Pension: SIPP vs LISA Clarity

TSR_Hound

So, I have a workplace pension, its the minimum employers contribution, not the best provider etc and I cant change that, transferred any old ones too it and its doing its thing.

I want to do more towards retirement now so weighing up which is better. Wow I am conflicted and confused,when normally when it comes to the financial side I don't really have an issue.

I have a S&S ISA for pre-retirement / early retirement, just my own funds free when I need, but wanted to add some to a SIPP for the relief, set one up and has fully custom funds, was happy, till I realised I could open a S&S LISA (as I used HTB ISA for house before someone asks about using LISA for house).

I am 30yo £40k a year, hard to say if I am ever going to the next tax bracket. I want to hard contribute in this till 60. Is SIPP or S&S LISA better? The possible changes, the not knowing about tax brackets in future, I can't decide, LISA seems like its better because of the total tax free side and 25% bonus, bit SIPP has more limits if your tax brackets change and funds, LISA changes uncertain, but SIPP age changes all the time… Hard stuck knowing which would be the best route for now.

All SIPP, all LISA, max LISA then SIPP, 50/50? I genuinely do not know what’s best, if anyone has any experience with a similar setup would be greatly appreciated!

Sam_666

Read some info here, https://www.moneysavingexpert.com/savings/lifetime-isas/

I would focus on pension/sipp. You will get tax rebate, plus wise investments will grow 10-20% p/y.
LISA is cash, so will erode over time and never match pension growth. Also, can only use it until 39y.
LISA and pension give same tax boost, except for salary sacrifice.

You have not said how much are your pension contributions.

TSR_Hound

https://forums.moneysavingexpert.com/discussion/comment/82060176#Comment_82060176

Hi, Stocks & Shares LISA isn’t cash though?

As for contributions, I stated its the minimum, can't change it, poor provider and just the employer minimum which I think is 5% Employee and 3% Employer…

Edit: Plus you can add into LISA till 50

hugheskevi

I am 30yo £40k a year, hard to say if I am ever going to the next tax bracket.

c25% pay increase gets you there, threshold is frozen for next 4 upratings. Prognosis after that isn't rosy, so it seems highly likely you will be a higher rate taxpayer, and probably sooner rather than later.

You have 3 plausible options:

(1) Stocks and shares LISA - 25% immediate uplift, accessible at 60 (earlier with penalty)

(2) SIPP - assume no salary sacrifice available, so net of basic rate relief, basic rate tax in retirement, and PCLS, 6.25% uplift

(3) Stocks and Shares ISA, with intent to use funds to enable greater pension contributions in the future when you get more relief. Note that this does not lose anything in terms of relief or compounded returns, as you are investing in the same as you would invest in a pension and so get tax relief on the ISA returns, making everything neutral as everything is multiplicative and so ordering does not matter.

If you in future are a higher rate taxpayer, and basic rate in retirement, you get a 41.7% uplift (£60 foregone now, £85 gained later after tax). If basic now and basic later it is 6.25% (£80 and £85). If higher on contributions and higher when drawn it is 16.7% (£60 and £70 - assuming Lump Sum Allowance available).

The more sure you are that you will be a higher rate taxpayer in the future, the more that pushes you toward SSISA. The problem with that is if you end up not paying higher rate tax, or not sufficiently as to be able to move all ISA savings into the pension and get higher rate relief.

From what you say, I see no reason to put anything additional into a SIPP at the current time. The nature of the 'use-it-or-lose-it' LISA allowance might push you toward LISA contributions, reviewed each year, with the remainder into S+S ISA. That hedges bets - you get the 25% LISA bonus with certainty, and in the scenario that is a bad decision, you are a higher rate taxpayer so things aren't too bad.

So, I have a workplace pension, its the minimum employers contribution, not the best provider etc and I cant change that, transferred any old ones too it and its doing its thing…wanted to add some to a SIPP for the relief, set one up and has fully custom funds, was happy, till I realised I could open a S&S LISA (as I used HTB ISA for house before someone asks about using LISA for house).

Are partial transfers from the employer pension possible, to move to your SIPP periodically, given you say the employer pension is not the best and you seem happier with your SIPP?

TSR_Hound

https://forums.moneysavingexpert.com/discussion/comment/82060207#Comment_82060207

So the provider does give me an app so can merge other pensions etc to it, so could yes transfer SIPP later to the main WP one…

I have the S&S ISA as a personal investment so if they make pensions 60 to withdraw for SIPP etc later in life which they probably will, I have something I can take out earlier to keep me going a few years. But you say its no different to SIPP but thought it was because S&S ISA is payment made after tax with an allowance for gains but SIPP you get tax relief added when you put in like a pension?

So this is why I was weighing up SIPP vs S&S Lifetime ISA as a personal pension pot on the side? In my thinking LISA is 25% bonus, in something like S&P500, totally tax free at 60, but thought SIPP was more flexible has tax relief but has tax on the income… but better if you go above tax limit to next tier?

This is why I am so confused on this…

hugheskevi

I have the S&S ISA as a personal investment so if they make pensions 60 to withdraw for SIPP etc later in life which they probably will, I have something I can take out earlier to keep me going a few years. But you say its no different to SIPP but thought it was because S&S ISA is payment made after tax with an allowance for gains but SIPP you get tax relief added when you put in like a pension?

Assume you are a basic rate taxpayer both when making the contribution and when taking the money from the pension, and there is no salary sacrifice.

Assume you put £80 into a pension. It is grossed up for basic rate tax to £100. It increases in line with what it is invested in, and when you withdraw it you get 25% tax free and pay 20% tax on the rest. Ignoring investment returns and charges, that means you receive £85 back. So the amount you get back is your gross contribution, multiplied by returns net of charges, multiplied by (1- average tax rate on withdrawal). In this case, (£80 divided by [1-20%]) * returns net of charges * (1 minus 15%)

Now assume you instead put that £80 into a S+S ISA. There is no grossing up at first as it is an ISA. It increases in line with what it is invested in, which should be the same investments and charges as the SIPP would be invested in. Assume that after 10 years you move the money into a SIPP. At that point you receive basic rate relief. Later you withdraw it and pay basic rate relief. You see that you get tax relief on the returns in the first 10 years it was in the ISA that you didn't get in the SIPP scenario. However, as everything is multiplicative and you get the same returns net of charges in the ISA and you get in the SIPP, you end up in exactly the same position after taking out the money, you just got there in a different way.

But if after 10 years you were a higher rate taxpayer, you end up in a better position, as you get more tax relief.

It is easiest to work through it yourself in a spreadsheet to see how it all ends up either being the same, or you win if you are a higher rate taxpayer in future. You also have access to your money as well. So it is a case of heads I win, tails I don't lose. A very good option to have.

Making pension contributions that don't increase employer contribution, don't have salary sacrifice, or benefit from higher/additional rate tax is a very questionable decision for anyone not close to retirement.

TSR_Hound

This makes a lot of sense now, so really thank you so much for this! S&S ISA for as long as needed then can could sell and move into other schemes later if required for the relief etc or if circumstances changes. Thank you!

Albermarle

Be aware that it appears the Govt is reviewing the role of LISAs in future. It is possible that the retirement option will be closed off.

You would not lose any money already invested but new contributions could be blocked.

It is only speculation and with changes in Chancellors, elections etc who knows what might happen.

OP - You mentioned a couple of times that your workplace pension has a poor provider. Could you say why you think that and who the provider is ?