LISA/SIPP Combination - Self-Employed Retirement Planning at 26

TJB24

Morning folks,
Objective: I plan to go self-employed within the next three years and would like initial feedback/advice on my provisional retirement plan.

Context: I'm 26 and have worked for the Civil Service (paying into the Alpha pension scheme) for seven years. I am a homeowner with approximately 25% equity, and a significant stock portfolio for general wealth investing equivalent to three years net salary. I am a fairly confident DIY investor, achieving above-benchmark returns so far. I also have a LISA - using exclusively for retirement purposes - with about £6k in it - also invested in the stock market. I am currently putting myself through university/night school to become a BACP-accredited counsellor/psychotherapist, and currently volunteer as a therapist for two charities to gain experience. I also continue to work full-time at the Civil Service, though I'm exploring part-time options to focus more on my course. Counselling is very much a passion of mine, building on experience in working with vulnerable people and bereaved families in a previous front-line role. I'm quite fed up of working for a soulless government organisation and prefer the immediate reward of working with therapy clients, and having the freedom to choose how I work.

Plan: I will most likely choose to set myself up in private practice after I fully qualify from my degree. Earliest I can do this will be from 2022, but may need to work on a part-time basis as it will take a while to build up a sufficient client list to be a full-time therapist, which will be very hard work. In any event, by going self-employed I will no longer be paying into the excellent Alpha scheme. So I would like to look at my options for effective, tax-efficient retirement planning. My idea as follows;

• Pay 10% of my monthly net profits into my Lifetime ISA, receiving a 25% bonus on deposits. I would expect this to be about ~£4,000 p/a including the bonus.
• Keep the Lifetime ISA investments in fairly aggressive growth stocks, paying in for the remaining 24 years I can make deposits (age limit for deposits is 50).
• At age 50, cease paying into the LISA and open a SIPP. Continue to deposit the same amounts but receiving tax-relief instead of a bonus.
• As my age increases, begin to shift the weighting from aggressive growth stocks to a mix including defensives and bonds.
• Access Lifetime ISA from age 60; all profits and dividends payouts from within the account are tax-free. Transfer LISA holdings to bonds/high-dividend funds with a target for <5% yield per annum. Assuming consistent deposits and a 5% average compound return, that would be a balance of £350k, yield of which would be £17.5k tax-free without the need for an annuity, and the ability to make lump-sum withdrawals if needed without tax or penalty.
• Access SIPP from age 68, either taking out an annuity or assessing my options there, though at least 75% of this will be taxable. Again assuming same deposit and return rates, that would be around £122k final balance pre-lump sum. State pension and Civil Service pension on top of that.

All of this of course not accounting for the curveballs life will throw at you, or changes to Government policy to both pensions and the LISA itself.
Thoughts, feedback and pitfalls all very welcome. Does this sound sensible, based on current information and assumptions? Is there anything big I'm missing here?

Albermarle

I think the flaw could be that the £350 K in the LISA includes inflation so will not be that much in todays money.
If you put £4K in a LISA ( including bonus for ) for 24 years , that means you will have contributed £96K .
Assuming say 6% growth and 2% inflation , then net growth is 4% . So you might have around £160K . then another 10 years with no contributions would mean about £240K in todays money . Very rough calculations .
Normally  making £4Kpa contributions , including bonus/tax relief will produce a good pot over that period of time ,  but nothing spectacular . Many posters on here would start to increase contributions as they got older / more disposable income . In your case you could open the SIPP before 50 and contribute to both SIPP and LIsa at the same time .
Then a consistent 5% yield is pretty ambitious .
Normally the approx. calculation is that you can safely take 3.5% from a pension pot .

cloud_dog

The other thing to seriously consider, especially as you are going self employed, is that your LISA monies would be taken in to consideration if you ever needed to claim means tested benefits, whereas your pension monies would not.

Marcon

Impressed as I was by your post (and I certainly was), I couldn't help wondering where the fun in life is coming from with all this long term planning and saving? COVID has brought home to most of us how fleeting and unpredictable life can be, so make sure you have some jam today as well as splendidly planned jam tomorrow.

wjr4

Have you got an emergency fund? Make sure you take out sufficient cover eg income protection. 

hugheskevi

Whilst I applaud long-term planning, I think this is too far in advance when you are planning to set up a new career and who knows how that will go.

I would be focusing on more mundane short and medium term planning, such as whether you plan to be self-employed or set up a Ltd company. This will have consequences around your incentives to make pension contributions, for example, if you were going to be self-employed and in the longer term expected to be a higher rate taxpayer than delaying pension contributions may be optimal. Whereas if running a Ltd company and paying yourself primarily from dividends the position is different (although pension can still be very attractive due to reducing Corporation Tax).

LISAs are good, but you can't put much in them, and the amount is fixed in cash terms so is being eroded by inflation. For serious retirement planning they are just not enough in most cases. Pensions have great tax advantages, particularly in certain conditions and I think they are likely to play a bigger role than you are planning (subject to policy change). Contributing more when conditions are ideal can be a lot better than a mechanistic %-based contribution pattern.

TJB24

Albermarle said:

I think the flaw could be that the £350 K in the LISA includes inflation so will not be that much in todays money.
If you put £4K in a LISA ( including bonus for ) for 24 years , that means you will have contributed £96K .
Assuming say 6% growth and 2% inflation , then net growth is 4% . So you might have around £160K . then another 10 years with no contributions would mean about £240K in todays money . Very rough calculations .
Normally  making £4Kpa contributions , including bonus/tax relief will produce a good pot over that period of time ,  but nothing spectacular . Many posters on here would start to increase contributions as they got older / more disposable income . In your case you could open the SIPP before 50 and contribute to both SIPP and LIsa at the same time .
Then a consistent 5% yield is pretty ambitious .
Normally the approx. calculation is that you can safely take 3.5% from a pension pot .

Stupid question, but what is the advantage of a SIPP over a LISA in terms of inflation? Surely Annuity yields are pretty low?Marcon said:

Impressed as I was by your post (and I certainly was), I couldn't help wondering where the fun in life is coming from with all this long term planning and saving? COVID has brought home to most of us how fleeting and unpredictable life can be, so make sure you have some jam today as well as splendidly planned jam tomorrow.

Haha! I wouldn't be much of a therapist if I didn't come with my own supply of quality perfectionist insecurity and need to over achieve! You aren't the first person to say that to me, it is something I'm trying to work on.wjr4 said:

Have you got an emergency fund? Make sure you take out sufficient cover eg income protection. 

I do currently, having cash liquidity would be a priority going self-employed.hugheskevi said:

Whilst I applaud long-term planning, I think this is too far in advance when you are planning to set up a new career and who knows how that will go.

I would be focusing on more mundane short and medium term planning, such as whether you plan to be self-employed or set up a Ltd company. This will have consequences around your incentives to make pension contributions, for example, if you were going to be self-employed and in the longer term expected to be a higher rate taxpayer than delaying pension contributions may be optimal. Whereas if running a Ltd company and paying yourself primarily from dividends the position is different (although pension can still be very attractive due to reducing Corporation Tax).

LISAs are good, but you can't put much in them, and the amount is fixed in cash terms so is being eroded by inflation. For serious retirement planning they are just not enough in most cases. Pensions have great tax advantages, particularly in certain conditions and I think they are likely to play a bigger role than you are planning (subject to policy change). Contributing more when conditions are ideal can be a lot better than a mechanistic %-based contribution pattern.

This is really helpful, thank you.

wjr4

FYI you do not need to purchase an annuity. 

Albermarle

Stupid question, but what is the advantage of a SIPP over a LISA in terms of inflation? Surely Annuity yields are pretty low

Maybe some confusion . What I meant is that when calculating how large your pot will be in 20 or 30 years time you have to take account of inflation .

So if you think the investment growth will be say 6% pa , you have to subtract an estimate of inflation from that , to get the true growth . So in your example, if I understood correctly , £350K in thirty five years time, will not buy the same amount of things as £350K would today . In real terms it would only have grown to approx. say £180 K .or maybe less

Alexland

Albermarle said:

Normally the approx. calculation is that you can safely take 3.5% from a pension pot .

...and even then it's on the basis of burning down the capital in retirement so probably nearer 3% for drawing an inflation linked income starting early at 60 assuming good health.

Albermarle said:

So if you think the investment growth will be say 6% pa , you have to subtract an estimate of inflation from that , to get the true growth . So in your example, if I understood correctly , £350K in thirty five years time, will not buy the same amount of things as £350K would today . In real terms it would only have grown to approx. say £180 K .or maybe less

Also remember to subtract fees too. So for example if during accumulation there was 4.5% investment growth, 2% inflation and 0.5% fees then the real return above inflation and fees would be only 2% pa. During deccumulation with a more conservative asset allocation it might be hard to make any return above inflation especially if we eventually see rising interest rates in future.