SIPP or pay into workplace pension

ForestBluebells · 12 January 2020 at 10:48AM

I’m currently paying the minimum into a workplace pension and my employer is paying their minimum, I don’t think I’m going to get them to increase their contributions so when I get my pay rise this month I intend to save all additional income into retirement plans. Is it best to pay it into my work pension given there’s no additional benefits from matching or should I set up a SIPP or S&S ISA instead and pay into that? I’m 35 if that makes a difference.

I’ve been looking at Vanguard and intend to set up a S&S ISA (either LifeStrategy 80/20 or VWRL) with them anyway to build up a cash fund for retirement/later in life needs and not touch it for 30+ years but this would be accessible should I ever need it before retirement however I wasn’t sure if I should also be looking at a SIPP or LISA and couldn’t work out which is best. I’m a basic rate tax payer. I also save into a regular saver (where my money goes currently ) but I want to start splitting this between pension, and other accessible funds but not sure which is best. So which is best? SIPP, LISA, workplace pension with no additional matching, S&S ISA.... or something else?

Albermarle · 12 January 2020 at 11:50AM

So which is best? SIPP, LISA, workplace pension with no additional matching, S&S ISA.... or something else?

Firstly investing in a SIPP or extra in the workplace pension, is basically the same thing . There will be some differences in charges and choice of funds, but effectively they are both pensions and ruled by the same tax regime.
The main point is that if you are a basic rate taxpayer and probably will be in retirement, then a pension has a 6.25% advantage over non pension investments , like S& S ISA. The disadvantage is that you will not be able to access the money until around 58 years old . If at any time you become a higher rate taxpayer and/or a non taxpayer in retirement , then the pension becomes even more attractive.
A LISA is a kind of special case , and can be used to help buy a house or to save for retirement with the government also chipping some money in, with a limit .
.https://www.moneysavingexpert.com/savings/lifetime-isas/
A S& S Isa could be useful if you think you might need to access the money before you retire but you should think in terms of a 10 + years timeframe , to iron out any volatility in the markets .

ForestBluebells · 12 January 2020 at 12:30PM

I already have £22k savings so these are truly future plans and won’t be touched, definitely long term investments. I don’t actually know the fees of my workplace pension I couldn’t figure it out, I seem to be paying a set fee each month is that normal?

Does the LISA work out better than a SIPP as I assume it’s very low interest rates currently whereas in the long term I would assume a SIPP could outperform that over time.

Marcon · 12 January 2020 at 12:42PM

ForestBluebells wrote: »

I don’t actually know the fees of my workplace pension I couldn’t figure it out, I seem to be paying a set fee each month is that normal?

Ask the pension provider - there will be a helpline number somewhere in the literature, so give the a call.

ForestBluebells · 12 January 2020 at 1:11PM

Ok I think it’s 0.5% annual management fee for my workplace pension

cloud_dog · 12 January 2020 at 3:07PM

ForestBluebells wrote: »

Does the LISA work out better than a SIPP as I assume it’s very low interest rates currently whereas in the long term I would assume a SIPP could outperform that over time.

Albermarle comments have pretty much covered things (together with the link). Access to a SIPP/pension is currently from age 55 (but will be going up in line with State Pension Age minus 10 years at some point), a LISA penalty free from age 60.

There are other pluses for a pension over a LISA, for example IHT considerations/planning and also if you think you may ever claim benefits (money in a pension is excluded, money in a LISA is included.

Can you confirm if your company pays you via Salary Sacrifice (SS) (sometimes referred to as Salary Exchange)?

If you are a BRT payer and your company does not pay you via SS, and as part of your planning you will access some of the money at 60 then a LISA may well be more beneficial. The reason for this is that all withdrawals from a LISA are tax free (from a pension 25% tax free then remaining 75% subject to your taxation at the point of withdrawal).

If you are paid via SS then this heavily sways the benefit of utilising the works scheme over your own SIPP/pension or a LISA.

Albermarle · 12 January 2020 at 3:30PM

Ok I think it’s 0.5% annual management fee for my workplace pension

Sometimes there is a fee for managing the pension + a fee for the actual investment fund ( which is not that visible ) Sometimes it is just all one fee , in this case 0.5% would be quite good .

kinger101 · 12 January 2020 at 3:53PM

On basic rate, it's partly a question of whether you have a salary sacrifice arrangement with you employer. Let's consider three examples.

LISA:

Every £1 you put in becomes £1.25. 25% uplift.

No salary sacrifice:

Regardless of whether it's a SIPP or company pension, £1 gross in your pension actually costs you 80 p of net salary. However, this £1 will be taxed at an effective rate of 15% on withdrawal (BR tax minus tax free lump sum).

80 p of net income becomes 85 p of net income, which is only a 6.25% uplift.

Salary sacrifice:

You'll need to use workplace pension for this, but now that 85 p of net income in pension only costs 68 p. Which is the same 25% uplift as the LISA.

It's swings and roundabouts whether LISA is better the salary sacrifice for basic rate taxpayers. It might partly depend on costs of the two schemes. On the positive side for the LISA though, I think you probably have better protection from legislative changes having a negative impact. The tax benefits of pension schemes are partly hypothetical in some way on what the tax regime is at retirement. Reduction of the TFLS for example would reduce that 25% uplift.

ForestBluebells · 13 January 2020 at 9:44AM

That’s really interesting as for some reason I just assumed the LISA wasn’t worth doing as it’s swings and roundabouts as you are taxed before you pay in the LISA and when you take your pension so I assumed it worked out the same. Now I’m not so sure that’s right and maybe a S&S LISA is the way to go.

I don’t currently have access to salary sacrifice but I will ask about it at work. I’m basic rate tax payer but may end up high rate in a few years.

AlanP_2 · 13 January 2020 at 12:59PM

Open a LISA before you hit 40 , even if only with a nominal amount. You will have access to it then whether you use it seriously or not.

ForestBluebells · 13 January 2020 at 7:54PM

Good idea, I’ll open a LISA and then decide, sounds like it might work out best.

SIPP or pay into workplace pension

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