BR Tax Payer - LISA or Pension

bowlhead99

JustAnotherSaver wrote: »

£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..???

Basic rate tax is 20%. So £3000 of income would be £2400 net of basic rate tax. If you put the £2400 into a pension you end up with £3000 in the pension after the pension provider has claimed 'basic rate relief'. Which is effectively the same as getting a 25% boost on the net of tax amount. (A 20% tax rate on £100 leaves you with £80, but £100 is 125% of £80).

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?

'cash outcome' is not really relevant after a year because you can't touch the pension and if you withdraw the LISA money you would have to pay a penalty which exceeds the bonus. And the return could be anything from +40% to -40% depending on the markets...

But basically you are right that if both products (SIPP and LISA are worth £3000 at the end of the year and invested in funds with the same total returns (on platforms with essentially the same costs), then they will grow at the same rate over time.

After 25 years at 5% return ignoring costs, £3000 would turn into about £10000.

So with your £2400 today plus LISA bonus or pension tax relief, either of the products would give you £10000.

However- only with the LISA can you take the money and do whatever you like with it. Your £10000 came from a combination of investment growth and a government incentive /bonus to help young people put money away for the long term.

Whereas with the pension, your £10000 came from a combination of investment growth and the fact you have taken tax relief so that your 2019/20 which ended up in the pension hasn't really suffered income tax yet. This means that the money in the pension (the £10,000) is mostly in scope of income tax when you eventually draw it.

Under current rules you would get 25% of the £10000 pension pot tax free (a £2500 tax free lump sum) and the remaining £7500 would be taxable at your marginal rate. That marginal rate might be 0% (within your personal allowance) or 20% (if basic rate tax is still 20% in 25 years time) or 40% on some of it (if taking the £7500 income in one tax year along with other income nudges you into higher rate tax).

So, unless you are able to draw all the pension out as tax free lump sum or within your annual allowances, you will pay some non-zero amount of tax on the £10,000. While with the LISA you wouldn't pay any tax on the £10,000.

You might think that £10000 from a pension is relatively easy to manage within your personal allowances, as it's not a huge number. However, if you are putting £2400 into the investment every year, that's a lot of £10,000s to have to manage, and presumably you'll have other pension money (workplace pension, state pension) using up most or all of your annual personal allowance, so LISA can be useful.

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?

The point being made was that SIPP is not currently better than LISA, because LISA is offering you £10000 in retirement with no tax to pay and SIPP is offering you £10,000 in retirement with only £2500 of it able to be drawn tax free and all the rest potentially being taxable depending on whether you have any spare personal allowance in the year you want to draw it. So, there is no need to focus on SIPP now when LISA is likely to be financially more lucrative and/or convenient to access.

If later in life you have a more compelling reason to use pension (for example, you become a higher rate taxpayer; or your projections show that you will definitely have loads of spare personal allowance in retirement allowing you to avoid tax on pension withdrawals while salary sacrifice becomes available through some future workplace pension, allowing you to save NI contributions by diverting your salary into a pension scheme) then you could start to focus more on putting your available money into pension.

For now, LISA looks to be financially better and is also more flexible (because you can take money out of it (with a penalty) to fund pensions, whereas you can't take money out of pensions to fund a LISA.

Alexland

JustAnotherSaver wrote: »

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)?

There is no getting around that a LISA will be more expensive than Cavendish 0.25% for the first few years. If you went with AJ Bell they charge the same 0.25% but £1.50 per fund trade or if you went with HL they charge 0.45% (but have some discounted funds available that saves around 0.10% such as Blackrock Consensus 85 or L&G International).

However as the LISA gets bigger then both HL and AJ Bell cap their custody charges at £45 and £30 respectively if holding exchange traded assets such as ETFs, ITs or individual company shares. These assets are however £12 or £10 respectively to adhoc trade and have no FSCS protection. We hold the LCWL Lyxor World accumulation ETF in our LISAs which has an OCF of 0.12% although you pay an initial circa 0.15% bid/offer spread whenever you buy more units.

Through conversation with others here we have determined that AJ Bell is even better than HL for a capped fee LISA as you can use the £1.50 scheduled trade to buy ETF units with both the contribution and bonus money (HL don't let you regularly invest a LISA bonus, or regularly invest into LCWL).

So your platform costs for making a one off lump sum £4k contribution (and subsequent £1k bonus) each tax year into an ETF could be as low as £30 + (2x £1.50) = £33 pa. Or if you invest a previous bonus at the same time as a future monthly contribution it could cost £30 + (12x £1.50 pa) = £48 pa. So if after 4 years you have £20k (+growth) invested in an ETF then your £48 platform fee assuming regular investing can be under 0.24% which is less than Cavendish.

Alex

System

One thing to mention is that a LISA can affect your entitlement to benefits and is hard to protect in terms of sequestration / bankruptcy.

With a pension, these are better protected from both issues - if the worst happens.

JustAnotherSaver

cloud_dog wrote: »

Ok, so two things here...

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).

so my (current) £200pm is boosted to £250 then, correct? Once tax relief is added that is.


I've never really 'got' the whole you only need to pay £80 in to get £100 thing. It comes across as pushing someone towards paying a bit less in because tax relief will make it up. Even the IFA i spoke with when i started out seemed to put it across as this.

I personally pay no/little attention to tax relief the same way i don't pay attention to the state pension. When i say i don't pay attention to it i mean i don't rely on it. I focus instead on what i can afford to not have per month any more. Currently that's £200. I don't think (if i've got my maths right), i can get away with paying in £160 because i'll have £200 going in this month because tax relief will sort me out.
I know you never said that's how i did it. I'm just commenting on how i see things.

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).

That's interesting because if between us we could pull £33k tax free then that may not be so bad.

Currently we pull about £43k between us (approx 25k+18k).

I made comments regarding the basic lifestyle because i knew the question i asked would/could result in an answer of it depends what lifestyle you want to lead. I tried to jump the gun and explain from the get go that we'd probably be more on the conservative side without going extremely conservative.

JustAnotherSaver

bowlhead99 wrote: »

'cash outcome' is not really relevant after a year because you can't touch the pension and if you withdraw the LISA money you would have to pay a penalty which exceeds the bonus. And the return could be anything from +40% to -40% depending on the markets...

I know this but the reason i was asking for a year was simply basic maths which i could then multiply by 30-35 to see what the difference would be between a LISA and pension. I would have no intention of withdrawing from the LISA after a year and i know the return could vary.

But basically you are right that if both products (SIPP and LISA are worth £3000 at the end of the year and invested in funds with the same total returns (on platforms with essentially the same costs), then they will grow at the same rate over time.

After 25 years at 5% return ignoring costs, £3000 would turn into about £10000.

So with your £2400 today plus LISA bonus or pension tax relief, either of the products would give you £10000.

However- only with the LISA can you take the money and do whatever you like with it. Your £10000 came from a combination of investment growth and a government incentive /bonus to help young people put money away for the long term.

Whereas with the pension, your £10000 came from a combination of investment growth and the fact you have taken tax relief so that your 2019/20 which ended up in the pension hasn't really suffered income tax yet. This means that the money in the pension (the £10,000) is mostly in scope of income tax when you eventually draw it.

That's pretty much what i was asking.

So if i get this right and everything was equal between the LISA and pension (minus the platform charges i suppose) then when you come to access the money you would have the exact same amount in the pot. You'd just potentially not have as much to put in your pocket from it with the pension due to paying tax then.


In this case i think perhaps it is best i would go with the LISA for the next 14 years until i hit 50 and then switch to contributing to the pension, so while each pot may be a little small, combined they should hopefully be enough.

JustAnotherSaver

Alexland wrote: »

There is no getting around that a LISA will be more expensive than Cavendish 0.25% for the first few years. If you went with AJ Bell they charge the same 0.25% but £1.50 per fund trade or if you went with HL they charge 0.45% (but have some discounted funds available that saves around 0.10% such as Blackrock Consensus 85 or L&G International).

Currently i pay £200pm as i say and i invest in VLS100 and Vanguard Emerging Markets.

If i did this same approach with AJ Bell are you saying this would cost me £3 per month in this instance?
I only ask as i remember contacting H'Lansdown thinking i would get charged monthly and they said that i had read it wrong and i don't charged for investing monthly at the time.


If i've got you correct then would it be a better idea in your opinion to save the contribution in to a regular saver and then dump the end balance in to the LISA for one payment of £1.50? I know you aren't then really spreading your contributions which is a gamble in itself i guess.

However as the LISA gets bigger then both HL and AJ Bell cap their custody charges at £45 and £30 respectively if holding exchange traded assets such as ETFs, ITs or individual company shares.

I've seen these ETF things mentioned. I'm not sure what it is i've invested in, i just know the fund name as i mentioned just above i'm afraid.
As mentioned somewhere, i was looking at switching these out for something like 1 fund like HSBC Global Dynamic but i haven't fully decided yet. It means that i'm not sure if the following:

So your platform costs for making a one off lump sum £4k contribution (and subsequent £1k bonus) each tax year into an ETF could be as low as £30 + (2x £1.50) = £33 pa. Or if you invest a previous bonus at the same time as a future monthly contribution it could cost £30 + (12x £1.50 pa) = £48 pa. So if after 4 years you have £20k (+growth) invested in an ETF then your £48 platform fee assuming regular investing can be under 0.24% which is less than Cavendish.

Alex

Applies to what i'm invested in or not.

Heng_Leng wrote: »

One thing to mention is that a LISA can affect your entitlement to benefits and is hard to protect in terms of sequestration / bankruptcy.

With a pension, these are better protected from both issues - if the worst happens.

This was one of my concerns. Not so much bankruptcy but the fact that you can be made to access the LISA for various reasons, which i wasn't keen on. Again, it's a gamble. You may never find yourself in such a situation so the worry will have been for nothing, but then again you might.

JustAnotherSaver

In addition to my situation i outlined, i also look at helping my brother & sister as some of you will know.



They're both currently contributing to a cash LISA for whenever they get round to becoming FTBs.



Regards retirement planning, they're in pretty much an identical boat to me, other than they're further along than i was at their age as i made sure they started at 18 and not 28 like i did. So all the things that applied to my case (BR tax payer, probably always will be, no salary sacrifice etc) apply to them also.


Their retirement plan is currently in the form of pensions - both workplace (minimum from the employer as in my case) and SIPP.


Since a S&S LISA is likely to then also be better for them too, how would you advise to proceed in their case?
Would you pay in to a S&S ISA (instead of a SIPP), same funds likely as the SIPP, and then once the cash LISA has been used to buy the house, then switch this S&S ISA to a S&S LISA and contribute in to that for their retirement plan?

JustAnotherSaver

Any feedback on post #18 at least?


Just wondering if that is the best approach in that situation or does anyone know of a better alternative perhaps?

cloud_dog

'Best' is a subjective word but, as you have discovered on your recent journey of understanding, a LISA would be financially a better option for a BRT payer.

There are things to consider regarding a LISA (discussed above; age 60 for withdrawal, money still attributed as an asset).

The general suggestion for BRT payer would be to use the LISA until aged 50 then continue in a pension. The above considerations not withstanding.

One aspect that can alter the bias of this equation is if your company pays you with Salary Sacrifice (salary exchange). This allows a BRT payer to save an additional 12% of the contribution from not having to pay NI. Additionally some companies may pass on some/all of their NI contribution savings to you, although this not usual.

It is a personal judgement call as to what is best and what the individual is comfortable with.

atush

It isnt one or the other, you can do both.