Pension VS Lisa for retirement in terms of overal profit

rafhelp

Used a Compond Calculator for a cash fund pension

Lump sum £0

Monthly Payments £333

Government contribution 24% (knocking off 1% to cover any fees or management fee)

Duration 30 Years

Ok so it said you would end up with a Pension Pot of roughly £148,651.0

Lets call it a nice round figure of £150,000

Youve put it £119,880

This is ignoring any other fees you have to pay.

Youve made a profit/growth of £30,120

But..

On retirement you want to buy a house so you want to take out all the money as a lump sum

You can take out 25% tax free so you take out £37,500 Tax Free

You are then taxed 20% on the remaining £112,500

So you pay £22,500  in taxes

This leaves you with £127,500 total in hand

So if you take that off the growth, overall after taxes you have made £7620 profit / growth in 30 years

Which over 30 years works out to £254 per year.

This is a a very crude basic example but is it right?

£254/ year growth is kinda bad.

If instead....

At age of 30years old you opened a LISA

You put £4000 in every year for 20 years

On retirement at 60 years age you would end up with about £129,307 (thats including interest)

"You can make full or partial withdrawals from your Lifetime ISA, without paying a fee, when you turn 60.
You won’t pay any tax and can use the money for whatever you want"

So you could withdraw the whole £129,307 without paying any tax.

So you just made a profit of £49,307

or over 30 years £1643 per year which is kinda better...

Correct me if anything is wrong

But if its more or less right isnt it better to just put any money you can afford into a LISA and not a pension pot?

ian1246

To start with, you ve forgot to factor in interest earnt for the pension. I.e. 30 x £4000 per year (30years) = £120,000, plus government 25% tax contribution = £150,000.... without any interest over those 30 years factored in!  So i think your compound calculator is not working in calculating the interest.

You've essentially compared pension with no interest vs. LISA with interest.

An accurate comparison would be both with interest.

kinger101

For higher rate taxpayers, pension is better.
For basic rate taxpayers, the LISA and salary sacrifice pensions are on a par in terms of a 25% uplift so it depends on a number of differences in the operation of the two, but most would go pension for administrative ease and slightly early access.
If you pay basic rate tax and cannot benefit from salary sacrifice, then LISA would be the most tax-efficient option once employer's contribution have been maximised.

The growth rate of a fund will be same whether is wrapped or unwrapped.

mark55man

if you took £100000 out all in one tax year you would pay more than 20% on a good chunk of it

Calculations below assuming no other income on £100000 withdrawal
25% tax free = Cash received £25,000- tax £0
The of the remaining £75000
£12500 personal allowance @ 0% Total Cash received £37,500- tax £0
up to £50000 HR threshold = 20% of 37500 = £7500. Total cash £67,500 - tax £7,500
40% HR tax then due on remaining £25,000 (up to £100000 taxable income) so 40% of £25000 = £10000.  Total cash £82500 - tax £17,500
Above £100000 two things happen you start losing your personal allowance £1 for every £2, a marginal tax rate of 60% up to £125000 and then I think at £150K you pay additional rate tax at 45%

Very easy to avoid if you spread the withdrawals over years, but that may be disadvantageous

Grumpy_chap

rafhelp said:

On retirement you want to buy a house so you want to take out all the money as a lump sum

Is this to buy a house on retirement to generate income (BTL), or to live in as primary residence?
If the latter, most people try to have their primary residence much younger so it is fully paid for at retirement.

georgehere

Also if the pension is a company one, there will be some kind of company contribution (free money) on top that will also compound in growth (minus a charge which is usually small)

Albermarle

Over 30 years nobody in their right mind would leave the money in cash of course , so it would be fairer to do both calculations with no interest.
However if you are a basic rate taxpayer + no employer contributions + the max you want to contribute is £4K pa , then probably the LISA is better.