Pension vs Lisa = Winner?

dqnet

Hi, excuse the ignorance but i'm a little confused on a something.
Let's say somebody has £1000 spare and is post taxed - so let's say after being paid.
This person could either a) put it in a LISA and get 25% so taking he's £1000 to £1250 no further tax  or.. b) put it in their pension getting 20% back so only costing him £800.
Now let's say they choose option b).   When they come to access their pension at 58 and at the time their nominal tax rate is 20%. Doesn't that mean he will get £200 tax free and be taxed on the remaining £800 if they go above the yearly Personal Allowance which effectively means he has been taxed twice making putting this spare cash in a LISA better?
Maybe I've missed something so please be gentle! 
Thanks!

Dazed_and_C0nfused

If you pay £1,000 into a relief at source pension scheme such as a personal pension or SIPP then the pension provider adds £250 basic rate tax relief.  Giving you a fund of £1,250.

When you take the £1,250 as a pension 25% (£312.50) is tax free and 75% (£937.50) is taxable.  If 20% tax is due on the taxable part then after tax that is £750.  Plus the tax free element of £312.50 gives a total of £1062.50.

Return of 6.25% (ignoring any investment return gain or loss).

Thrugelmir

LISA cannot be withdrawn penalty free until you are 60. 
The net £1,000 invested into a pension plan would be grossed up to £1,250. (Assuming that the individual concerned is a basic rate taxpayer). £312.50 would be the tax free sum. Pension can be withdrawn from 55.

Different horses for different courses. LISA would be counted as savings if benefits were to be applied for. Pension not. For example. Often a combination is better than a one strategy plan. 

kuratowski

Under current rules you can get 25% of your pension pot tax-free, which effectively transforms the retirement tax rate from 20% to 15%.

Also, many people aim to use a DC pension pot to "bridge the gap" before they can access their state pension and other pensions, i.e. they may only draw down as much as possible to use their personal allowance, which would otherwise be wasted, and thus in effect their tax rate is 0% on the first 16,667 they draw (=12500/0.75).

Otherwise, the choice between LISA and pension contributions depends on whether or not you get an NI saving from salary sacrifice and/or and matching employer contributions as an employee.

• Without salary sacrifice, the LISA might be better, but only if you are planning on drawing down along side other income, so that you've already used the personal allowance.
• If you have salary sacrifice available, the boost from putting money in your pension matches LISAs (i.e. 85/68 = 1.25) and, it may be better than LISAs if you are using part of your personal allowance.

If you are currently a higher rate taxpayer, then pensions always beat LISAs.  Unless your income is high enough that you're able to exhaust your annual allowance.

dqnet

I see, but you would never get £1250 you would have got £1200 (20% tax relief) so technically you would have £1200 and with a LISA £1250.  The LISA gives you that completely tax free but you would have been previously taxed during your pay check. However if you were to put that previously taxed pay into a pension you would be taxed on it taking it out later in life as you would get 20% relief going into the pension taking the £1000 to £1200 so £1200 - 25% tax free on exit = £900. The remaining £900 would be re-taxed at 20%) no?   (I'm just trying to understand why you aren't technically taxed twice?)   I'm a little confused sorry   

dqnet

Thrugelmir said:

LISA cannot be withdrawn penalty free until you are 60. 
The net £1,000 invested into a pension plan would be grossed up to £1,250. (Assuming that the individual concerned is a basic rate taxpayer). £312.50 would be the tax free sum. Pension can be withdrawn from 55.

Different horses for different courses. LISA would be counted as savings if benefits were to be applied for. Pension not. For example. Often a combination is better than a one strategy plan. 

Thanks, but aside of the age limitations and means tested stuff.. I'm just trying to understand how one is taxed once and one is taxed twice. It does make sense if you never need more then the personal allowance but what if you do need more?

Dazed_and_C0nfused

dqnet said:

I see, but you would never get £1250 you would have got £1200 (20% tax relief) so technically you would have £1200 and with a LISA £1250.  The LISA gives you that completely tax free but you would have been previously taxed during your pay check. However if you were to put that previously taxed pay into a pension you would be taxed on it taking it out later in life as you would get 20% relief going into the pension taking the £1000 to £1200 so £1200 - 25% tax free on exit = £900. The remaining £900 would be re-taxed at 20%) no?   (I'm just trying to understand why you aren't technically taxed twice?)   I'm a little confused sorry   

Basic rate tax relief on relief at source pension contributions is 20% of the gross contribution, which equates to a 25% uplift on what you pay.

So you pay over £1,000 and that becomes £1,250.

20% of £1,250 is £250.

dqnet

kuratowski said:

Under current rules you can get 25% of your pension pot tax-free, which effectively transforms the retirement tax rate from 20% to 15%.

Also, many people aim to use a DC pension pot to "bridge the gap" before they can access their state pension and other pensions, i.e. they may only draw down as much as possible to use their personal allowance, which would otherwise be wasted, and thus in effect their tax rate is 0% on the first 16,667 they draw (=12500/0.75).

Otherwise, the choice between LISA and pension contributions depends on whether or not you get an NI saving from salary sacrifice and/or and matching employer contributions as an employee.

• Without salary sacrifice, the LISA might be better, but only if you are planning on drawing down along side other income, so that you've already used the personal allowance.
• If you have salary sacrifice available, the boost from putting money in your pension matches LISAs (i.e. 85/68 = 1.25) and, it may be better than LISAs if you are using part of your personal allowance.

If you are currently a higher rate taxpayer, then pensions always beat LISAs.  Unless your income is high enough that you're able to exhaust your annual allowance.

Yea, outside of Salary Sacrifice and Work Place Pensions, this is just if you have £1000 spare money from your pay check after you have already been paid (taxed on it). Putting all LISA and Pension benefits aside (60, means tested, 57 etc.) So, I guess the ultimate question is would it be better to put this already pre-taxed at PAYE £1000 into a LISA or Pension with regards to tax relief on retirement?

kuratowski

dqnet said:

It does make sense if you never need more then the personal allowance but what if you do need more?

If you think you might have any unused personal allowance your tax rate will be a mixture of 0% and 15% (75% of 20%) so it is still worthwhile to contribute to a pension.  As Thrugelmir said, it usually makes sense to have a combination of vehicles.

Zorillo

If you put it in the pension,  you get the tax you've paid on it paid back (relieved). So when you're taxed later on 75% if it, you've only really been taxed on it once. 

If you put it in a LISA, you've  been taxed on it, this tax is not relieved but you're paid a bonus on it instead, and then you can withdraw it tax free at aged 60, so you've also only been taxed once.

ColdIron

dqnet said:

I see, but you would never get £1250 you would have got £1200 (20% tax relief) so technically you would have £1200

No

£1,250 taxed at 20% = £1,000

£1,000 with 20% tax relief, or 25% uplift, = £1,250

You get all your tax back