BR taxpayer whilst earning and when retired - is LISA better value than a SIPP?

michaels

Basic Rate (20%) tax payer whilst earning and BR whilst drawing down

SIPP - £100 gross salary = £100 into pension wrapper = £85 to spend after 25% TFLS and BR tax on drawdown
LISA - £100 gross salary = £80 income after BR = £100 in LISA grossed up = £100 to spend on 'drawdown'

I had thought they were equally advantageous but it seems that LISA is a massive winner for basic rate tax payers

Marcon

michaels said:

Basic Rate (20%) tax payer whilst earning and BR whilst drawing down

SIPP - £100 gross salary = £100 into pension wrapper = £85 to spend after 25% TFLS and BR tax on drawdown
LISA - £100 gross salary = £80 income after BR = £100 in LISA grossed up = £100 to spend on 'drawdown'

I had thought they were equally advantageous but it seems that LISA is a massive winner for basic rate tax payers

For some, yes - but it won't invariably be 'a massive winner' for all basic rate taxpayers (and of course some people are quite simply too old to open a LISA). See https://www.moneysavingexpert.com/savings/lifetime-isas/#retirement and read the section headed 

Lifetime ISA need-to-knows for retirement savers

NlghtOwl

yes, Lisa is better for BR taxpayers if they qualify except for the IHT benefit of sipp

DietIrnBru

There is a case to be made for the LISA if a basic rate tax payer (I am one).

I have an NHS pension which i contribute to - technically maxed out as you cant increase your contributions unless you are working more hours. My LISA is an adjunct to this pension - not a replacement. I had my LISA left open from when I bough my flat - but I am now depositing the £4k a year until aged 50 (10 years from now). The lump sum at the end would have benefited from tax relief - and not having tax taken off the way out.

However I would watch your math regarding the taxation rate for the SIPP. Remember that you get tax relief on that £80 taking it up to £100. However, there is that 25% tax free lump sum you can take, meaning that the tax rate would be at 12.5%. The LISA still wins for a basic rate payer (after they have utilised their workplace pension) - but its still something to keep in mind.

IHT will not apply to me (regardless of what many Daily Mail readers may think that the government is coming for their small pots); nice tax free lump sum at 60. However, keep in mind that if you have to access the benefits system before that - the LISA funds would be considered fair game to access regardless of the fee incurred. 

Dodl do a decent range of funds - HSBC Global Tracker is fairly cheap. Dodl charges minimum £1pcm - once the investments pass £8k the fee becomes 0.15% (still a minimum of £1). The only downside to Dodl is that you have to go into the app to invest the bonus when it arrives. Small thing but it does detract from desire for minimal interventions.

I also have a Vanguard ISA which I save regularly into as I wish to retire at 55 or at least dramatically cut my hours back. Once I hit 50 I will again save into the SIPP.

michaels

DietIrnBru said:

There is a case to be made for the LISA if a basic rate tax payer (I am one).

I have an NHS pension which i contribute to - technically maxed out as you cant increase your contributions unless you are working more hours. My LISA is an adjunct to this pension - not a replacement. I had my LISA left open from when I bough my flat - but I am now depositing the £4k a year until aged 50 (10 years from now). The lump sum at the end would have benefited from tax relief - and not having tax taken off the way out.

However I would watch your math regarding the taxation rate for the SIPP. Remember that you get tax relief on that £80 taking it up to £100. However, there is that 25% tax free lump sum you can take, meaning that the tax rate would be at 12.5%. The LISA still wins for a basic rate payer (after they have utilised their workplace pension) - but its still something to keep in mind.

IHT will not apply to me (regardless of what many Daily Mail readers may think that the government is coming for their small pots); nice tax free lump sum at 60. However, keep in mind that if you have to access the benefits system before that - the LISA funds would be considered fair game to access regardless of the fee incurred. 

Dodl do a decent range of funds - HSBC Global Tracker is fairly cheap. Dodl charges minimum £1pcm - once the investments pass £8k the fee becomes 0.15% (still a minimum of £1). The only downside to Dodl is that you have to go into the app to invest the bonus when it arrives. Small thing but it does detract from desire for minimal interventions.

I also have a Vanguard ISA which I save regularly into as I wish to retire at 55 or at least dramatically cut my hours back. Once I hit 50 I will again save into the SIPP.

I think the exact number is £100 gross can be £80 (20% BR tax) now or £85 (£25 tax free plus £75 taxed at 25%) if received via a pension.

vacheron

michaels said:

Basic Rate (20%) tax payer whilst earning and BR whilst drawing down

SIPP - £100 gross salary = £100 into pension wrapper = £85 to spend after 25% TFLS and BR tax on drawdown
LISA - £100 gross salary = £80 income after BR = £100 in LISA grossed up = £100 to spend on 'drawdown'

I had thought they were equally advantageous but it seems that LISA is a massive winner for basic rate tax payers

It also depends on what you mean by "whilst earning". 

If you are contributing to a SIPP with money already "in hand", then yes. However, the majority of basic rate "earners" will probably have access to an employer pension scheme with employer contributions, and also possibly salary sacrifice which would add another 8% NIC saving (and possibly more if employer NIC savings are credited to the employee), it could then substantially outperform the LISA option. 

But if just considering investing already earned "Net" money, and assuming that the individual meets the LISA criteria, then yes, the LISA would be the winner in this scenario.

hugheskevi

vacheron said:

michaels said:

Basic Rate (20%) tax payer whilst earning and BR whilst drawing down

SIPP - £100 gross salary = £100 into pension wrapper = £85 to spend after 25% TFLS and BR tax on drawdown
LISA - £100 gross salary = £80 income after BR = £100 in LISA grossed up = £100 to spend on 'drawdown'

I had thought they were equally advantageous but it seems that LISA is a massive winner for basic rate tax payers

It also depends on what you mean by "whilst earning". 

If you are contributing to a SIPP with money already "in hand", then yes. However, the majority of basic rate "earners" will probably have access to an employer pension scheme with employer contributions, and also possibly salary sacrifice which would add another 8% NIC saving (and possibly more if employer NIC savings are credited to the employee), it could then substantially outperform the LISA option. 

But if just considering investing already earned "Net" money, and assuming that the individual meets the LISA criteria, then yes, the LISA would be the winner in this scenario. 

Even with salary sacrifice available (no employer savings passed on) LISA beats pension for the basic rate individual:

• £72 net cost after sal sac to get £100 into pension which after tax pays out £85
• £72 into a LISA is boosted to £90 with no further tax to pay.

SSISA should also be considered if the basic rate taxpayer thinks they may be a higher rate taxpayer at a future point. Although LISA allowance is use it or loss it, an SSISA can be used to defer the pension decision. Even if not a higher rate taxpayer in future, they also get the benefit of access to the funds which they wouldn't have in a pension.

vacheron

Hi hugheskevi

Apologies, I edited my first post after your reply which made things a bit confusing, so have removed the addition from the edit and and pasted it below. 

• Below 5% of salary my employer matches adds 9:5 'ths and 25% of their employer NIC savings, so I would recieve about £268 for a £100 Gross contribution on up to 5% of salary.

• Above 5% of salary, this would be considered an AVC resulting in no match, but 100% of my employers NIC savings, so would recieve £113.80 for a £100 gross contribution. 

Yours and the OP's maths are correct, but important to let people know not to disregard their possible workplace scheme benefits by declaring LISAs as "massive winers for most basic taxpayers" over "pensions".

In my personal circumstances I would be a HR taxpayer (if not for my pension contributions), and am 50, so the pension wins hands down by default!   

michaels

I am too old to have bene able to benefit from LISA unfortunately, however the relevance to me is that we have a vague plan to help our kids onto the housing ladder ideally using funds from downsizing but given they are now 18 and not in a position to take advantage of their LISA allowance we should probably be filing theirs for them as part of this deposit contribution.  Finding that sort of money before downsizing will require some financial engineering.

[They may not need to be fully aware of this action on our part as they are still at the stage where 4k in a savings account would look very attractive to towards a trip to 'Napa with mates or an unsuitable car purchase]

Another aside - if the funds are for a potential house purchase with a time horizon of 5-15 years rather than decades are they better invested in a 'cash' LISA than an S&S one?

vacheron

michaels said:

I am too old to have bene able to benefit from LISA unfortunately, however the relevance to me is that we have a vague plan to help our kids onto the housing ladder ideally using funds from downsizing but given they are now 18 and not in a position to take advantage of their LISA allowance we should probably be filing theirs for them as part of this deposit contribution.  Finding that sort of money before downsizing will require some financial engineering.

[They may not need to be fully aware of this action on our part as they are still at the stage where 4k in a savings account would look very attractive to towards a trip to 'Napa with mates or an unsuitable car purchase]

Another aside - if the funds are for a potential house purchase with a time horizon of 5-15 years rather than decades are they better invested in a 'cash' LISA than an S&S one?

I had a similar quandry with the Junior ISA  fo my son in that I wanted to save for him for possibly his first house / university, but really didn't like the junior ISA mentality of "We will tell him when he turns 16 that he is coming into a 5 figure sum when he turns 18, that it's legally entirely his to do with what he wants, and there is nothing Mum or Dad can legally do to stop him! 

I've no problem setting up a JISA for him to save his own money into, or allowing friends / relatives to gift into one if they wish (this element I can understand especially if the relatives feel that the child has parents / guardians who may not be "entirely trustworthy")! 

In my case we (his parents) opened an S&S ISA in our name and have been adding his child allowance and other amounts into it since the day he was born, but this has been going for 12 years now and he won't need it for at least another 6-7 years, so the stock market was the best choice for us.
 

michaels

vacheron said:

michaels said:

I am too old to have bene able to benefit from LISA unfortunately, however the relevance to me is that we have a vague plan to help our kids onto the housing ladder ideally using funds from downsizing but given they are now 18 and not in a position to take advantage of their LISA allowance we should probably be filing theirs for them as part of this deposit contribution.  Finding that sort of money before downsizing will require some financial engineering.

[They may not need to be fully aware of this action on our part as they are still at the stage where 4k in a savings account would look very attractive to towards a trip to 'Napa with mates or an unsuitable car purchase]

Another aside - if the funds are for a potential house purchase with a time horizon of 5-15 years rather than decades are they better invested in a 'cash' LISA than an S&S one?

I had a similar quandry with the Junior ISA  fo my son in that I wanted to save for him for possibly his first house / university, but really didn't like the junior ISA mentality of "We will tell him when he turns 16 that he is coming into a 5 figure sum when he turns 18, that it's legally entirely his to do with what he wants, and there is nothing Mum or Dad can legally do to stop him! 

I've no problem setting up a JISA for him to save his own money into, or allowing friends / relatives to gift into one if they wish (this element I can understand especially if the relatives feel that the child has parents / guardians who may not be "entirely trustworthy")! 

In my case we (his parents opened an S&S ISA in our name and have been adding his child allowance and other amounts into it since the day he was born, but this has been going for 12 years now and he won't need it for at least another 6-7 years, so the stock market was the best choice for us.
 

We are in agreement.  My kids got the junior isa/child trust fund money from the govt that we chose not to top up for precisely that reason and sure enough the to who have reached 18 they have spent their just under £1000 on holidays alcohol and trainers.  WE have tried both through example and education to teach our kids money management but they have no interest.  WE live in a part of the country where part time jobs at adult NMW even for 16 year olds are easy to come by and our kids have always bene happy to earn themselves some money and then immediately blow it, they don't see it as a valuable resource but easy come and therefore easy go.  We can not afford to and nor would we chose to give them the large monthly allowances that their peers receive but I suspect that as all they can see is teenagers spending they can't understand re budgeting