LISA vs SIPP

gudthing

Hey folks, 

My fiance is about to go on maternity leave for a year and will get the basic Statutory Maternity Pay - no deal from employer (runs for 39 weeks I think, then nothing for the remaining 13 weeks). There is a good chance that she won't go back after that year so as to be a stay-at-home mum for the next ~2-3 years (possibly longer if we have another child by then). Financially, I can support us on my wage, plus she has a little on-the-side 'business' that brings in a small amount of additional income - so I'm not too worried.

My question is about my Fiance's retirement fund. She's been with her company since 2013 but as a small business the mandatory workplace pension didn't kick in until late 2017, so she doesn't have a lot in there and her employer pays the minimum. Since contributions will go down when she is on maternity (and then possibly after that she won't be employed so will stop altogether), is setting up a s&s LISA a sensible thing to do? We're planning to pay in a lump sum of £2-4k (to help cover 2013-2017 when the company didn't have a pension scheme) and then £200 pm. I'm pretty sure we're still way off target, but it's a start (I'm aware of the £4k LISA cap, but we would max it if this is the way to go).

I've also come across SIPP, and from my understanding:

LISA: (after-tax) - £4k cap pa, 25% topup bonus, 'can't' touch until 60 (without penalty), can't add any more funds in until 50, (Help-to-buy not relevant we already own a house) - for every £100 we get £125 (straightforward) 

SIPP: (pre-tax) Matched on income up to £40k cap pa (£3600 if unemployed), Basic-tax relief (20% - she is a basic tax bracket) so for every £100 you put in you get £120? Only the first 25% of pot is tax-free, you have to pay 20%-40% tax on remaining, can't touch until 55 -

We don't have a problem with waiting until 60, so unless I'm missing something, to me it sounds like a LISA is a no brainer better whilst she is 'unemployed'/lower-tax-bracket. It makes me wonder why would anyone who is on a lower tax-bracket use a SIPP over a LISA - but I suspect I've misunderstood something? 

cloud_dog

No, not really.

If, as you say you can wait until 60 for penalty free access and you are a basic rate tax payer (and your work pension doesn't benefit from Salary Sacrifice) then a LISA is more tax efficient than a pension, as it gets the same amount of uplift but isn't subject to any taxation on the way out.

There are a couple of caveats.... Pensions are better at protecting monies from IHT up to age 75, and are also excluded from any income based benefits calculations (should you ever require them).

gudthing

@cloud_dog thank you for your response! In this case, I will set up and pay into a LISA whilst she does not benefit from Salary Sacrifice. Once she is back in employment/getting SS, then we'll make sure (like we do anyway) to match employer contributions and probably increase workplace pension contributions/or up a SIPP to try and accelerate her pension growth

cloud_dog

If she is able to benefit from SS, then that is the most effective route as it also saves on national insurance contributions.

I need to ask...are you comfortable/sure her work offers payroll with. SS?