SIPP, LISA, S&S... Death by acronym!

CarbonImage

Hi all,

Sorry if this is one of those boring threads you have to answer all the time in here, I spend most of my time in the House Buying forums and know how tedious it can be when someone asks a questions that's been asked a thousand times. I would usually turn to friends and family for advice on things like this, but all my family are public sector workers, retired public sector workers, or full-time carers (yes really). All my friends are young and unable/unwilling to contribute extra to their retirement yet. SO I turn to you learned people of MSE.


I have just found out that due to the fact bonus and overtime payments (which make up 40-50% of my salary) are not counted as salary, my pension contributions have been much lower than expected for the past 3 years. As such I am looking to start boosting with a private pension.

I am fairly savvy and understand the differences between LISA, ISA, S&S, and SIPP, but I just can't see any one being better than the other in my situation. I know I am likely to hold this product for up to 40 years so I want to be sure I'm starting down the right path.

I like the idea of a SIPP, however as some months I am a HR taxpayer and some I am SR, I'm unsure how it would work with tax relief. Also I don't like the idea of being subject to the changing whims of the Governments over the next 40 years. I'd also like to think that in the next couple of decades I may become a permanent HR taxpayer. But I like the idea of being able to access my money whenever I should need it. Does anyone have any advice?

Personal background:

I am 26. I am maxing out NEST contributions at 5% (employer 3%). I can earn anywhere between £2k and £7k+ per month before tax depending on how busy I've been, but the NEST contributions only get paid on the £2k. I have a mortgage and a decent EF. I am interested in managing things myself, but I'm a busy guy so won't be switching funds constantly.

I would love to retire earlier than the current projected age of 68 (my parents did and I've seen how much it's improved their quality of life), however it's so far in the distance that anything could happen. I just want to make the most of my ability to take advantage of compounding now.

TL;DR - Which type of long-term investment/pension product should I choose in my situation? HELP!

cfw1994

Defo add more to a pension, I would say....

I know nothing about NEST, & if your employer already pays as much as they can to your pension, pretty sure you could open another pension (SIPP).

For our early 20's 'kids', I have tried to 'educate' them into understanding longer term finance planning. On that path, I have helped them do a few things:

• Open a Vanguard 100 S&S ISA (money they can get at any time, but for medium-long term really)
• Open a S&S LISA (for them to use for house - I realise you have one - or indeed from 60, take the 25% government investment as a bonus) - theirs is with AJBell, can't recall the fund, but broadly tracker, higher risk
• Added a low-cost Index 100 pension with Intelligent Money (see pistonheads finance forum sticky thread for details on that)
• They also have a small premium bond holding - yes, not a great investment, but alway a chance....and the easiest money of all to get their hands on within a couple of days!

They will add to those things as they see fit over the years ahead.
My help is a smaller regular payment for the time being to 'kick start' things.

I lean towards the http://kroijer.com philosophy - doubt I will consistently 'beat' the market for years, BUT over many years, the market will rise, so get the broadest lowest cost tracker you can!

I appreciate many are concerned and chose lower "risk" funds, & I also personally feel the market is overdue a correction.... but generally I feel that if you are trickling monies in, for a longer term, I would personallyaccept and take the 'higher' risk funds (eg, Index 100 versus an Index 60 type thing).

One of them told me their Vanguard has shown them a "Internal Rate of Return" over 12%, which sounds fair to me for a fund they have had less than 18 months. Of course it could dive - if my prediction of markets dropping a bit over coming months - but for the funds buying in during those dips, the price is good for future growth!

Hopefully this gives you some ideas!

OldMusicGuy

If you want to contribute to a SIPP and your pay is variable, wait until towards the end of the tax year and make a lump sum contribution based on your likely annual earnings and whatever allowances you have available. You do not have to pay into a SIPP monthly.

SonOf

I like the idea of a SIPP, however as some months I am a HR taxpayer and some I am SR, I'm unsure how it would work with tax relief.

It is the tax year as a whole that matters.

I am fairly savvy and understand the differences between LISA, ISA, S&S, and SIPP, but I just can't see any one being better than the other in my situation.

There will be a clear pecking order in terms of tax efficiency.

Also I don't like the idea of being subject to the changing whims of the Governments over the next 40 years.

Whilst Governments do play around the edges with pensions periodically, the fundamental things havent changed much in the last 50 years.

Section 226 Retirement Annuity contracts (RAC) were introduced in 1970. These were the forerunners for todays personal pension plans (PPP) that were introduced in 1988. PPPs were very similar to RACs. except the amount of tax free cash was adjusted to 25% of value rather than 3 times the annual annuity as it was on RACs. There were tweaks in 2001 that improved things and tweaks in 2006 that improved things further and tweaks in 2015 that improved things more. There have actually been very few things that have been negative. However, basically, since 1970, things have been relatively stable on the retail pensions side despite the masses of tweaks and changes in other types of pension.

But I like the idea of being able to access my money whenever I should need it

Get that out of your head straight away. It will cost you if you have that as a red line.

Which type of long-term investment/pension product should I choose in my situation?

Probably a mixture of the workplace master trust scheme (NEST in your case) and LISA in respect of your retirement planning. S&S ISA in respect of your medium term planning and cash savings for your short term needs. i dont see any reason why you would need a SIPP.

squirrelpie

i dont see any reason why you would need a SIPP.

Surely a SIPP would be beneficial if the OP is as he says a higher-rate tax payer?

wjr4

squirrelpie wrote: »

Surely a SIPP would be beneficial if the OP is as he says a higher-rate tax payer?

A standard personal pension is fine. I think this forum thinks a SIPP is the only type of pension sometimes!

cfw1994

I would add this too; relax, you are doing very very well!
A property you are paying off...planning for the future, don't overthink things whilst enjoying life as someone in their twenties!

Ideally, at age 26, MSE would suggest you should be trying to save 13% (half your age) of your salary into a pension: I would use that as a "rule of thumb" (rising 1% every 2 years).

IF you can exceed that, great - the laws of compounding mean that anything you can put away in the next 5-10 years will very likely reap dividends to you in the distant future!

Just remember that investments OUTSIDE of pensions are ones you can get your hands on before your retirement age.....& therefore potentially help you "retire early"....
......but those investments are also taxed today, on the way from your salary, whilst pensions gain tax benefits on their way in (if that makes sense - it sounds awful!) - noting SonOfs' comment that your tax rate depends on your ANNUAL earnings, not month to month!

You already have a house, so a LISA would not add value to you for that purpose....but can be accessed from 60, so could also help fill years before State Pension.

& again, I would *personally* recommend using "higher risk equities" when the access timeframe is decades in the future. But that is clearly not advice (I'm not an advisor!)....

The great news is you are thinking about this way ahead of most.....& my most useful advice is to remember to live a little in the meantime

SonOf

squirrelpie wrote: »

Surely a SIPP would be beneficial if the OP is as he says a higher-rate tax payer?

Nothing the OP has posted suggests a SIPP is needed or would be suitable.

The master trust pension already held (NEST) is more than adequate.

SIPPs are one type of pension. They are not the only type of pension. The OP already has a pension. Do they really need another type?

Ideally, at age 26, MSE would suggest you should be trying to save 13% (half your age) of your salary into a pension: I would use that as a "rule of thumb" (rising 1% every 2 years).

Just being pedantic but the "half your age" crude guide has been around for 30 odd years. long before MSE. It is only to get people thinking about the actual ballpark to what they should be paying. It is not at all accurate to rely on with proper financial planning.

pip895

Put what you need to (to get out of 40% tax) into a PP/SIPP the rest into an ISA to keep things simple & flexible.:)

You might need to stop saving at some point, perhaps if a family comes along. You could then draw out of the ISA to keep up the PP/SIPP contributions and so keep the tax advantages in place.

atush

Split your money each month that you have excess to your needs.

First off, you need emergency cash ot around 6 months outgoings. This can be in easy access and PBs. If you are saving for something ina years time or more, look at regular savers too.

Second, boost your pension. Open a PP or a Sipp, and invest. For your age, i would suggest a higher risk global 100% equity tracker or Vanguard 100. If that is too much for you, then look at Vanguard 80 (80% equities). Put in at least enough to take you out of HRTax at the end of the tax year. but more hopefully, esp if you want to retire early.

Third, S&S isas, or even a LISA too. This is money for longer term, ie 10 years plus. But do be aware you'll loose the gov boost on your LISA if you withdraw funds before 60 as you have already bought a home. But a S&S isa gives you access without reduction (but no 'boost').

squirrelpie

wjr4 wrote: »

A standard personal pension is fine. I think this forum thinks a SIPP is the only type of pension sometimes!

SonOf didn't suggest a standard personal pension at all either. He just singled out a SIPP, which is why I mentioned it.


edit: the OP said he was maxing out his existing pension, so I take it using that is not an option.