You would assume they would encourage people to get growing what their own capital, it will ultimately end up back in the system.
Thanks for a very informative post. How would £10K in a LISA do? Thanks
LISA is not directly comparable with the others. As you probably know, money saved in a LISA can only be withdrawn for property purchase, or after age 60. You must be aged 18 to 39 to open a LISA and can continue to contribute until age 50. A maximum of 4000 can be added each year, and this is topped up by the government 25% to 5000. Whatever you put in LISA reduces the amount you can add to an ISA. A good way to save, and better than the standard ISA, if a property purchase is a long term goal.
For a basic rate taxpayer 5000 in SIPP is the same as 5000 taxed down to 4000 and then receiving the top up to become 5000 in LISA. The difference is the withdrawal rules and fact that LISA withdrawals are tax free whereas SIPP withdrawals are only 25% tax free.
For a higher rate taxpayer compare putting 5000 in a SIPP. In LISA 5000 is taxed down to 3000 and receives 750 top up in LISA to make 3750. So initially SIPP means more money invested. However, SIPP withdrawals are taxed and LISA withdrawals are not. So again, assume 100% growth and higher rate tax at withdrawal time. The SIPP produces 10000 x 0.7 = 7000. The LISA 7500. However, if basic rate taxpayer in retirement the SIPP will give 10000 x 0.85 = 8500. So SIPP better for someone who expects to be higher rate when working and basic rate when retired.
I am too old to have ever had a LISA, but they look good.
Probably UK people on this platform aspire to be higher rate taxpayers in retirement, no?
Appreciate your detailed response. As usual very helpful. SIPP /pension not really an option for me as likely to hit lifetime allowance by the time I retire from work pension. It’s really between ISA & LISA for long-term saving. Saving at present is well below 20K per year. Trying to contribute both to ISA & LISA as much as I can (for retirement).
I agree with this, it seems like a large double taxation.
According to projections I will not be anywhere near close of the limit when I retire. Despite contributing a relatively high percentage of my pay to my work pension, in monetary terms it is not a lot. I guess I need to get a larger salary .
Nonetheless, I am still interested in understanding how it all works and the options available, though.
I searched it and found this:
So my question would be, could you get round this by “buying”/“getting” an annuity?
Or would the annuity be charged at 25%? / Whatever your income tax is at the time?
I don’t know much about annuities, but they seem like a good idea in case you live beyond the average life expectancy, even if they are more expensive than just drawing out monthly from your pot.
Another point to consider: Has the maximum lifetime allowance for pension been £1,073,100 for a while or has it risen in recent years? For example, does it rise with inflation?
If you live abroad, lets say like a typical UK retiree in southern europe, would you still pay the 55% UK tax on anything over the lifetime allowance?
I think there rules mean that if you have excess of 100,000 you can either immediately withdraw it paying tax of 55%, or take it gradually as income, paying 25% on top of normal income tax. In the second case the pension administrator would pay 25% to HMRC, leaving you with 75,000 with which to buy an annuity or take as monthly income, which will be taxed at your marginal rate. That means you get the fraction 0.75 x 0.6 = 0.45 if a higher rate taxpayer paying 40%. Thus the two options are equivalent.
It does not help to live overseas in retirement. These tax deductions are made by the UK SIPP administrator directly to HMRC.
Interestingly, this punitive tax can still make sense for some earning just over 100k, where the marginal rate due to loss of personal allowance is 60%. Suppose you earn £110,000. By stashing 10,000 in a pension, that avoids tax at 60% in favour of a 55% tax on withdrawal.
The LTA rises each year at the same rate as the consumer price index figure.
Perhaps I am looking at all this a little bit to naively and not getting the greater impact of all this, but the whole pension or LISA roadmap, to me at least, seems like a big waste.
Essentially people are locking their money away, for a long time - with limited capacity to retrieve said money in years to come. The tax saved or gained in the short term is just robbed right back off of us in the long term when we come to take the money out. So I’m struggling to see the upside in this trade off. Surely micro managing your money for 30+ years is better than locking it away for tax gains that never come. + they can change retirement ages as/when they like, which they have done and more than likely will continue to do.
Several newspapers today mention that the Chancellor favours changing pension tax relief for all taxpayers to 25%. So everyone could buy 10000 of pension contribution for 7500 of after tax income. Currently this costs basic rate payers 8000 and higher rate payers 6000 of after tax income.
So for a higher rate taxpayer, 10000 of income could generate 6000 in an ISA or 6000+2000=8000 in SIPP, rather than 10000 as now. If SIPP withdrawals remain taxed as now that would be for higher rate taxpayer net spendable of 0.7 x 8000 = 5600. So ISA better.
You are right. Government can change rules, and rates. Some are calling for ISA allowance to be reduced from 20000. I feel sure we will not be seeing ISA limit increased.
Same here, but investing isn’t something that was ever talked about while growing up. I think it should be - in schools and at home.
I agree with you on that.
My little girl is five and I’ve got her a pie so I’ll try and educate her a bit when she’s in her teens.
You could even start now, make some sort of educational game out of it or something. Spending time together, having fun and learning how to handle money.
It might not a bad shout. I try to do this with playing shop etc, there is a worrying sign she’s inherited her mothers brains unfortunately. Bless her.