S&S LISA for retirement or pension?

VNX

Hello all,

Brief bit of background, I am 40, 41 next month.

I have my work place pension in place with Aviva, pre covid my employer paid quite generous contributions. I took voluntary redundancy during covid due to the fact the industry I work in was on its knees.

This pension is now frozen.

I now work in the same industry again and have a new Aviva pension invested in the same fund, but my now employer only has the minimums, 3% employer, 5% employee.

Last month I cleared my mortgage and so have an extra £700pm spare.

I am unsure whether to look to put most of this into the pension or a S&S LISA. 

With the pension I get salary sacrifice and taken before tax, the monies into the LISA would be post tax but untaxed on the way out, the research I’ve done shows pension to be better overall but, the S&S LISA, as I am (let’s say 41) if I contributed 4k pa over the next nine years I would receive 8/9k LISA bonus.

I set up a cash LISA when I was 39 just in case so I can transfer this to a S&S LISA. 

I guess my question is for you wise folk here is, pension overall is a better option as I understand it but that doesn’t take into account the 8/9k government bonus, with this in mind, in my situation what would you prioritise, my Aviva pension or the S&S LISA to get the bonus?

Thank you in advance 

NoMore

Are you a higher rate tax payer ? If so Pension beats LISA. If basic rate payer its about a draw, so the later age access for LISA may be come a factor

toothdoctor

If you are a basic rate taxpayer then 4k into a LISA each year is not a bad idea.

A LISA is the only product that is tax free on the way in and on the way out i.e. you contribute with taxable income but that tax is given back to you in the form of the bonus, so effectively tax free on the way in, and then there is no tax on withdrawal (unlike a pension which is tax free on the way in but taxable on the way out/ normal ISAs are from taxed income on the way in but tax free on withdrawal). If you are a higher rate tax payer then pension wins due to the higher tax relief you can get. 

As mentioned above you do have to wait a little longer to get your money with a LISA (60 for LISA vs 57/58???.... for a pension depending on if government fiddles with the rules again).

cloud_dog

Just to clarify the above.... A LISA isn't tax free on the way in as the contributing money will likely come from earned / taxed money.  It can still be a very efficient vehicle for BRT payers.

VNX

NoMore said:

Are you a higher rate tax payer ? If so Pension beats LISA. If basic rate payer its about a draw, so the later age access for LISA may be come a factor

its a draw even taking the 8/9k bonus into account?

I am a basic rate tax payer 

QrizB

VNX said:

NoMore said:

Are you a higher rate tax payer ? If so Pension beats LISA. If basic rate payer its about a draw, so the later age access for LISA may be come a factor

its a draw even taking the 8/9k bonus into account?
I am a basic rate tax payer 

As a basic rate taxpayer you're liable to 20% income tax and 8% NI on your marginal earnings. So, you earn £1000 and pay £280 to the government, leaving you with £720.

If you then pay that £720 into a LISA, the 25% bonus tops it up to £900. When you withdraw it, it's tax-free so you've still got £900.

If you salsac the £1000, you don't pay tax or NI so all £1000 goes into your pension. When you withdraw it you get 25% (£250) tax free, and the remaining £750 is taxed at 20% (no NI to pay) costing £150. So you get £850 back.

So the LISA gives you an extra £50 for every £1000 of gross earnings you funnel into it, when compared to a pension.

(Happy to have my maths checked and corrected, if I've missed anything.)

Albermarle

In the latter part of this article, there is a detailed pros and cons of pensions vs LISA.
Lifetime ISA (LISA): how they work & best buys

VNX

QrizB said:

UVNX said:

NoMore said:

Are you a higher rate tax payer ? If so Pension beats LISA. If basic rate payer its about a draw, so the later age access for LISA may be come a factor

its a draw even taking the 8/9k bonus into account?
I am a basic rate tax payer 

As a basic rate taxpayer you're liable to 20% income tax and 8% NI on your marginal earnings. So, you earn £1000 and pay £280 to the government, leaving you with £720.

If you then pay that £720 into a LISA, the 25% bonus tops it up to £900. When you withdraw it, it's tax-free so you've still got £900.

If you salsac the £1000, you don't pay tax or NI so all £1000 goes into your pension. When you withdraw it you get 25% (£250) tax free, and the remaining £750 is taxed at 20% (no NI to pay) costing £150. So you get £850 back.

So the LISA gives you an extra £50 for every £1000 of gross earnings you funnel into it, when compared to a pension.

(Happy to have my maths checked and corrected, if I've missed anything.)

This is really very helpful thank you for taking the time to post this 

toothdoctor

cloud_dog said:

Just to clarify the above.... A LISA isn't tax free on the way in as the contributing money will likely come from earned / taxed money.  It can still be a very efficient vehicle for BRT payers.

Apologies for any mis-information I may have contributed but can you explain this please.

 My thinking was that if you are a basic rate tax payer then 5k earned gross at 20% tax band would give you 4k in your paypacket. You then contribute this 4k (taxed income) to the LISA and the government tops up 25% to 5k. In effect the bonus cancels the tax out so it is tax free on the way in. 

Would be grateful if someone could explain why my thinking is wrong.

Thank you.

cloud_dog

You are right in your overall summary effect regarding the tax aspect, but it is wrong to describe it as tax free going in.

It is (probably) taxed money going in which receives a bonus (equivalent to BRT) and, tax free on withdrawal.