Should my 21 year old son take out a SIPP? Should he max out his Lifetime ISA?

20 July 2021

Question by Richard

Holly has given me some great food for thought before for my son who is in full time employment & a volunteer cop - he is a good lad, aged 21, lives in the smoke of London & is saving to buy a property!!! He has a work-based pension which he contributes 3% to, matched by 3% from his employer. The employer contribution increases to 5 % after 1 yr. Nearly 10k with Nutmeg, 4K + in a Lifetime ISA, the rest in an ISA. If he increases his pension contribution, I have read it may affect the amount he can borrow on a mortgage. Is this correct? Should he take a SIPP out as well & start feeding a small direct debit into it each month, for a few select funds? I am hesitant in advising him to do this because I have read a SIPP is more suited for large deposits, but my thinking is that it is a good way to start learning about investment. I have a SIPP with Hargreaves Lansdown, which is doing ok. Finally, is there any advantage in maxing his Lifetime ISA up in the next financial year (it is a managed one with Nutmeg)? I know that the monies have to be in there for a year to benefit from the 25% but when does the clock start for this please. Thanks so much... Best, Richard & Rory

Answered by Holly Mackay

I wonder if you are over-complicating things for a 21 year old?

He’s paying into workplace pension already and his contributions will now be 5%. His boss will add another 3%. (Unless he opts out, but I sense he’d incur your wrath if he did that! ) So that’s already 8% of his salary being swept across into a pension.

So he has a workplace pension, a Lifetime ISA and an ISA. That’s pretty good going for 21!

Yes, private pensions as well would be great, because they get you Government top-ups. But it is locked away for a long time for him, and he is saving for a property.

If he is dead set on buying a house, then the Lifetime ISA makes sense as a savings vehicle and he gets the 25% top-up from the Government. If he can afford to contribute the full £4,000 maximum this tax year, he will get a free £1,000 from the Government. And then he could in theory put in another £4,000 from the 6th April (next tax year) and get another £1,000 then too. Just check that he reads up around the penalties if you use the Lifetime ISA, but end up deciding NOT to buy.

Nutmeg have the following on their help pages which is useful:

“The government pays Lifetime ISA bonuses around the 25th of the month.

The monthly bonus claim periods cover from the 6th day of one calendar month to the 5th day of the next calendar month, and they take into account the qualifying payments received and cleared by Nutmeg into your Lifetime ISA during the claim period.

An example may help to clarify the position. The bonus due around 25th August will relate to the payments received and cleared into your Lifetime ISA from the 6th July to the 5th August.”

He sounds like he’s on an OK path to me.

Yes, of course in a bubble, I might have said he should also set up a SIPP, but I’m realistic about the costs of living in London for a 21 year old – we can’t do everything that the textbooks say because real life gets in the way. In about 5 years’ time his workplace pension will start to look more impressive and at that stage another think about the best pension approach / supplementing this could be in order. But at 21 I’d back off that for now.

As always – this isn’t regulated advice, I don’t know your full circumstances, and so it’s food for thought only. Hope it’s helpful.

Answered by

Holly Mackay

Founder and CEO of Boring Money

I’ve worked in investment markets for over 20 years. I started out at Merrill Lynch Investment Management and worked at a few big names before setting up my first business in 2008.