Lifetime ISA Suitability for Retirement Investing

[edwills46]

Hi,
My daughter is still young enough to start a Lifetime ISA, but has read Martin Lewis' advice and other things and is confused.
She has an occupational pension scheme to which both she and her employer contribute.
She wishes to save more for retirement, but wants to avoid using her employer's additional contributions scheme (which appears simply to be referring her to a couple of preferred private pension providers).
She is a basic rate taxpayer and likely to remain so for at least several years.
Going bankrupt and/or divorce have been rejected as considerations and retiring before state pension age seems an unlikely possibility to her.

Are there good reasons she should still avoid a LISA in favour of using a SIPP, provided she finds a LISA that charges no more than a SIPP (preferably less, but we don't know the charges yet)?

Thanks in advance,
Ed

[hiriskpaul]

Go for the LISA.

For each £1000 invested in a personal pension, £200 tax will be paid, but this same amount will be added to the pension. On withdrawal, £250 is taken tax free, leaving £750. Assuming 20% tax is paid on this leaves £600, for a total after tax return of £850.

For a LISA, £1000 becomes £800 after tax as before and again £200 gets added as a bonus. This time however there is no tax on withdrawal, so the total after tax return is £1000 instead of £850.

[hiriskpaul]

P.s. I have ignored growth on the assumption that it is the same for both the pension and the LISA, which is likely to be the case. Charges should definitely be incorporated into the calculation as well, but I suspect these may end up lower for the LISA as it should be simpler to administer.

[ursaminortaur]

My daughter is still young enough to start a Lifetime ISA, but has read Martin Lewis' advice and other things and is confused.
She has an occupational pension scheme to which both she and her employer contribute.
She wishes to save more for retirement, but wants to avoid using her employer's additional contributions scheme (which appears simply to be referring her to a couple of preferred private pension providers).
She is a basic rate taxpayer and likely to remain so for at least several years.
Going bankrupt and/or divorce have been rejected as considerations and retiring before state pension age seems an unlikely possibility to her.

edwills46,

Is this the Martin Lewis article you are referring to

http://www.moneysavingexpert.com/savings/lifetime-ISAs

?

From the article

Contributions to a LISA are restricted to only £4000 per year with the Government giving a bonus of 25%. Hence if someone started contributing at 18 and continued contributing £4000 per year as long as possible ie to 50 they would only get a maximum bonus of £32,000. So although you say your daughter is young enough to contribute to a LISA - ie under 40 - the first question to ask is how old she is and how much she wants/can contribute.
Hiriskpaul makes a valid point about the tax advantage of the bounus over pension contributions but this advantage is severely limited by the LISA contribution limit.

Secondly unless you want to lose both the bonus and an extra 6.25% of your investments as a penalty you won't be able to touch these funds until you are 60 whereas with a personal pension or SIPP you can access them from 55. (i'm treating the LISA here purely as a retirement savings vehicle - you can take money out of the LISA to purchase a house but I am ignoring that).

Thirdly unlike pensions the money in the LISA is considered for means tested benefits and hence would reduce her benefits if your daughter were to lose her job.

Personally I see these disadvantages as outweighing the small extra tax advantage.
Unless the Government decides to massively increase the LISA contribution limit then I see the LISA as a gimmick. From a psychological point of view combining saving for your first house and saving for retirement in one savings vehicle may have some appeal but these are very different aims and combining them and restricting the contributions to just £4000 a year doesn't look sensible to me.




Dave

[Alaric]

For each £1000 invested in a personal pension, £200 tax will be paid, but this same amount will be added to the pension. On withdrawal, £250 is taken tax free, leaving £750. Assuming 20% tax is paid on this leaves £600, for a total after tax return of £850.

I don't think that's correct. Surely you start with £ 800 to which the government adds £ 200 after a couple of months. You then get £ 850 back as outlined.

[ursaminortaur]

She wishes to save more for retirement, but wants to avoid using her employer's additional contributions scheme (which appears simply to be referring her to a couple of preferred private pension providers).

What type of pension does she have ? AVCs are usually associated with DB pensions and with some there can be an advantage to contributing to the AVC in that you may be able to take the full 25% tax free lump sum out of the AVC fund rather than having to either forgo it or commute valuable DB annual pension payments (at a usually horrible commutation rate). Not all DB pensions allow this but it may be worth checking.

One other final point on the LISA. As with ISAs you are reliant on future governments honoring the idea that they won't be taxed when you withdraw the money. This would be of particular concern with the LISA because like a pension your money is tied up so you wouldn't be able to take any action if such proposals were raised.


Dave

[hiriskpaul]

For each £1000 invested in a personal pension, £200 tax will be paid, but this same amount will be added to the pension. On withdrawal, £250 is taken tax free, leaving £750. Assuming 20% tax is paid on this leaves £600, for a total after tax return of £850.

I don't think that's correct. Surely you start with £ 800 to which the government adds £ 200 after a couple of months. You then get £ 850 back as outlined.

Ed's daughter is a basic rate taxpayer, so all I am saying here is that in order to get £800 to put into either a personal pension or a LISA, she will have had to earn £1000. The uplift from tax rebate/bonus is the same in both instances, £200. The difference in outcome is due to tax being deducted on withdrawal from a pension, but not from the ISA.

[hiriskpaul]

My daughter is still young enough to start a Lifetime ISA, but has read Martin Lewis' advice and other things and is confused.
She has an occupational pension scheme to which both she and her employer contribute.
She wishes to save more for retirement, but wants to avoid using her employer's additional contributions scheme (which appears simply to be referring her to a couple of preferred private pension providers).
She is a basic rate taxpayer and likely to remain so for at least several years.
Going bankrupt and/or divorce have been rejected as considerations and retiring before state pension age seems an unlikely possibility to her.

edwills46,

Is this the Martin Lewis article you are referring to

http://www.moneysavingexpert.com/savings/lifetime-ISAs

?

From the article

Contributions to a LISA are restricted to only £4000 per year with the Government giving a bonus of 25%. Hence if someone started contributing at 18 and continued contributing £4000 per year as long as possible ie to 50 they would only get a maximum bonus of £32,000. So although you say your daughter is young enough to contribute to a LISA - ie under 40 - the first question to ask is how old she is and how much she wants/can contribute.
Hiriskpaul makes a valid point about the tax advantage of the bounus over pension contributions but this advantage is severely limited by the LISA contribution limit.

Secondly unless you want to lose both the bonus and an extra 6.25% of your investments as a penalty you won't be able to touch these funds until you are 60 whereas with a personal pension or SIPP you can access them from 55. (i'm treating the LISA here purely as a retirement savings vehicle - you can take money out of the LISA to purchase a house but I am ignoring that).

Thirdly unlike pensions the money in the LISA is considered for means tested benefits and hence would reduce her benefits if your daughter were to lose her job.

Personally I see these disadvantages as outweighing the small extra tax advantage.
Unless the Government decides to massively increase the LISA contribution limit then I see the LISA as a gimmick. From a psychological point of view combining saving for your first house and saving for retirement in one savings vehicle may have some appeal but these are very different aims and combining them and restricting the contributions to just £4000 a year doesn't look sensible to me.




Dave

The LISA is a gimmick and is limited, but how is that a disadvantage? I see no reason not to take advantage of free money while it is being given away. As for the difference in age before access, it has already been suggested that the age limit for withdrawal from personal pensions will rise. I don't see the extra benefit as small either. The final outcome will be boosted by 17.6% with a LISA compared with a personal pension (assuming the same investment growth rate, charges and Ed's daughter paying 20% tax on the personal pension withdrawals in retirement).

Fair point about ISAs being taking into consideration for means tested benefits. Certainly a risk that should be taken into consideration before going down the LISA (or ISA) route instead of a pension.

If more than £4000 per year is available for investment, I would fill up the LISA first, then think about a personal pension, or even a regular ISA depending on personal circumstances.

[Kantwebefriends]

She has an occupational pension scheme to which both she and her employer contribute.
She wishes to save more for retirement, but wants to avoid using her employer's additional contributions scheme (which appears simply to be referring her to a couple of preferred private pension providers)

Is it by salary sacrifice? That might tip the balance in favour of the pension.

Otherwise I agree with people who incline to the LISA. At least open one with some minimal amount so that the ability to contribute up to age 50 is secured.

[ModernMicawber]

The LISA is a gimmick and is limited, but how is that a disadvantage? I see no reason not to take advantage of free money while it is being given away.

Which is why er' indoors will be signing up as soon as a non-gouging broker shows their hand on pricing/availbility. I was hoping we could sign up for £333 a month starting next month, but I think we will probably wait for the market (in LISAs, not in stocks!) to mature a little before leaping in; having just forked out the price of a reasonable Grand Cru claret to transfer my own ISA I'm hoping to avoid a repeat occurrence of this for a few years at least.

Whilst it would be unseemly to reveal her age, I think it's fair to say she is in the top quartile of LISA eligibility, so the number of years this wheeze will be available is less than it might be in some other cases. This, of course, also reduces the risk of having to pay the "early access" penalty at some stage in the future.

[edwills46]

Thank you all.
Sounds like a LISA is likely to be a good bet for my daughter's purposes.
I guess we will now wait a while to see who offers them.

Ed

[taken2often]

One other option would be to have a standard investment ISA. As your reserve for access. As a low tax earner the tax free element is not so attractive
when you have to pay tax on your own 75% at the other end. Invest in Preference shares up to the first 100k. At present you can still get around 6%.
and have no great worries about market swings. Your growth comes from compounding of this income. After 100k start investing for Dividend Growth
for indexing. As interest rates rise you will be able to buy more Preference Shares at higher yields. When ready to drawdown the income try to take
80% and leave 20% for growth. Hopefully you will find the 80% sum will grow each year.

Result DWP Pension plus DB Pension taxable ISA tax free

Hope this helps

Bob

[taken2often]

Another thing I should mention is that when the interest rates rise you will have a capital loss. Ignore this, it could all swing round again. Just think about the 5,6,7% that you will be drawing for the next 30 years perhaps, and still have a fund to leave.

Remember when you buy an annuity all your capital is gone.

Bob

[Bialystock]

Also a Labour Government could renege on the deal and cancel the bonuses.

Got to find the money to pay benefits to their demographic, so this would be an easy target.

[Kantwebefriends]

Also a Labour Government could renege on the deal and cancel the bonuses.

Got to find the money to pay benefits to their demographic, so this would be an easy target.

Don't the bonuses happen on the way in? It's surely political hard to steal them. I could see them announcing "no more bonuses" though.