax year.

Depending on how much you earn and contribute over a lifetime, your workplace pensions and state pension may adequately use up your personal allowances in retirement and so it would be quite convenient for the additional provision you are making now to go into a LISA scheme. Worth noting that because LISA schemes are technically accessible (with a penalty), they are taken into account for means testing and in bankruptcy etc, as well as being inside the estate for inheritance taxes if any of those things become an issue at some point.

If you don't expect to be higher rate taxpayer in the forseeable future, there doesn't seem to be much harm in picking LISA over pension for now. You could always skew your savings and investments more towards pension later.

If you do expect to be higher rate taxpayer within a few years, it may be more efficient to primarily use a regular (penalty-free) S&S ISA for now and move the money into a pension later, only doing a small amount of LISA for now - because high rate pension relief (assuming basic rate in retirement) beats LISA bonus.

cloud_dog

OP, based on the information provided, financially you would be better off putting the excess money in to a LISA (assuming you are ok to wait to 60 for penalty free access)

Zorillo

My plan is to recycle my LISA money into my pension once I'm 60+.

Alistair31

Zorillo wrote: »

My plan is to recycle my LISA money into my pension once I'm 60+.

Will you still be working at 60+ ? Otherwise you would be pretty limited in what you could “recycle” from LISA through the pension, no ?

Zorillo

If I'm not still working at 60 things have either gone spectacularly well or spectacularly badly. If I'm wealthy enough without recycling it into my pension, then I won't.

JustAnotherSaver

bowlhead99 wrote: »

Under current rules, only a quarter of the pension can be taken tax free and the rest would be taxable - so for that taxable element you could expect to get some of it tax-free within your personal allowances, but you would have to carefully manage withdrawals to avoid paying tax in any one tax year.

I'm not sure how basic you would need to live in order to do this.

I'm no big spender. Some would say we live a 'boring lifestyle' but we're happy enough, we're just not huge spenders. I plan on starting to track every penny spent very soon just to see really what we spend in a year & where we spend it. I did this with just supermarkets for 3 months and was surprised with the outcome. The knock on effect of this tracking is to see what we'd need to earn per year to live a lifestyle that we'd be comfortable with. We're not the new car every 3 years along with a couple holidays per year type but we're also not eating cold beans out of the tin for breakfast, dinner & tea.

Depending on how much you earn and contribute over a lifetime, your workplace pensions and state pension may adequately use up your personal allowances in retirement and so it would be quite convenient for the additional provision you are making now to go into a LISA scheme.

To be honest i didn't think too much about the workplace pension in that sense. The reasoning for this is that i imagine it's probably invested very very conservatively as the government wont want bad press on them - that way it wont (shouldn't) lose much money but for us it wont make a great deal either (pure guesswork and could very well be totally incorrect). For a rough idea, my contribution last month was £80.00. My pot is somewhere around the £2000-£3000 mark last time i looked (just workplace, my SIPP is about £19k-£20k).


Question: would you say the increased platform charges are not enough to make any significant difference? (taking the Cavendish SIPP vs Hargreaves Lansdown LISA as my comparison)?

Worth noting that because LISA schemes are technically accessible (with a penalty), they are taken into account for means testing and in bankruptcy etc, as well as being inside the estate for inheritance taxes if any of those things become an issue at some point.

That is a concern, but hopefully wont come in to play. I was actually aware of it. I've had a few joint operations and i do a manual job. It concerns me the impact of this in later life and whether i will struggle to do my job. This may or may not come to anything, but if there's one thing i'm good at then it's worrying :rotfl:

If you don't expect to be higher rate taxpayer in the forseeable future, there doesn't seem to be much harm in picking LISA over pension for now. You could always skew your savings and investments more towards pension later.

I would need to change my job entirely to become a higher rate tax payer. I have no actual qualifications in anything beyond A-Levels so it would be a total role change for that to happen. Nothing is impossible but i can't see it happening.

Regards the bit in bold, what would make you pay in to a pension later? Are you referring to the fact you can pay in to it until you're 50, so at that point you'd then switch to a SIPP or are you referring to something else?

JustAnotherSaver

Brynsam wrote: »

Why are you not paying more to your workplace pension - just because your employer won't pay more because you do doesn't make it a bad idea if costs and fund choices are better than your SIPP.

The reasoning behind it was that i suspect it's invested very conservatively and due to my age i don't think that's a good idea.
I also don't really know what i'm invested in. I did ask but they were extremely wishy washy.


My workplace pension with NOW: Pensions cannot be tweaked in any way. My wife and sister are both with NEST and you can tweak it to the higher risk fund if you so wish or some other funds if they take your fancy.

But with NOW: Pensions you can't change anything.

I checked out their charging and it says: https://www.nowpensions.com/why-choose-now-pensions/pricing/
Monthly fee of £1.50
+
Annual fee of 0.3% of fund.


I've just looked now and my pot (workplace) actually sits at £4.5k.

How old are you now and when do you hope to retire?

I'm 36 and hope to retire ASAP.
I know the second half to that isn't what you wanted because most people want/give a number to that question but i can't. If i could retire tomorrow then i would. So as soon as i can financially no longer have to work again, that's when i'll retire, whenever that may be.

JustAnotherSaver

cloud_dog wrote: »

OP, based on the information provided, financially you would be better off putting the excess money in to a LISA (assuming you are ok to wait to 60 for penalty free access)

I know i said in my last post that i want to retire at ASAP but realistically speaking, i can't see it being before 60 and if it was then it'd be a lotto win and i wouldn't have an issue.


But can you (or anyone) put it in to figures for me so i can better understand a reasoning as to the why? No rush so whenever anyone has the time to spare.


Take it over 1 year as an example based on the current situation...


£200pm so £2,400 per year contributed in to either a SIPP or LISA.
* The LISA gets a 25% boost so that's £600 which puts £3,000 in the pot.
* the pension gets (conflicting here...) 20% or 25%. bowlhead mentioned 25% boost but doing a Google search just now it says 20% so this is where i'm going to trip myself up with the numbers. I'll assume the £2,400 is turned in to the same £3,000 at the end of the year..???


5% growth seems to be a figure i've seen thrown around these forums
Minus the annual charges for each (0.45% Hargreaves Lansdown, 0.25%+0.05% Cavendish Online)


My head is spinning and i'm sure i'll have missed something but basically at the end of year 1, all things being equal (such as contribution in, fund invested in (so therefore the growth)) what would be the cash outcome at the end of year 1 for both a SIPP and LISA?

cloud_dog

Ok, so two things here...

JustAnotherSaver wrote: »

Take it over 1 year as an example based on the current situation...


£200pm so £2,400 per year contributed in to either a SIPP or LISA.
* The LISA gets a 25% boost so that's £600 which puts £3,000 in the pot.
* the pension gets (conflicting here...) 20% or 25%. bowlhead mentioned 25% boost but doing a Google search just now it says 20% so this is where i'm going to trip myself up with the numbers. I'll assume the £2,400 is turned in to the same £3,000 at the end of the year..???

Percentages are always from the perspective of a specific figure. The reason BH99 mentions two figures is that you get 20% tax relief on the gross amount, or you get a 25% uplift on your net contribution.

£100 in to a company pension benefits from 20% TR (£20) so costs you £80
£80 in to a personal pension/SIPP is grossed up to £100 so benefits by an increase of 25% of the £80 (£20).

JustAnotherSaver wrote: »

5% growth seems to be a figure i've seen thrown around these forums
Minus the annual charges for each (0.45% Hargreaves Lansdown, 0.25%+0.05% Cavendish Online)


My head is spinning and i'm sure i'll have missed something but basically at the end of year 1, all things being equal (such as contribution in, fund invested in (so therefore the growth)) what would be the cash outcome at the end of year 1 for both a SIPP and LISA?

The advantage of the LISA over a pension is that all withdrawals from a LISA are tax free.

Just another comment.... You mention that people living on or around the personal allowance level might be living a basic(????) lifestyle but if you and your partner withdraw money from both your pensions using the uncrystallised method (UFPLS), for example, you would be able to withdraw £16666.66 each without paying any tax (£12500 personal allowance / tax free, plus 25% of this amount tax free from the pension (£4166.66)), so combined £33333.33 per year. A number of posters in the 'What's my Number' thread are identifying a household income requirement of approx £25k (plus or minus depending on your own personal requirements).