Cheap pension providers for smaller contributions?

Sorry at their age I am unsure why we are not talking about filling S&S LISAs? Did I miss something?

If they are basic rate taxpayers with no salary sacrifice or additional employer contributions then the tax benefit of putting money in an additional pension might be low. If they invest and grow enough from their workplace pensions to use up their personal allowances when drawing income in retirement they will pay an effective tax rate of 15% (20% on the non tax free 75%) on the SIPP draw down.

However with LISA saving you get the 25% bonus and there is no tax to pay at 60. Under current rules you can even cycle the LISA money into a pension between the age of 60 and 75 at 2880 per year if a non earner (or more if still earning) to get the marginal tax benefit of a pension?

Alex

Yes savings including LISAs can reduce your entitlement to benefits. As can income from a pension. Appreciate that you have recently seen this in your close family and you will have to judge if it is likely to affect any benefits they are realistically likely to claim.

The core problem is that for a working basic rate taxpayer, once they have harvested the max employer contribution and if they have no way of saving national insurance, the tax benefits of saving into a parallel pension or making extra contributions can be limited.

Sure it's great to see the 25% government bonus when contributing to a SIPP or the reduced tax on a payslip but you need to consider the tax paid on income when they become a pensioner.

While pensioners get a tax free income allowance it is likely that it will be used up by the state pension and the income they receive from their workplace pension if they continue to be employed to state pension age.

As such a second parallel pension would be taxed at 20% (unless they retire before state pension age) which would completely wipe out the 25% bonus they received on the contribution - if it wasn't for the chance to take 25% out tax free. So the effective tax rate is around 15% which means there is a small advantage provided the income tax rate doesn't go up or the tax free element is not reduced.

However on a LISA the upfront bonus is the same 25% but it will not be taxed when it becomes accessible at 60. In addition if the LISA money is then put into a pension between the ages 60 to 75 you can still get the small tax advantage.

Finally if they do really well for themselves in the future then the LISA could be released before 60 to help with house - while I understand this is not the objective the flexibility is there.

Alex.

Most of the press coverage has been where someone might crazily opt out of auto enrollment and give up the employer contributions. With salary sacrifice the returns of additional unmatched contributions are about the same as the LISA.

Higher rate tax payers are more likely to read and write financial articles and get significantly more benefit from a pension than basic rate taxpayers.

It's totally unfair and I say that as someone with a high enough income to benefit enormously from the status quo.

I would prefer to see a reformed pension system where everyone benefits the same regardless of income or whether their employer offers salary sacrifice. Then the majority of people would have an incentive to put more away for retirement. Still too many vested interests with the decision makers to make that happen.

Alex

Yes assuming no difference in fees and ignoring the slight difference in timing in recieving the government bonus for the first year then at 60 (or 65 or all the way through) you would have had the same 25% boost putting £4k into a personal SIPP or a LISA. The main difference is than when withdrawing the money the LISA is tax free whereas the pension may attract income tax.