Pension vs Lisa = Winner?

dqnet

Ahhh, I see now!  So the only true benefit of the LISA is if you wanted all your money in one go without any worries otherwise if you are prepared to make do with the 25% tax relief on drawdown + keeping the remaining 'taxed' 75% under the PA then they are technically the same and only the 'other' pros and cons come into affect?  Correct?

kinger101

dqnet said:

Ahhh, I see now!  So the only true benefit of the LISA is if you wanted all your money in one go without any worries otherwise if you are prepared to make do with the 25% tax relief on drawdown + keeping the remaining 'taxed' 75% under the PA then they are technically the same and only the 'other' pros and cons come into affect?  Correct?

No.  The pros and cons of LISA version pension for basic rate tax taxpayers are as follows;

Under a LISA, £1 of post-tax  income becomes £1.25.  That's a 25% uplift.  

For a pension scheme which is not contributed to under salary sacrifice, a £1 contribution costs 80 p of post-tax income.  However, unlike the LISA, that £1 will be taxable income in the future.  25 % of the pension pot can be withdrawn tax free, but the remain will be taxed at the marginal rate (usually 20 % based on present tax rates).  So one usually assumes pensions are taxed at 15 %.  So that 80 p of post-tax income isn't worth £1 in the future.  It's only worth 85 p.  An uplift of 6.25 %.

If you can make contributions under salary sacrifice, you can save NI too, which means the future 85 p costs 68 p.  Same 25% uplift as LISA.  Swings and roundabouts at this point which is better.

But for BR taxpayers who cannot benefit from salary sacrifice, LISA is by far the most tax efficient vehicle for retirement savings.

Barry_Bear

A SIPP may be better in general for a pension. But is there a case, if you have the cash, for using the LISA allowance as a future tax free income?

If basic rate tax were much higher than now when you retire (think 1970s) then - all else being equal (assume a future goverment does not decide to tax the LISA) having a LISA in retirement could mitigate this by proving a source of tax free income?

kinger101

Barry_Bear said:

A SIPP may be better in general for a pension. But is there a case, if you have the cash, for using the LISA allowance as a future tax free income? If basic rate tax were much higher than now when you retire (think 1970s) then - all else being equal - having a LISA in retirement could mitigate this by proving a source of tax free income?

Unless an employer can pay directly into a pension under salary sacrifice, a pension scheme will never be better for the basic rate taxpayer for the reasons I've outlined above.  An almost certain 25% gain is better than a tentative 6.25% gain.

When comparing LISA vs SS, then one does have to worry about the future tax regime.  One is taking a much bigger gamble on future tax rates with a pension.  Reduction in the tax free amount or increases in income tax rates will quickly tip the balance in favour or LISA.  

Zorillo

There are more benefits to LISA than are immediately obvious:
Access in an emergency at any time (with a small penalty). (You can't with a pension)

You can pay the money into a Pension at 60 and get still tax relief on it. (You can't recycle  pension money)

You can draw it down tax free at any amount you choose to supplement pension income from 60 onwards, or take it as a lump sum.

I'm aiming for my LISA to make up approximately 1/4 of my overall retirement funds, and I believe it will allow me lots more flexibility at 60 than if I was solely reliant on my DC pension. I do not intend to retire earlier than 65 unless I'm forced to.

afis1904

I think for most basic rate taxpayers in the private sector a LISA will be the more efficient than putting more money into their workplace pension or using a SIPP since most basic rate taxpayers do not have access to salary sacrifice schemes.

Thrugelmir

If the money is to be invested in stocks and shares then fund management cost needs to be factored in to the potential returns. 

kuratowski

Tax rules are of course subject to change (probably made even more likely by current events).  But as of now the optimal approach for a basic rate taxpayer without SS is to save enough in their pension to be able to draw down £16667 pa between age 55 and SPA, and then £4533 pa until death, and then after that to max the LISA.  Of course with investment returns (as well as tax rules) being uncertain it is impossible to be so precise.

afis1904

Thrugelmir said:

If the money is to be invested in stocks and shares then fund management cost needs to be factored in to the potential returns. 

Yeah I was about to say that and most workplace pensions tend to be more expensive than other schemes whilst a SIPP can be slightly cheaper than a LISA.

dqnet

@kinger101
Correct me if I am wrong but it's not 25% uplift as you were taxed at 20% before you are getting your 25% relief.  When you put that £1.00 in you had previously earned £1.25 so effectively you are returning it to its original value. With a pension, the £1.25 you earned turned into £1.00 and went back in to £1.25 however when you come to withdraw it providing it is under the 20% PA allowance you got the 25% back just as with a LISA no - its just a question of money now or risk later?  (Salary Sacrifice and Auto Enrolment not accounted for as per original question).