LISA v SIPP, which is best?

What is a LISA?

LISA is an acronym and stands for: Lifetime Individual Savings Allowance. It hasn’t been around that long- announced by the government in 2016~. It’s another type of ISA (comparison here) limited to £4,000 per tax year. It can be invested as either cash or stocks & shares/bonds and pretty much anything else.

What is a SIPP?

SIPP is also an acronym, for Self Invested Personal Pension. Which basically means its a pension that you choose where you would like to have it invested. You will also need to pick a pension provider to open your SIPP with- Monevator has a great list to get you started.

Which is best?

Well, that really depends on your situation- each has their positives and negatives:

LISA

Positives:

• Can be used to purchase first house- Huge benefit
• Doesn’t have any income requirements (you don’t have to be paying any tax at all)
• Can be withdrawn at any time (subject to 25% fee on the entire amount you are withdrawing, unless it’s for your first house or you are 60+)
• Tax relief/bonus of 25% applied to contributions… but (see negative)
• No tax to pay on the LISA- however you decide to withdraw it.
• Any dividends/interest/capital gains is tax free (same as SIPP)

Negatives:

• Will be counted if you ever claim any benefits etc
• If you are already over 40 (and don’t already have one) I’m afraid it’s too late for you to open one
• Limited to a maximum of £4,000 per tax year
• Shares the same £20,000 ISA limit (subject to above £4k LISA limit)
• Maximum tax relief of 25%- even if you are a higher rate tax payer.
• Cannot be withdrawn until age 60 without a penalty – unless you are purchasing first property (currently)
• You can only pay-in until the age of 50

SIPP

Positives:

• Cannot be used against you for any benefit claims etc
• Tax relief available to the tax rate that you pay- Huge benefit.
• 25% of the amount can be taken tax free at pension age.
• You can pay in all the way into retirement (should you wish) Any dividends/interest/capital gains is tax free (same as LISA)

Negatives:

• Cannot be withdrawn early- unless you have terminal illness
• Limited to the amount you pay tax on (though you can input £2,880 even if you earn nothing)
• Tax rate/amount due on the amount that you withdrawn when you take pension.
• Cannot be used for first house (unlike LISA)
• Pension age could be changed by the government- they could also change the tax rules as well

LISA v SIPP – I’m still not sure?

Always take the employers pension first- since this will match the amount that you put in- basically doubling your money. Neither the SIPP or LISA can match this.

If you are looking to buy your first house, then I think you would be pretty mad not to consider using a LISA- it’s a free 25% from the government towards it! You can always open/use the LISA for retirement after purchasing your house as well!

If you are a basic rate taxpayer, it’s more difficult to pick from a LISA or SIPP- but if you are worried about an emergency (when really you should budget & have an emergency fund) then a LISA might be the best for you. At least you can get access to this money should you really need (albeit with additional fees)

If you are a higher rate taxpayer, then you should really be looking at the SIPP option, since you can claim more tax relief than the LISA option. If you are still saving for your first house- it maybe worth using the LISA for this, but as soon as it’s for retirement- SIPP is the best option.

If you are only going to use the LISA as your retirement pot- the £4,000 per tax year, and no more contributions from 50 onwards is likely going to constrain the amount you can have saved here. Even if you started at age 20, and saved the maximum all the way to age 50- you would only have £120,000 (+ any growth).

You can have both should you wish- there is no rule to say that you have to have one or the other.

The age that you can currently withdraw both options (LISA – 60, SIPP 57/58) is approximately the same, but this could change in the future. The SIPP age is set to 10 years before the state pension age, and this has been decided that it will increase over the next few years. So, I can see them both being approx 60 by the time that most of us get there!.

Further Reading:

What is an ISA?

Why a pension is the best investment you will ever make