pension craziness

[Marco]

I opened a Lifetime ISA at the start of this tax year... you have to open one before the age of 40 (which i managed with about a week to spare!), then you can only contribute to it until 50.... then you can't access it tax-free until 60..... can put in a max of £4000 per year and the govt add 25% on top.

If this had been available when I was under 40 then I'd have put the maximum amount I could into it for the duration.

Further to what Travs mentioned, you can withdraw your money, tax-free, before the age of 60 to buy your first home. Otherwise you pay a charge of 25 percent (in effect losing all of your tax relief).

Whilst I have done well with my SIPP, which also has the same level of tax relief for basic rate payers, the lifetime ISA is tax free on withdrawal - as long as you are over 60 or using it to buy a first home, so a better option

[Graham Breeze]

I doubt you would get good running advice on a financial forum!

I'm not even sure we always get good running advice on here...

[mr brightside]

Follow the person in front

[TheHeathens]

Welcome back, TH.

I've not seen you much in the Today's Football thread lately

Coaching it rather than watching it nowadays!

[TheHeathens]

If this had been available when I was under 40 then I'd have put the maximum amount I could into it for the duration.

Further to what Travs mentioned, you can withdraw your money, tax-free, before the age of 60 to buy your first home. Otherwise you pay a charge of 25 percent (in effect losing all of your tax relief).

Whilst I have done well with my SIPP, which also has the same level of tax relief for basic rate payers, the lifetime ISA is tax free on withdrawal - as long as you are over 60 or using it to buy a first home, so a better option

Nothing beats a pension for tax efficiency.

Immediate 25% uplift on a net contribution, with the ability for higher rate taxpayers to claim more
Tax free growth
25% tax free cash upon retirement.
Can contribute up to £40K per annum

The key, however, is to have a range of investments, reduce the amount of 'forced income' (income you can't stop and therefore get taxed on, e.g. property income)and use mainstream tax allowances to create tax-free cashflow.

ISAs, LISAs, Unit Trusts, Pensions, UK and International investment bonds can/should all play a part in retirement planning. It's not an either / or situation.

Then you also have Enterprise Investment Schemes and Venture Capital Trusts for the less risk averse. Not recommended for the average investor though.

[Marco]

Nothing beats a pension for tax efficiency.

Immediate 25% uplift on a net contribution, with the ability for higher rate taxpayers to claim more
Tax free growth
25% tax free cash upon retirement.
Can contribute up to £40K per annum

Yes, if you're over 50 or a higher rate taxpayer

No, if you're under 50 or a non tax payer or basic rate taxpayer. In these circumstances the LISA is the better option as it offers:

Immediate 25% uplift on a net contribution
Tax free growth
100% tax free cash available upon reaching 60, or when buying your first home
Can contribute up to £5K per annum after tax relief (£4k net)

[TheHeathens]

Yes, if you're over 50 or a higher rate taxpayer

No, if you're under 50 or a non tax payer or basic rate taxpayer. In these circumstances the LISA is the better option as it offers:

Immediate 25% uplift on a net contribution
Tax free growth
100% tax free cash available upon reaching 60, or when buying your first home
Can contribute up to £5K per annum after tax relief (£4k net)

On the face of it, it's not too dissimilar to a pension (and in its infancy was known in the profession as a 'pension ISA') but.....

1) If you access it before age 60 and don't purchase a house, you end up paying a penalty. For example, you contribute £4,000 and it gets topped up to £5,000 (additional 25%). However, circumstances dictate that you need the money the month after. Assuming no growth, you will be charged a penalty of 25% on £5,000 meaning you only get £3,750 back.

2) If using for retirement purposes, you can't access it until age 60 and can't contribute after age 50. Where are your contributions going during this time? A pension? (NB. You can access pensions from age 55/57)

3) Your employer can't pay into a LISA. Missing out on employer's contributions is perhaps one of the stupidest decisions you can make in financial planning.

4) The maximum contributions are £5,000 (gross). That's not a small figure but it's not going to fund somebody's retirement.

5) You can use phased drawdown with pensions to utilise both the 25% tax free cash and the personal tax free allowance).

6) If you ever run into financial difficulty and were served either an IVA or a bankruptcy order, your LISA would/could be used to pay creditors. A pension is protected by its trust arrangement.

If you're employed, then a pension is almost always the best option because of the employer's contributions. If you're self employed and a higher rate tax-payer, then a pension is usually better because of the tax relief. You could potentially make an argument for a LISA for a self-employed basic rate tax-payer.

I have both, by the way. I'm not hating on LISAs - but they are very restrictive and you definitely shouldn't be stopping saving at 50 unless you've saved a significant portion of your income previously (much more than £5,000pa).

[Marco]

On the face of it, it's not too dissimilar to a pension (and in its infancy was known in the profession as a 'pension ISA') but.....

1) If you access it before age 60 and don't purchase a house, you end up paying a penalty. For example, you contribute £4,000 and it gets topped up to £5,000 (additional 25%). However, circumstances dictate that you need the money the month after. Assuming no growth, you will be charged a penalty of 25% on £5,000 meaning you only get £3,750 back.

2) If using for retirement purposes, you can't access it until age 60 and can't contribute after age 50. Where are your contributions going during this time? A pension? (NB. You can access pensions from age 55/57)

3) Your employer can't pay into a LISA. Missing out on employer's contributions is perhaps one of the stupidest decisions you can make in financial planning.

4) The maximum contributions are £5,000 (gross). That's not a small figure but it's not going to fund somebody's retirement.

5) You can use phased drawdown with pensions to utilise both the 25% tax free cash and the personal tax free allowance).

6) If you ever run into financial difficulty and were served either an IVA or a bankruptcy order, your LISA would/could be used to pay creditors. A pension is protected by its trust arrangement.

If you're employed, then a pension is almost always the best option because of the employer's contributions. If you're self employed and a higher rate tax-payer, then a pension is usually better because of the tax relief. You could potentially make an argument for a LISA for a self-employed basic rate tax-payer.

I have both, by the way. I'm not hating on LISAs - but they are very restrictive and you definitely shouldn't be stopping saving at 50 unless you've saved a significant portion of your income previously (much more than £5,000pa).

If you are younger, committed to it, and not a higher-rate taxpayer, the LISA is the pension vehicle to look at.

And in answer to the valid points you made:

1) Yes, there are penalties to access it early for a use other than buying a house - but you can access it unlike a pension. I've known two people who diligently paid into their pensions in their 20s, but then tried (unsuccessfully) to withdraw some money for a house deposit.

2) As I said yesterday, pensions are great for the over 50s and higher-rate taxpayers

3) My employer only paid the minimum amount into my pension for the last 2 years of my employment (when it was a legal requirement). And they would only pay it into a new NEST pension, which was $&!+. This is how I ended up with my sixth pension. After leaving them I transferred it into my SIPP. In my own time, and at my own expense.

4) I was on less than average salary for all bar 2 tax years of my 36 year working life. I never got remotely close to paying higher-rate tax. Putting £4k into anything is a big commitment when you're paying a mortgage single handed; the mortgage rate was 16.5 percent when I started my mortgage.

5) Since January 2021 I've been taking lump sums out of my pension, and it's been effing difficult. HMRC wrongly took £3100 off me, and it took 4.5 months to get it back - with no apology or interest. My lump sums are taxed on the PAYE system, which requires calculations to avoid being taxed and then having to wait 4.5 months after the end of the tax year to claim it back.

For this reason, alone, if I was 20 years younger I would open a LISA and pile in the maximum amount every year. I would also pay the minimum amount into a workplace pension to get the employer's contributions, although I would monitor its performance, and any additional money I could afford to contribute would go into a SIPP