Company Pension + LISA?

jmeselby wrote: »

Thanks peacefulwaters, I guess that try as long as I don't go over the pension saving limit?

Yes, watch the annual and lifetime limits

I'm still thinking this might be a good addition.....or am I really better off focusing on a pension?

If you put £4000 from your net salary into a LISA you get £5000 gross in it. A 25% boost.

If you are high rate taxpayer and put £4000 from your net salary into a pension you get £6,667 gross in it. A 67% boost.

If that was all there was to it, the second option would be a complete no brainer.

but:
The LISA has no tax when you draw it in retirement, no matter how much you take out in a given year. So you will definitely get the £5k.

For the pension, a quarter of it will be tax free in retirement and the other three quarters will be taxable. The quarter is £1667 and the three quarters is £5000. However, if you take it out during tax years where it fits into your annual allowance (e.g. you give up work at 60 but aren't going to draw state pension and your other work pensions until 67), you will be pulling that taxable £5000 out and paying your marginal rate of tax on it which is 0%. So, you will quite possibly be able to get the £1.67k out and all of the £5k out without paying tax for a total of £6.67k, which is a lot more than just getting the £5k from the LISA.

Even if for some reason you couldn't fit *any* of the taxable three-quarters of the pension pot into your annual allowance and paid basic rate tax on the lot, you would end up with the £1.67k+ (£5k x 0.8= £4k) which is a total of £5.67k and still over 13% more than the £5k via LISA route. Only if you were somehow paying high rate tax in the year you take the taxable element, would you be down to £1.67k + (£5k x 0.6=£3k) which is a total of 4.67k and a little under 7% worse.

So, subject to annual and lifetime limits, pension is offering you more money in retirement. It also has the advantage that it is not going to be counted when you have the debt collectors or bailiffs or bankruptcy court taking your money off you to settle debts. And it is not going to be counted in your estate for inheritance taxes. And it is not going to be counted if you end up needing to seek means-tested benefits between now and retirements. A LISA would for all three, because of the ability to access it.

Still, the positives of LISA is that ability to access it, flexibly. If you have completely screwed up your retirement planning so much that you have overcommitted and need the money back before retirement, you can give up the bonus, and growth on the bonus, and pay a penalty, and pull money out. To pay off the debt collectors before your get the bailiffs and bankruptcy.

Or when you get to age 60 and you want to blow £100k on a Ferrari, you can access the money very flexibly and just pull £100k out of the LISA and buy the Ferrari with no tax implications. Whereas if you tried to pull £100k out of a pension in a single tax year, then (apart from the tax free lump sum element) you might end up being tipped into higher rate tax that year instead of basic rate tax or 0% tax (especially if you are still working at that point), and so you would need to plan it over multiple tax years to minimise tax impact and hold on to those 'better than LISA' gains.

If you are unconvinced by your ability to plan your money properly in retirement and want to maintain maximum flexibility, accepting lower returns... or are in danger of hitting the lifetime pension allowance , then use LISA for some of your retirement savings.

It is not all or nothing though is it:

If you are a high rate taxpayer and have £500 a month gross (£300 net pay) to put away, that's £6k which could be in a pension. If you want to hedge your bets and put a bit into a LISA, you could do two thirds pension and one third LISA. This would give you £4k in the pension, and the other £2k could be taxed down to £1.2k and then LISA-bonused back up to £1.5k.

You would then have £5.5k in your retirement pot instead of £6k, but would have the 'comfort' that £1.5k of it would be accessible pre-60 (by paying a penalty, to get your hands on £1.125k and throw the rest in the bin), or would be in that 'Ferrari fund' to draw out at age 60+ without worrying about how to time it carefully and avoid high rate tax.

having access to a salary sacrifice pension tips the balance in favour of pension, not LISA.

£4,000 (from your net salary) paid into a LISA becomes £5,000, which can (when you're 60+) be withdrawn with no tax payable.

giving up £4,000 of after-tax salary will give you £5,882.35 inside a pension (because £5,882.35 of gross salary, on which you pay 20% income tax and 12% national insurance, leaves you £4,000 after tax).

you can take 25% of the pension tax free - which comes to £1,470.59.

you may have to pay income tax (but not NI) on the other 75% - which is £4,411.76, so if you pay 20% tax, that's £882.35 income tax.

that would give you a total from the pension of £1,470.59 + £4,411.76 - £882.35 = £5,000 - exactly the same as the LISA!

however, you may well not pay 20% tax on the full amount, because you have a personal allowance, and withdrawals from a pension will be covered by that, if you take them when you don't have much other taxable income. and if some of the pension income has no tax payable, some has 20% tax, then overall the pension will beat the LISA.

note that the pension could do worse than the LISA if you became a higher-rate taxpayer when you're drawing from it. generically, this is not very likely - many people drop down to a lower tax bracket in retirement, few go up a bracket. but worth mentioning.

if you didn't have access to a salary sacrifice scheme, LISA would generally beat a pension. because in that case, giving up £4,000 of net salary gives you £5,000 in a pension (because you only save the 20% income tax). so the pension starts with the same amount as the LISA. so it can at best match the LISA (if all the pension is covered by your personal allowance when you draw it), and could easily be worse (if you end up paying tax on even part of the pension income).