All in SIPP... or partly LISA

rundmc-k

I would like to start a new SIPP and possibly LISA (both S+S) before the end of the tax year. I thought I had worked everything out and was going to deposit in both, but after paralysis by analysis I am suddently questioning if the LISA is of any benefit.

Background: I am age 36, a higher rate taxpayer, I have an NHS pension that should be enough from age 68 but want to have a 58-68 retirement option.
I can afford to put up to ~10k into 'later-life' investments in this tax year. If that all went in a SIPP I would still be in the higher tax bracket, and I wouldn't reach my pension annual allowance either. So I could get the benefit of the government addition to the SIPP and the reclaim through self-assessment.
So I am wondering... is there any benefit to filling a LISA as well?

My one consideration was that if I contributed to a LISA as well that at age 58 I could take a lump sum and personal allowance from the SIPP, then from age 60 have a salary by taking 1/8th of the LISA plus again the personal allowance from the SIPP... until 68 at which point NHS pension would kick in. That way I would minimise paying tax on the SIPP on the way out. Am I overly complicating things though? Could I better just to pay as much as possible into a SIPP now, then at age 58 try to make it span 10 years?
Any help is appreciated.

kinger101

As a higher rate taxpayer, LISA is only beneficial if;
(a) you're using it to purchase a house; or
(b) you've already contributed sufficiently to a pension to drop yourself back into BR tax and cannot benefit from salary sacrifice.

It would be worth opening the LISA door before you're 41 40 (as it then stays open until you're 50) with a token amount, but it will be a less tax-efficient option.

For LISA, every £1 you put in gets a 25 p uplift (25% uplift)
For a HR taxpayer using a SIPP, every 60 p in a pension is worth £1 gross or 85 p net (41.67% uplift).

Pensions are also more efficient for IHT.

rundmc-k

@kinger101 Thanks for the reply, that does make a lot of sense. I suppose the one thing that confuses me though is that if I solely rely on the SIPP, then I will have to pay 20% tax on a significant portion of it on the way out other than the TF lump sum (esp as I get a small NHS pension of around £6k at age 60 which would take up about half of my tax free allowance).

If I have a LISA as well though, I can "create" a tax free salary for the ages 58-68 from the SIPP lump sum, LISA and then staying within my tax free allowance with my SIPP withdrawals. Is there any benefit to that, or is it still overall more beneficial to concentrate on the SIPP primarily?

eskbanker

kinger101 said:

It would be worth opening the LISA door before you're 41 (as it then stays open until you're 50) with a token amount, but it will be a less tax-efficient option.

Pedantry alert: LISAs need to be opened before 40, as per https://www.gov.uk/guidance/managing-lifetime-isa-applications-and-accounts

Individuals who are 40 or older are not eligible to open a Lifetime ISA.

tim_london

rundmc-k said:

@kinger101 Thanks for the reply, that does make a lot of sense. I suppose the one thing that confuses me though is that if I solely rely on the SIPP, then I will have to pay 20% tax on a significant portion of it on the way out other than the TF lump sum (esp as I get a small NHS pension of around £6k at age 60 which would take up about half of my tax free allowance).

If I have a LISA as well though, I can "create" a tax free salary for the ages 58-68 from the SIPP lump sum, LISA and then staying within my tax free allowance with my SIPP withdrawals. Is there any benefit to that, or is it still overall more beneficial to concentrate on the SIPP primarily?

If you have 10000 to invest in either SIPP or LISA.  Using over simplified maths with assumption of 2% growth per year and 20 years until retirement (also ignoring LISA limit for now):

• SIPP:  £10k invested.  Over 20 years at 2% growth you end up with £14,913.  25% is tax free and other 75% is subject to income tax (for argument sake I'll assume 20% because you used up your allowance elsewhere), you will end up with £12,676  ((14913*0.25)+(14913*0.75*0.8))
• LISA: £10k to invest, 40% hit on higher tax band, then get 25% LISA boost: ends up with £7500 in LISA account.  2% annual growth for 20 years is £11,184.  No income tax deductible.

SIPP still wins?

Also:

1. LISA withdrawal age is 60, whereas SIPP is 55
2. LISA is not protected like SIPP, so If you have some life event that made you bankrupt you'll creditors can go after your LISA, but they can't on your SIPP.

Alexland

Also worth noting that for those of us who have already been making high pension contributions the LISA is good as it doesn't use up your pension lifetime allowance. It would be a shame for any mathematically superior SIPP contributions to be damaged by the LTA excess charge.

Albermarle

1. LISA withdrawal age is 60, whereas SIPP is 55- The OP is only 36 so by the time they get to retirement age , it would not be surprising if the withdrawal ages were almost the same 
2. For a HR taxpayer using a SIPP, every 60 p in a pension is worth £1 gross or 85 p net (41.67% uplift). Unless the OP is a higher rate taxpayer in retirement. 
   

Alexland

Albermarle said:

The OP is only 36 so by the time they get to retirement age , it would not be surprising if the withdrawal ages were almost the same

I am still crossing my fingers hoping that they give members of existing schemes which have an unconditional right of access at 55 a protected retirement age as suggested in the recent government consultation paper (although it also suggested using the consultation date as the cut-off but that might change). As such it might be worth anyone considering an early retirement who does not currently have a pension that gives access at 55 to open a second pension with such access even if it only has a token small contribution in to get it started. An earlier access age would also reduce the chance of LTA issues with a few years less investment growth.

rundmc-k

I have just assumed that if I open a SIPP I won't be able to access it until at least 58 as that is 10 years before current retirement age of someone in my age group. I hadn't even considered the possibility of a SIPP giving me a protected age 55 retirement... maybe that's not possible but would be great if it was. I also don't think I should have LTA issues as at 36 I am only at 20% of my LTA so far.

I tried to do an analysis of paying solely into a SIPP, or partly into a SIPP and LISA with a view to using them both up completely with minimal tax being paid between the ages of 58-68, as I really shouldn't need anything left over once NHS pension starts.

My analysis (for an example) was:
8k per year into SIPP for 22 years or...
4k per year into LISA for 14 years (age 50) and
4k per year into SIPP for 22 years + an additional 4 K for 8 years after paying into LISA stops.

When incorporating SIPP lump sum and my small "1995 scheme" NHS pension that I can get at 60 (about 6k p.a. and 18k lump sum) into these, I can create a 'theoretical' annual wage of about 32k (after tax) for that 10 year period, using either method. The difference seems negligible (unless I made a mistake which is entirely possible)
When I then take into account the rebate that I should hopefully get from HMRC after putting details of the SIPP into self assessment each year, it would seem the "larger amount in SIPP" approach is definitely preferable.

I have probably way overanalysed this as I tend to do... but do those musings seem accurate?

tim_london

From what I've read and understand yes - I agree with the take.  Even when you are over the LTA, the pension freedom means the choice between 20% or 55% LTA charge is only applicable if you decide to 'crystallise' portions of your pension pot.  You still have a lot of control on how to minimise tax.  

The general consensus seems to be:
Max out pension contribution £40k
Max out LISA for (25% tax relief) if eligible £4k
Max out ISA £20k - no tax relief but at least you have freedom on when to access
Diversify some to investing VCT for 30% tax relief (note: high risk and money locked for 5 years)
Invest in stocks and share, diversify high value vs high dividend to max out annual tax free dividend allowance (£2k) and CGT allowance (£14k ish?)

kinger101

eskbanker said:

kinger101 said:

It would be worth opening the LISA door before you're 41 (as it then stays open until you're 50) with a token amount, but it will be a less tax-efficient option.

Pedantry alert: LISAs need to be opened before 40, as per https://www.gov.uk/guidance/managing-lifetime-isa-applications-and-accounts

Individuals who are 40 or older are not eligible to open a Lifetime ISA.

Not pedantry.  Accuracy.  Thanks for correcting.