Hello, I already have a workplace pension. Can I also have a private pension? If so, I have a LISA as well. Can I have all three in place?
The answer to your question is, yes.
You can hold a workplace pension, a private pension, and a Lifetime ISA (LISA) all at the same time.
Often by the end of their career, people may have many workplace pensions, and potentially a few private pensions too.
That is where companies such as PensionBee step in - they help people who have small pensions lying around and need to join them up in one place.
Things to remember:
- Government bonus: If you are a basic-rate taxpayer, the tax relief on a pension will work out the same as the cash boost offered by the government for LISAs. This is because on a pension the 20% tax relief you get is from your pre-tax gross income (e.g. if you put £100 into your pension, this contribution will be topped up to £125.) Meanwhile with a LISA you'll receive a 25% top-up from the government. This bonus is on taxed income, or net income, so it works out as the same as a pension.
- BUT: higher-rate taxpayers and top-rate taxpayers receive a bigger government boost from their pensions than a LISA, as they are able to claim back up to 40% or 45% tax relief.
- Tax: ISA money will be taxed on the way into your ISA, as you'll already have paid income tax on it. However, the money in your ISA can then be taken out tax-free. But when putting money into a pension, you'll get your tax relief but your money will be taxed when on the way out of your pension.
- SO: a basic-rate taxpayer could withdraw all the money from a £5,000 LISA, but if they wanted to do the same from their £5000 pension, the tax would mean they'd only get £4,200 (assuming 25% tax-free and 20% on the remainder).
- Workplace employer contributions: By saving into a workplace pension you get the nice benefit of an employer contribution, as well as the boost of a government top-up. Meanwhile, if you want to use an ISA for your retirement, you wouldn't be able to receive employer contributions into that account.
- LISA limits: you can only save up to a maximum £4,000 each year; LISAs are only available if you're between 18 and 39; contributions to a LISA count towards your £20,000 annual ISA allowance; unless withdrawing for your first home, you'll only be able to withdraw the money after turning 60, or you'll face a 5% exit fee and will lose your 25% government bonus;
- LISA benefits: you can choose to save into a Cash LISA or a Stocks & Shares LISA, while pensions are only invested in Stocks & Shares; you can choose to withdraw your LISA money after one year (rather than waiting till you turn 60) if you need it to help you buy a first home (worth up to £450,000).
Which is better?
The general advice is to have both a LISA and a pension.
If you're a basic-rate tax payer, make sure you make the most of employer contributions into a workplace pension, but also take advantage of the flexibility of a LISA, which lets you withdraw the money if you really need it.
Meanwhile, for higher-rate taxpayers, pensions offer a better source of tax relief than a LISA, plus you can pay more in.
What do the experts say?
Richard Perkin, Head of Pensions at Fidelity: "It will clearly remain best advice for people to stay in their workplace pension and get any employer contribution available to them. But saving in a pension beyond this level may be questionable. Generally, anybody paying basic-rate tax today will be better off making additional saving in a Lifetime ISA rather than saving in a pension."
Ben Stanway, Co-Founder of Moneybox: "A 25-year-old saving £4,000 a year (£333 per month) until 35 into a cash LISA could end up with £52,000 - £10,400 more than with a regular ISA - to put towards a house. £10,000 comes from the government bonus, providing a huge boost in these times of low interest rates. However, the biggest winners could be those investing LISA savings into stocks and shares, benefiting from the power of compound interest. As an example - based on historic returns of 5.5 per cent - a 25-year-old investing £330 per month until the age of 60 into a Lisa could end up with £546,000 - an extra £106,000 compared with a regular ISA."
Hope this helps!