turnaround wrote:am i correct in thinking that if i dont top out the £120k over 3 years higher rate pension allowance then a LISA only makes sense if i think that my total pension pot might be bigger than life time allowance of £1m?
I don't think I fully understand the question, but if you are comparing a LISA to your employer's pension you need to consider what you get back under various scenarios.
A payment into a LISA is made with after tax money, but boosted by 25%, so you get £1.25 back for each after tax £1.
If I understand your pension correctly, for an additional contribution to your pension you get a top-up of 6.9% (half of employer's NI). So you end up with 106.9p in the pension for each 60p net of tax contribution, or for each after tax £1, that is about £1.782 in the pension. What you are left with after drawing that £1.782 depends on 1) your marginal income tax rate at the time of withdrawal; 2) whether the £1.782 has been subject to an LTA charge. Here are some scenarios:
1) No LTA charge, marginal income tax rate 20%, you get back 25% as a PCLS and 75% taxed at 25%, total £1.514
2) LTA charge, marginal rate 20%, no PCLS is allowed, a 25% LTA charge is applied, followed by 20% tax, total £1.069
3) LTA charge, marginal rate 40%, no PCLS is allowed, a 25% LTA charge is applied, followed by 40% tax, total £0.802
Scenario 3 is the one to avoid - you would be better off paying money into a conventional ISA. Since you are in control of how much you draw, this scenario should be avoidable*
Scenario 2 is better than a conventional ISA, but not as good as a LISA.
Scenario 1 is great, much better than a LISA.
Unfortuneately you are not going to know whether additional pension contributions end up under scenario 1 or 2 until long after the option of paying into a LISA has passed. Personally I think I would go for the LISA as an additional diversification option, but there is no clearcut answer as to which is best, except one based on hindsight.
* There is one extra niggly complication here. There are LTA tests done at age 75 which look at 1) Nominal growth in the portfolio and 2) A test on any funds that have not been crystallised. So if you end up with a very large pension and get good growth, you could be subject to a later LTA charge even if you draw down the maximum you can paying 20% tax.
ps, if you save personal NI as well (I am not 100% sure how PAYE works with employer's pensions), adjust the above accordingly. It is not going to make a huge difference to the choice between a LISA or additional pension contribution though.