NHS pension additional payments vs S&S LISA

mrkds

I've recently been reviewing my savings / investment / pension stratagy. I am trying to decide wheather to maximise my S&S LISA, while  l still can (I'm in my early 40s) or to make additional payments (APs)  into my NHS pension. The gist of advice I have read is that you should maximise pension contributions before using a LISA due to being more tax-efficient.  However looking further into APs to NHS pension, this doesn't look apealing. 

I read with interest this thread, the concensus of which is that making APs is an amazing deal and should be maximsied where possible.  But when I use the NHS pension AP calculator, the amount I need to pay (lump sum) for additional £1000/yr pension, would be about £10,000. That is equal to 10 years of additional pension payments. So if I was to treat this as an investment, I would not see a return until 11 years after my SPA,  when I'll be 79, (which happens to be the life expectancy of men in UK!!). So its a 50/50 chance I'll see a return before I die!  I get that if I live to 100, the returns will be fantastic  but there is no cirtainty of that. So  APs look like a huge gamble to me!

In comparison I am projected to see an approx x3 return on my LISA over that time, and  I will get to access that at 60. That is 8 years before my SPA and 19 years before I would see an ANY return on my APs.  I know there is no market certainty and no gains in S&Ss are garunteed,  but it seems there will is a much higher chance of seeing decent returns in my lifetime with the LISA. 

This seems to go against the general wisdom  about pensions vs LlSA, so im asking if anyone can convince me otherwise? Is there a flaw in my thinking? Will appreciate any advice. 

Albermarle

Two flaws in your reasoning.
1) Although the average life expectancy of a man is 79, as you get older this age goes up. A 65 year old man will on average live another 19/20 years. So 50% will live longer than that and I think 25% will live over 90.
2) The payments from the NHS pension will rise with inflation. So for example if your first annual payment was £10K , then after 15 years it could be say £18K . All 100% guaranteed. So your LISA has to first beat inflation and its performance will never be guaranteed.

I think similar comments were made in the thread you linked.

You might be interested to know that to buy a fully inflation linked pension of £1000pa from age 65 ( as an annuity) would cost about £25K ( the inflation linking pretty much doubles the price). A year or so ago it would have cost £40K +. So you can see that only paying £10K is a great deal

Ideally though you should contribute to both, as the LISA will be helpful to tide you over if you retire early.

Dazed_and_C0nfused

And unless you are a very low earner the real cost is likely to be 20% less because you will get tax relief on the additional pension contributions.

Depending on your personal tax situation it could well be more than 20%.

r6mile

Unless you will be using it for a first home purchase, instead of the LISA you could consider the NHS Additional Voluntary Contribution scheme which is a defined contribution scheme, separate from your main NHS defined benefit pension. Especially if you are a higher rate taxpayer.

This will be a more flexible option than Added Pension, which you can invest in a range of funds similarly to a stocks and shares LISA.

mrkds

Albermarle said:

Two flaws in your reasoning.
1) Although the average life expectancy of a man is 79, as you get older this age goes up. A 65 year old man will on average live another 19/20 years. So 50% will live longer than that and I think 25% will live over 90.
2) The payments from the NHS pension will rise with inflation. So for example if your first annual payment was £10K , then after 15 years it could be say £18K . All 100% guaranteed. So your LISA has to first beat inflation and its performance will never be guaranteed.

I think similar comments were made in the thread you linked.

You might be interested to know that to buy a fully inflation linked pension of £1000pa from age 65 ( as an annuity) would cost about £25K ( the inflation linking pretty much doubles the price). A year or so ago it would have cost £40K +. So you can see that only paying £10K is a great deal

Ideally though you should contribute to both, as the LISA will be helpful to tide you over if you retire early.

Thanks for this. I hadn't thought about inflation. So when the calculator tells me £10,000 lum sum paid now wil get me £1000/yr additional pension, it means £1000 in today's money? So the actual figure I will get at retirement will be £1000+inflation between now and then, about £1800 with your example?
That does make APs much more attractive. 

mrkds

r6mile said:

Unless you will be using it for a first home purchase, instead of the LISA you could consider the NHS Additional Voluntary Contribution scheme which is a defined contribution scheme, separate from your main NHS defined benefit pension. Especially if you are a higher rate taxpayer.

This will be a more flexible option than Added Pension, which you can invest in a range of funds similarly to a stocks and shares LISA.

Thanks. I didn't know there was such a scheme. That definitly sounds like a better option than the LISA. I only have the LISA as a med-long term investment, before I thought about the tax implications.  I think spreading funds between that and APs might be the optimal stratagy. 

r6mile

Do you have any DC pensions from previous employers? If the NHS AVC scheme is anything like the Civil Service one, their charges are pretty low so consolidating might be worthwhile to look into consolidating them into that.

AlanP_2

I think there is a 3rd flaw in your reasoning in as much as Pension beats LISA as you say but the underlying assumption there is DC Pension not DB.


DC v LISA v S&S ISA are all using the same basis of equity / bond investments so are a like for like comparison.

mrkds

Thanks for all the helpful comments.

I did a bit of (rough) number crunching,  assuming a rate of inflation, rate of growth and tax rates, considering death at ages 60 to 100. Acording to my calculations, contributing to the AVC has better returns up to the age of 78, but after that the returns on APs sky rocket!! The LISA doesn't hold up very well in comparison, but potentially helpful for bridging the 60-68 gap if I need it. 

So, I think I'm going to split my funds 50-50 between APs and the AVC, and maybe trickle extra funds into the LISA now and then. 

mrkds

r6mile said:

Do you have any DC pensions from previous employers? If the NHS AVC scheme is anything like the Civil Service one, their charges are pretty low so consolidating might be worthwhile to look into consolidating them into that.

I do. I am considering doing that. However,  I'm finding it hard to compare charges between schemes. I look at the descriptions of the two available NHS schemes (linked here), but no clear description of charges. I also found this other thread on the subject , a comment suggests these AVPs may not be that competitive. So not sure where to turn...

mrkds

AlanP_2 said:

I think there is a 3rd flaw in your reasoning in as much as Pension beats LISA as you say but the underlying assumption there is DC Pension not DB.


DC v LISA v S&S ISA are all using the same basis of equity / bond investments so are a like for like comparison.

Yeah comparing returns on a DB vs a DC scheme is not straight forward, as I've recently learned!