Pensions, like cramming onto the train to get to work in the morning, are a pain. Complicated and ever changing, the rules around saving for our retirement can seem impenetrable and so, sadly, millions of us just aren’t bothering.
This is a big problem for a number of reasons: longer lives, stagnating house prices, demise of final salary pensions etc. First and foremost, though, because we are missing out on FREE MONEY from our employers and from the government in the form of pension saving tax relief.[1]
Auto-enrolment has gone some way to fixing the problem. Introduced in 2012, around 9 million Brits have been brought into the pensions melee through an ‘opt-out’ system that encourages employees to save a minimum of 3 per cent of their salaries, with employers adding a minimum of 2 per cent every month (rising to 5 per cent and 3 per cent on 6 April 2019).
Not everyone has access to a workplace pension, though. Indeed, with the rise of the gig economy, the number of self employed Britons has skyrocketed in recent years and data suggests many of these workers are not saving for retirement at all.
With this demographic in mind, HMRC introduced the LISA in 2017, a flexible addition to the ISA stable that allows savers to stash up to £4,000 per year for a home or retirement, to which the treasury adds a 25 per cent annual bonus (that’s right: more free money!).
Pensions vs. LISA
So what’s the difference between a LISA and a pension, then? And which is best for who?
If you have access to a workplace pension, this is almost always the best option due to – you guessed it – the FREE MONEY from your employer. If you wouldn’t refuse a pay rise, don’t miss out on that.
Those that don’t have access to an employer scheme could start by considering an old fashioned personal pension with insurers and banks including Aviva, Standard Life, Scottish Widows, Prudential, Aegon, Canada Life, Virgin Money or Vitality Invest Pension.
Typically, these plans have fixed monthly minimum payments and don’t allow you to choose your investments – or have a very limited range of options. By way of compensation, fees are often quite low – between 0 per cent and 0.75 per cent a year.
In the more modern and innovative category we have the online wealth managers, or robo-advisers, many of whom have launched pension products of late, including Moneyfarm, Wealthsimple and Pension Bee.
The latter is the better option for the Good investor: the Pension Bee future world fund (powered by Legal and General) is a low cost and easy to understand ethical option in the personal pension world.
A peak at the portfolio, though, reveals holdings that might surprise the sustainably minded, including oil and gas majors Exxon Mobil and Royal Dutch Shell, plus Johnson and Johnson, which is currently facing more than 11,000 law suits for giving customers cancer with its baby powder.
SIPPs
Those that want to do real Good with their money, then, will want to take control of their own retirement through a SIPP, or Self Invested Personal Pension, through which you can choose EXACTLY what you invest in.
Sam Secomb, director of Women’s Wealth, says: “It’s important anyone who is investing realises that LISA, ISA or personal pension are just wrappers that describe the tax treatment of the investment contained within. Getting the right investment inside your wrapper that is appropriate for your time horizon and meets your objectives is, arguably, more important.”
Once an expensive option, a number of online providers now offer SIPPs with competitive fees including AJ Bell YouInvest, Bestinvest, Interactive Investor and Hargreaves Lansdown.
As well as having full control of where your money is going, most of these providers also claim back the first 20 per cent of tax relief from the government for you (higher earners need to claim the next 20 per cent back on their tax returns.).
To decide what to put into that SIPP, you need look no further than the Good Investment Review – your guide to the best sustainable investment funds in town.
LISA
Finally, we come to the LISA. Much like the SIPP or the stocks and shares ISA, the LISA allows savers to choose exactly what funds they save into. Moreover, basic rate taxpayers get the same amount of money back from the government through the 25 per cent top up as if they were claiming back tax for £4,000 of savings inside a pension.
The downsides, however, are that you can only save up to £4,000 per year and you have to wait five years longer to access your pot than with the personal pension or SIPP: so that’s 60, rather than 55 (you can technically withdraw money whenever you like from the LISA, but you will lose the bonus – and more – unless the money is used to buy your first home).
On the plus side, the money inside the LISA remains TAX-FREE throughout your retirement. This is a huge benefit for anyone planning to live on any amount more than the tax-free allowance per year in retirement (currently £12,500).
For Jeannie Boyle, executive director and chartered financial planner at Good Egg company EQ Investors, this makes LISAs the better choice for all except higher rate taxpayers.
She says: “Pensions are generally more attractive for higher rate tax payers, but with the government constantly threatening to scrap higher rate relief, this may not be the case forever. In-fact, despite the slow up-take so far, LISAs may well be how we all save for our retirement in the future.”
Tax dog
As ever, though, don’t necessarily let the tax tail wag the investment dog. Even if you have access to a workplace pension you may choose to invest in a LISA or SIPP instead in order to have full control of your pot and what goes inside it (hooray for you! GOOD investor).
Or, you may have a workplace pension and the provider won’t allow you to consolidate your previous schemes into it, so you could use either a SIPP or a LISA to bring all of those other pots (and lets face it –most of us have a few) together.
You might even choose to save into a LISA as you are at the limit of what you can save into a pension tax free, or are in danger of going over the £1,030,000 lifetime savings allowance (rising to £1,054,000 in April 2019) – though these are considerations for only the highest earning among us.
However, whatever you choose and for whatever reason, the most important thing is that you choose something: those long lunches and Mediterranean cruises are NOT going to pay for themselves, dear.
[1] Currently, this is 20 per cent for basic rate taxpayers and 40 per cent for higher earners.
