Pension/SIPP/LISA help for the clueless

JonSalji

Hi all, recently lucky to have gotten a small pay rise that takes me into the higher tax band. 

I am 40, have a DB Alpha pension so far and expect to stay in this job for a while, have been in the UK/paying NI for 11 years, have SIPP and LISA accounts that I have been paying sporadically into. 

I read that I can now get more tax relief on my SIPP contribution, and that a SIPP is better than a LISA due to the higher tax band. However, I don’t really understand why so hope I get pointed to somewhere to start understanding it all and be smarter about tax and pensions. 

My annual taxable pay is around £54k. 

Many thanks!

ColdIron

A pension allows you to get tax relief, a LISA doesn't

Start with this?

https://www.moneysavingexpert.com/savings/tax-relief-pension-contributions/

Isthisforreal99

JonSalji said:

Hi all, recently lucky to have gotten a small pay rise that takes me into the higher tax band. 

I am 40, have a DB Alpha pension so far and expect to stay in this job for a while, have been in the UK/paying NI for 11 years, have SIPP and LISA accounts that I have been paying sporadically into. 

I read that I can now get more tax relief on my SIPP contribution, and that a SIPP is better than a LISA due to the higher tax band. However, I don’t really understand why so hope I get pointed to somewhere to start understanding it all and be smarter about tax and pensions. 

My annual taxable pay is around £54k. 

Many thanks!

Is that £54k before or after Alpha contributions?

JonSalji

Isthisforreal99 said:

JonSalji said:

Hi all, recently lucky to have gotten a small pay rise that takes me into the higher tax band. 

I am 40, have a DB Alpha pension so far and expect to stay in this job for a while, have been in the UK/paying NI for 11 years, have SIPP and LISA accounts that I have been paying sporadically into. 

I read that I can now get more tax relief on my SIPP contribution, and that a SIPP is better than a LISA due to the higher tax band. However, I don’t really understand why so hope I get pointed to somewhere to start understanding it all and be smarter about tax and pensions. 

My annual taxable pay is around £54k. 

Many thanks!

Is that £54k before or after Alpha contributions?

That figure is after Alpha contribution.  Thank you in advance. 

Dazed_and_C0nfused

JonSalji said:

Isthisforreal99 said:

JonSalji said:

Hi all, recently lucky to have gotten a small pay rise that takes me into the higher tax band. 

I am 40, have a DB Alpha pension so far and expect to stay in this job for a while, have been in the UK/paying NI for 11 years, have SIPP and LISA accounts that I have been paying sporadically into. 

I read that I can now get more tax relief on my SIPP contribution, and that a SIPP is better than a LISA due to the higher tax band. However, I don’t really understand why so hope I get pointed to somewhere to start understanding it all and be smarter about tax and pensions. 

My annual taxable pay is around £54k. 

Many thanks!

Is that £54k before or after Alpha contributions?

That figure is after Alpha contribution.  Thank you in advance. 

If you are contributing to a SIPP that means you will be using the relief at source method.

That's where you pay the net contribution, say £100, and the pension company adds 25%, to make up the gross contribution of £125 (£25 being 20% of the gross contribution).

The gross contribution increases your basic rate band and you need to contact HMRC to get the higher rate relief.  The extra tax saving always comes back to you, it is never added to your pension fund.

https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Triumph13

That extra £4k over the £50k threshold is just under £2.4k after you've paid tax and NI on it by taking it as salary.  Lets ignore NI for simplicity and say £2.4k.  If you put £2.4k in a LISA, it gets bumped up to £3k and that's what you get when you withdraw it.

If you put it into a SIPP it's a bit more complicated. What you would actually do is pay £3.2k into the SIPP.  That would be grossed up to £4k in the pension and you would also reclaim £800 in tax yourself to get your net cost back to £2.4k.  If you are a 20% taxpayer in retirement and haven't exceeded the limit for tax free cash then the £4k in the pension would be £1k tax free, plus £3k taxed at 20% so £3.4k.  SIPP therefore beats LISA by £400.

All the above ignores investment growth for simplicity.

DRS1

You mention having been in the UK for 11 years.  Does that mean you may leave the UK in future?
If so you should bear in mind that an ISA (and I imagine a LISA) won't protect against foreign taxes.
A pension may be better because double tax treaties recognise pensions (though you'd have to check locally as to how a UK pension and investment growth within a UK pension was taxed there)..

JonSalji

DRS1 said:

You mention having been in the UK for 11 years.  Does that mean you may leave the UK in future?
If so you should bear in mind that an ISA (and I imagine a LISA) won't protect against foreign taxes.
A pension may be better because double tax treaties recognise pensions (though you'd have to check locally as to how a UK pension and investment growth within a UK pension was taxed there)..

Can’t say for sure but the plan is definitely to remain here for long term/forever but this is definitely a consideration, thank you. 

JonSalji

Triumph13 said:

That extra £4k over the £50k threshold is just under £2.4k after you've paid tax and NI on it by taking it as salary.  Lets ignore NI for simplicity and say £2.4k.  If you put £2.4k in a LISA, it gets bumped up to £3k and that's what you get when you withdraw it.

If you put it into a SIPP it's a bit more complicated. What you would actually do is pay £3.2k into the SIPP.  That would be grossed up to £4k in the pension and you would also reclaim £800 in tax yourself to get your net cost back to £2.4k.  If you are a 20% taxpayer in retirement and haven't exceeded the limit for tax free cash then the £4k in the pension would be £1k tax free, plus £3k taxed at 20% so £3.4k.  SIPP therefore beats LISA by £400.

All the above ignores investment growth for simplicity.

Thank you! This is probably the first time I have seen an example that I can truly understand!

One more question, is there a point putting in more than £3200 into my SIPP? I am planning to put away £300-£400 a month which would exceed this annually and I presume whatever I put in above £3200 will not be eligible for the additional tax relief?

Albermarle

JonSalji said:

Triumph13 said:

That extra £4k over the £50k threshold is just under £2.4k after you've paid tax and NI on it by taking it as salary.  Lets ignore NI for simplicity and say £2.4k.  If you put £2.4k in a LISA, it gets bumped up to £3k and that's what you get when you withdraw it.

If you put it into a SIPP it's a bit more complicated. What you would actually do is pay £3.2k into the SIPP.  That would be grossed up to £4k in the pension and you would also reclaim £800 in tax yourself to get your net cost back to £2.4k.  If you are a 20% taxpayer in retirement and haven't exceeded the limit for tax free cash then the £4k in the pension would be £1k tax free, plus £3k taxed at 20% so £3.4k.  SIPP therefore beats LISA by £400.

All the above ignores investment growth for simplicity.

Thank you! This is probably the first time I have seen an example that I can truly understand!

One more question, is there a point putting in more than £3200 into my SIPP? I am planning to put away £300-£400 a month which would exceed this annually and I presume whatever I put in above £3200 will not be eligible for the additional tax relief?

Correct, but you would still get basic rate tax relief ( at 20%) that the provider will add on automatically.