SIPP or LISA?

[Lawrencepa2014]

I’m 35 and hoping to retire at 60 at the latest.
Been with Royal Mail for last 5 years and have a pension pot of about 20k (I didn’t pay into pension before Royal Mail). According to my pension letter I got a little while ago I would get 1200 a month at aged 68 which doesn’t really help as I want to retire at 60. I have been paying into a LISA for the last 6 months and have 700 quid in there so far including government bonuses. I am probably due to get quite a bit of inheritance money soon and my plan was to pump as much into there as I could. But after doing some research it seems I might be better off doing a SIPP. My only fear is that the minimum age will be over 60 until I could withdraw by then so I won’t be able to retire when I want but I could be wrong. I have a mortgage and with the inheritance could probably pay the majority of that off as well. I’m thinking of just withdrawing the LISA funds potentially and put it in a SIPP instead and start making regular payments to it now as well as any inheritance. Do you think it’s worth spending some in a lisa and some in a sipp or put it all in a sipp in my situation? I’m not that interested in getting a lump sum as much as I would a guaranteed income that would be enough to live on but the most important thing for me is to be able to do it at 60 or younger if possible. Any ideas?

[RobertT]

Here's a few points to think about:

1. Check your state pension entitlement to ensure you're on track to get the full amount by your state pension age 68 at the latest and preferably earlier.
2. Make sure you're benefiting in full from the RM pension. Are you in the new RMCPP and paying into the Booster? Are you paying into the AVC and getting the extra benefit of salary sacrifice(PSE)?
3. It sounds like the RM pension you already have is the RMDCP with Scottish Widows? Your statement probably assumes your going to pay into that until 68 – you're not! And then buy an annuity(income for life) – but you can also do drawdown and set your own income until it runs out.
4. Is your RMDCP invested for long term growth?
5. What is your risk profile for investing. At 35 it needs to be for growth.
6. A LISA offers the same tax incentives as a SIPP, except a LISA is limited to £4k per year and a SIPP is as much as you earn(including payments into other pensions such as the RMCPP), up to £60k.
7. There are penalties if you withdraw money from a LISA if it's not for property purchase or retirement.
8. The minimum access age for pensions is currently 55 and due to increase to 57 in 2028, and then be 10 years lower than state pension age going forward. There's currently no definite plans to increase SPA above 68.
9. Inheritances sound great but ultimately you don't get them until that person dies. They could still spend/need it while they're still alive!
10. Be aware that current rules can always change, you may change jobs, or there might be other factors that mean you might have to amend your plans.

There's probably loads more.....

I would say £20k at 35 is a very small sum, so you really need to throw a lot of money at it over the next 25 years. But the sooner you start, the more your cash will compound and grow.

What I did was look at how much guaranteed income I was going to get from the state and RM pensions(I joined in 1987) and work backwards to ensure I have enough in AVC's, DC pensions and ISA's to supplement them if needed, and preferably to provide an income before they even kick in.

For example:
At 68 - your state pension and RMCPP should provide a reasonable income.
At 67 – you'll have the RMCPP(assuming you take it at NRA).
Before that, your other more flexible savings will come into their own.

It's along road, good luck.

[posted]

I’m 35 and hoping to retire at 60 at the latest.
Been with Royal Mail for last 5 years and have a pension pot of about 20k (I didn’t pay into pension before Royal Mail). According to my pension letter I got a little while ago I would get 1200 a month at aged 68 which doesn’t really help as I want to retire at 60. I have been paying into a LISA for the last 6 months and have 700 quid in there so far including government bonuses. I am probably due to get quite a bit of inheritance money soon and my plan was to pump as much into there as I could. But after doing some research it seems I might be better off doing a SIPP. My only fear is that the minimum age will be over 60 until I could withdraw by then so I won’t be able to retire when I want but I could be wrong. I have a mortgage and with the inheritance could probably pay the majority of that off as well. I’m thinking of just withdrawing the LISA funds potentially and put it in a SIPP instead and start making regular payments to it now as well as any inheritance. Do you think it’s worth spending some in a lisa and some in a sipp or put it all in a sipp in my situation? I’m not that interested in getting a lump sum as much as I would a guaranteed income that would be enough to live on but the most important thing for me is to be able to do it at 60 or younger if possible. Any ideas?

If that was me ...

• Commit to dumping at least £4k into the LISA every year

• Pay off as much of the mortgage as you can

• Any left, put it into the SIPP

• Increase your AVCs to at least what you were paying for your monthly mortgage payment (grossed up 25%) as you are already committing that amount against your lifestyle spend

Having said all that, regardless of if you were getting your inheritance or not, follow what RobertT about assessing what income you want at 60, what you currently have and what extra you need to save. We should all be doing that anyway

[Lawrencepa2014]

Here's a few points to think about:

1. Check your state pension entitlement to ensure you're on track to get the full amount by your state pension age 68 at the latest and preferably earlier.
2. Make sure you're benefiting in full from the RM pension. Are you in the new RMCPP and paying into the Booster? Are you paying into the AVC and getting the extra benefit of salary sacrifice(PSE)?
3. It sounds like the RM pension you already have is the RMDCP with Scottish Widows? Your statement probably assumes your going to pay into that until 68 – you're not! And then buy an annuity(income for life) – but you can also do drawdown and set your own income until it runs out.
4. Is your RMDCP invested for long term growth?
5. What is your risk profile for investing. At 35 it needs to be for growth.
6. A LISA offers the same tax incentives as a SIPP, except a LISA is limited to £4k per year and a SIPP is as much as you earn(including payments into other pensions such as the RMCPP), up to £60k.
7. There are penalties if you withdraw money from a LISA if it's not for property purchase or retirement.
8. The minimum access age for pensions is currently 55 and due to increase to 57 in 2028, and then be 10 years lower than state pension age going forward. There's currently no definite plans to increase SPA above 68.
9. Inheritances sound great but ultimately you don't get them until that person dies. They could still spend/need it while they're still alive!
10. Be aware that current rules can always change, you may change jobs, or there might be other factors that mean you might have to amend your plans.

There's probably loads more.....

I would say £20k at 35 is a very small sum, so you really need to throw a lot of money at it over the next 25 years. But the sooner you start, the more your cash will compound and grow.

What I did was look at how much guaranteed income I was going to get from the state and RM pensions(I joined in 1987) and work backwards to ensure I have enough in AVC's, DC pensions and ISA's to supplement them if needed, and preferably to provide an income before they even kick in.

For example:
At 68 - your state pension and RMCPP should provide a reasonable income.
At 67 – you'll have the RMCPP(assuming you take it at NRA).
Before that, your other more flexible savings will come into their own.

It's along road, good luck.

Thanks for your help. I’ve taken it on board. I am or at least was with Scottish widows but I’ve had problems logging on to the account recently. I can’t remember if I want the “money4life” “retirement account” or “work place pension” but I’ve requested a username reminder with no luck. Might be worth phoning them. I joined in April 2019. Am I definitely still with Scottish widows then? How can I access my account to make some changes?

[milly]

If I was 35 I very much doubt that I would risk putting too much into a pension.
Labour seem to increasingly view it as their money rather than yours.

[RobertT]

Thanks for your help. I’ve taken it on board. I am or at least was with Scottish widows but I’ve had problems logging on to the account recently. I can’t remember if I want the “money4life” “retirement account” or “work place pension” but I’ve requested a username reminder with no luck. Might be worth phoning them. I joined in April 2019. Am I definitely still with Scottish widows then? How can I access my account to make some changes?

You would have been with SW from shortly after joining RM, and your £20k is still with them and will still be invested in your choice of fund/s.
That'll be the case until retirement or until you transfer it elsewhere.

As far as I know it's the money4life website you'll need!
Look at the RMDCP plan guide for more info – details in the 'pension websites stickie'.

I assume you're now paying into the new RM Collective Pension(from 7th Oct).

[NorthernBoy]

Some good advice from Robert and Posted.

Remember at 35 you have still have time on your side to build up a large pot.

If it was me at that age I would be investing in funds/stocks rather than low risk cash type funds. Clearly this will depend on your own risk tolerance level.

Don’t be alarmed if the markets crashes 30%, if you are buying monthly and in for the long term this is not a bad thing as you will be lowering your average purchase price.

Personally what I’m doing and this is not financial advice is buying Tesla shares every month.

I believe this company will be the biggest in the world within 5 years. This company is close to solving full self driving which if they succeed will transform the entire transport industry. They are also developing robots where the demand will be almost unlimited.

Good luck with your plans

[TopperGas]

Some good advice from Robert and Posted.

Remember at 35 you have still have time on your side to build up a large pot.

If it was me at that age I would be investing in funds/stocks rather than low risk cash type funds. Clearly this will depend on your own risk tolerance level.

Don’t be alarmed if the markets crashes 30%, if you are buying monthly and in for the long term this is not a bad thing as you will be lowering your average purchase price.

Personally what I’m doing and this is not financial advice is buying Tesla shares every month.

I believe this company will be the biggest in the world within 5 years. This company is close to solving full self driving which if they succeed will transform the entire transport industry. They are also developing robots where the demand will be almost unlimited.

Good luck with your plans

It's a very risky business investing all your investments in just the one company no financial advisor will advise anybody to do that.

[heapsy]

Thinking about everything posted above, here are my thoughts. RobertT is correct to advise maxing out your pension contributions, AVCs etc. I'd max out on the LISA. Not everyone is young enough to have these. Pay into a Cash ISA, a regular sum which equates to a new car every 5/6 years. (I'm assuming you have the need). The rest, as close as possible to maxing on the ISA limt, I'd put into a Stocks & Shares ISA. The reasons for the latter are varied. 1 the minimum pension age will be 10 years before State pension. This will keep rising and will be 10 years prior to your State pension. 2 Some of the money could be taken as lump sums, with some left to provide tax free income while left invested. 3 The rules are different from pension rules, see above, ie flexibility to mix and match, without maximum limits on lump sums, or WHEN you can take it. Only 25% can be taken as a tax free lump sum.

[RobertT]

The pension vs ISA debate is one of those old chestnuts that crops up on here occasionally and there's plenty of debate on the internet in general about it too.

A bit of basic maths will say that a SIPP will beat an ISA due to the tax relief, and that's regardless of whether you're paying 20% tax on 75% of it.

For example, based just on contributions:

You pay £10k into an ISA, you can withdraw £10k from it too and free from any tax.

But if you pay £10k into a SIPP you'll receive another £2,500 in tax relief.
25% of the total is tax free and assuming you're paying 20% tax on the rest, you'll lose £1,875 to the taxman and still have £10,625 in your hand. A minimum 6.25% uplift for doing nothing and more if you can avoid tax on any of it!

If you're a 40% tax payer in work and 20% in retirement, you'll be even better off due to getting a higher rate of tax relief on the way in.

Depending on how you access it and other income, it's possible to avoid tax altogether or pay 40% or even 45% tax some of it. That'll come down to the individual, the amounts involved and their withdrawal choices.

Workplace pension contributions are often paid out of gross pay before any deductions, plus you have employer payments and possibly salary sacrifice(not all employers do it). SIPP and ISA contributions come out of net pay, meaning a company pension will beat a SIPP and wipe the floor with an ISA, assuming you don't pay any more than 20% tax on the taxable element.

RM pensions are a law unto themselves to some degree.
But even if you have AVC's above the 25% tax free limit, you still keep 85% of the excess(taxable) – which factoring in the tax relief, PSE and any employer contributions(old bonusplan & new booster) will still be more than you've paid in!
There's also the transfer out option which might be more tax efficient for some.

The DBCBS is often where it falls down, as that has become a very tax inefficient scheme. Many will end up paying 40% on at least some of that and so losing some of the benefits mentioned above.

That's the financials, but as heapsy says, ISA's give you flexibility that pensions don't.
There no waiting until a minimum age before you can access the money, and you can take it all out without worrying about tax, etc.

Pensions(SIPP's in particular) have the same investment choices as an ISA, especially if you have both with the same provider/platform. So the returns on your money are potentially the same.

Most IFA's will advise a mixture of both is best.

LISA's have elements of pensions and ISA's.
They benefit from the same tax breaks as a pension does, as long as you're a basic rate(20%) taxpayer, but they do use up some of your ISA allowance.
You can only pay into one between the ages of 18 and 50(1st payment before 40) and if you don't use it to fund a house purchase, you can't withdraw any until 60, unless you give back the 25% government contribution.

In my opinion they're best suited for house purchases, with retirement being a secondary use.

Whatever route you take, the best way to a decent and preferably early retirement is to start early and save as much as you can afford.

[posted]

supplementary question on SIPP and PSE... and hijacking this thread

Is the only advantage of PSE on Pension Contributions the NI saving (which is currently 8%)?
I currently contribute a total of 10%

I'm thinking of reducing my employee contributions to the minimum 6% required, enough to get the max Employer contributions.

The remaining 4% AVC I currently contribute would go into a SIPP of my choice.
My maths works out that...
The gross £4 (out of every £100) I currently contribute as PSE only costs me £2.88 net
But If I took that £2.88 as net pay and put it into a SIPP, with Tax Relief added it would only be worth £3.60

Is that right?
Seems a significant difference

[posted]

A minimum 6.25% uplift for doing nothing and more if you can avoid tax on any of it!

If you're a 40% tax payer in work and 20% in retirement, you'll be even better off due to getting a higher rate of tax relief on the way in.

Depending on how you access it and other income, it's possible to avoid tax altogether

Do tell more

The only bit I could work out myself are the bare basics...
Withdraw £16,760
25% of that will be tax free.
The remaining 75% that is taxable is £12,570, which happens to be the PA

(if you have marriage allowance then withdraw £18,436)

This doesn't take into account the state pension which of course for full amount would finish off the PA.

What other ways are there?

[RobertT]

supplementary question on SIPP and PSE... and hijacking this thread

Is the only advantage of PSE on Pension Contributions the NI saving (which is currently 8%)?
I currently contribute a total of 10%

The taxman is paying 28% of each gross pension contribution instead of you, 8% of that is a result of PSE. The other 20% is tax relief.

I'm thinking of reducing my employee contributions to the minimum 6% required, enough to get the max Employer contributions.

Which scheme are you currently paying into? To get the max employer contributions you need to pay:

7% into the RMCPP - basic plus booster
6% into the RMDCP
5% into Nest unless you're one of those who can get the full contribution level of 6%/13.6% because you're paying into Sharia. I still don't really understand that perk to be honest.

The remaining 4% AVC I currently contribute would go into a SIPP of my choice.
My maths works out that...
The gross £4 (out of every £100) I currently contribute as PSE only costs me £2.88 net
But If I took that £2.88 as net pay and put it into a SIPP, with Tax Relief added it would only be worth £3.60

Is that right?
Seems a significant difference

I'm no tax expert but my understanding is:

Let's say your extra 4% relates to £10 gross per week – keeping it simple!

At the moment that's only costing you £7.20. But if you chose not to pay that £10 via your wages, and assuming you pay income tax and NIC's on it at a total of 28%, that means you'll get an extra £7.20 in your take home pay.
You then put that in a SIPP and gain the tax relief, giving you £9.00 in there instead of £10 via RM.

A minimum 6.25% uplift for doing nothing and more if you can avoid tax on any of it!

If you're a 40% tax payer in work and 20% in retirement, you'll be even better off due to getting a higher rate of tax relief on the way in.

Depending on how you access it and other income, it's possible to avoid tax altogether

Do tell more

The only bit I could work out myself are the bare basics...
Withdraw £16,760
25% of that will be tax free.
The remaining 75% that is taxable is £12,570, which happens to be the PA

(if you have marriage allowance then withdraw £18,436)

This doesn't take into account the state pension which of course for full amount would finish off the PA.

What other ways are there?

I think you answered the question yourself.

You only pay tax on income over £12,570, assuming the standard personal tax allowance applies to you. It can sometimes vary with the individual!

So if your income is less than that, you won't pay tax on the difference.

In the example I gave in the post above of £10,625 in your pocket – if you didn't have any other income in that particular tax year, all of the £12,500 would be tax free, and that uplift becomes 25% for doing nothing.

[posted]

Thanks RobertT

Which scheme are you currently paying into?

I was in the RMDC scheme paying 10% (6% Standard + 4% AVC) whilst RM contributed 10%
Now moved to the Nest scheme in the Sharia fund, so continuing to contribute the same from myself whilst RM chips in 13.6%

Let's say your extra 4% relates to £10 gross per week – keeping it simple!

yes, your £10.00/£7.20/£9.00 example works out the same as mine.

I think you answered the question yourself.

You've disappointed me with this now.. i was hoping there was some simple way to avoid/minimise paying tax that I was missing out on

Death and taxes hey!

Even with the 2 reductions in NI we've had from the last Gov, pensioners haven't really benefitted directly from that as they don't pay NI after reaching SPA. Freezing of PA is also a damper too.