Should I get a LISA?

Cam93

To keep it short and sweet, I’m looking to expand my saving diversification, I currently pay 5% into my work place pension which keeps me just below the HTR bracket, I then also put 300pcm into a VLS80.

ive been looking at LISA aswell but I’m not sure I fully understand then so I’m asking for advice. I understand I can only pay up to 4K per year into it which would give me a government bonus of 1k (25%) but does this 5K per year gain interest via S&S aswell? E.g if I pay 4K over 10 years I would have a total of 50k in the LISA or would this be subject to potential interest % increases too?

im looking at long term savings that I can pay into and forget about in short - does this also work for a JISA if we were to open one up for a child?

i know I’ll be asked the usual questions so;
26 year old, home owner at 2% intrest rate but about to remortgage to 1.5%, no debts, nothing on finance, 50-53k salary. Employer won’t increase their pension contributions beyond their current 3% hence looking at other long term ideas

thanks in advance!

kinger101

The merits of LISA versus other pension schemes depends partly on whether you can get salary sacrifice, and whether the tax saved is higher rate or basic rate.

The calculations are as follows.
LISA
80 p of gross income becomes £1 of non-taxable income.  25% uplift
PENSION WITH NO SAL SAC.
For basic rate, 80 p of gross income becomes £1 in the pension pot.  Likely to have a marginal rate of 15 % once withdrawn for the pot, so you'll only see 85p.  A 6.25 % uplift.
For higher rate, it's 60 p becomes 85 p, = 41.67 % uplift.
PENSION WITH SAL SAC.
This time we save NI too, so for basic rate 68 p becomes 85 p (+25%) and 58 p becomes 85 p (+46.55 %).

If it's basic rate, then LISA will beat pension without SS, and is on a par if it is SS.  Personally, I still think LISA is slightly better, as the pension gains are based on 25% being tax free and income tax rates being the same.  I'd prefer the certainty.  But as you're on the HR threshold, you should also consider whether more of you income is likely to be in this band in higher years.  In which case, it might be worth using a regular ISA, then drip feeding into a pension in later years.

Either way, increasing your savings for retirement from the current 8% is highly advisable. 

masonic

Cam93 said:

I understand I can only pay up to 4K per year into it which would give me a government bonus of 1k (25%) but does this 5K per year gain interest via S&S aswell? E.g if I pay 4K over 10 years I would have a total of 50k in the LISA or would this be subject to potential interest % increases too?

You will receive interest if you invest in interest producing assets (e.g. a bond fund). If you invest in S&S investments then you'll hopefully get capital growth and/or dividends.

afis1904

masonic said:

Cam93 said:

I understand I can only pay up to 4K per year into it which would give me a government bonus of 1k (25%) but does this 5K per year gain interest via S&S aswell? E.g if I pay 4K over 10 years I would have a total of 50k in the LISA or would this be subject to potential interest % increases too?

You will receive interest if you invest in interest producing assets (e.g. a bond fund). If you invest in S&S investments then you'll hopefully get capital growth and/or dividends.

And you'll obviously be able to reinvest that bonus into whatever you want

dd95

how does 5% of a 50-53k salary keep you under HTR? You're still earning a HTR salary (50k)?

bowlhead99

dd95 said:

how does 5% of a 50-53k salary keep you under HTR? You're still earning a HTR salary (50k)?

Because if you put 2.5k of your earnings into a pension and you were only earning 50k to 52.5k in the first place, you won't have any salary left above the 50k higher rate tax threshold and all the salary you do get will be taxed at 0% (within personal allowance) or at 20% (within basic rate band).

Or if it is not a salary sacrifice  / salary exchange scheme and you do still technically have taxable salary above the threshold, you'll get tax relief on it, and/or the basic rate band will be extended by HMRC. Either way, you've chosen to have money in your pension rather than cash in your hand, and by doing so, avoid paying high rate tax this year.

It's quite common for people to put their earned income in excess of the basic rate band into a pension to avoid paying high rate tax on it.