SAHM pension/LISA - am I being stupid?

[Essie274]

I'm a SAHP and have been since I had my first child in 2020. Money has been tight the majority of the time, but due to lockdowns, childcare costs and moving around for DH's job (now settled), I just didn't/couldn't go back to work or contribute to a private pension. I've never had a career so am not worried about the time out of the workforce from that point of view, but I am worried about my pension (or lack thereof). I'll likely be at home mostly (likely will retrain part time before returning to work) for the next 5 years.

We are now in a financial position to put about £300 aside each month towards my pension/retirement. Pensions really confuse and worry me. I have absolutely no idea about them and my brain gets fuzzy when I try to learn about it. So I had the idea to just stick it in a LISA instead. Is that a really stupid decision? I have no idea what kind of returns you get from a pension vs LISA and if I'd be really shooting myself in the foot by going down that route.

Could someone please talk to me about this as if I'm a complete idiot (I feel like one anyway!)?

TIA

I can't give you pension advice BUT make sure that you are claiming child benefit or apply for NI credits if your partner earns £50k+. www.gov.uk/government/publications/national-insurance-credits-for-parents-and-carers-cf411a

The advantage of contributing to your pension is that is nearly always tax free (but are you actually paying any tax?).

You have an annual ISA allowance of £20k and lots of flexibility as to what you invest in. I would be inclined to invest in that instead in case you want the money before you reach pension age.

The maximum you can contribute to a pension as a non earner is £2880 before tax relief. You will then get a further £720 tax relief paid into the pension (so total £3600 per year)

You cannot access your pension until aged 55 (or 57 from 2028). When you do access it you can take 25% tax free and the rest is taxed as income

The maximum you can pay into a LISA is £4000 a year. You will then get a further 25% bonus from the government (£1000 if you pay in max) so total maximum of £5000 per year.

You can't pay into a LISA beyond the age of 50. You can use the money to buy your first house, or you can access it from the age of 60 (or if you are terminally ill). You don't pay any tax when you take the money out

Or you can go for a bog standard ISA. Can contribute up to £20000 per year. No restrictions on when you can access. Again you don't pay any tax when you take the money out

The returns you get will depend on what you invest in. So if you stick them in the same investments the returns will be the same

If you're not an income tax payer I'm not sure what the benefits of a pension would really be? The LISA would be topped up by a government provides a top up bonus to LISA contributions.

However, you said "I have no idea what kind of returns you get from a pension vs LISA" - the answer is "it depends what you invest them in". You could invest in (for example) cash, or shares, or bonds, in either a LISA or a pension. So returns is not really what you should use to decide which to pay into.

Whatever you decide, you should consider your time horizon for investing - if you're going to be investing for 10 years or more then you need to think about long term investments like shares for example, and not just put it all in cash where the interest won't necessarily be very good. Check out things like the Martin Lewis moneysavingexpert website as I bet that has some tips on it. You then just remember that shares can go down as well as up, so you won't see your fund value increase every single year ... but over the long term shares tend to outperform cash.

My LISA is with the same company my self -invested pension is with (Hargreaves’s Lansdown). I pick the stocks my money is invested, so in my case, there isn’t much difference with the SIPP or the LISA.

If your happy with your current arrangement you could then open a SIPP when you’re 50 and you can no longer contribute to the LISA

@snowlaser
If you're not an income tax payer I'm not sure what the benefits of a pension would really be?

You still get tax relief on contributions up to £2880 per year even if you are not an income tax payer. So there is a benefit

But how is that different/better than a LISA?

I guess there is the 25% tax-free lump sum at retirement....

I didn't say it was better than a LISA. What I said is that there is a benefit to a pension if you don't pay income tax

There are different restrictions between a LISA and a pension, so if the choice is between them then it is up to the individual to decide which one works for them.

Thank you all for your input - very helpful.

I am 26 if that makes any difference, so a very very long time away from retirement! I just have absolutely no idea about this stuff, my parents have always been careless and frivolous with money and without a lot of luck they would be in a real mess with their upcoming retirements (they admit this), so it has made me anxious about my own.

@Essie274 do you own a property? You can also used the LISA to put towards a deposit on a house. But you must be a first time buyer.

also you need to open a LISA before you are 40 - so you qualify on that front

I would put towards both a simple pension and a LISA. You do not know what Government will do in the future, how taxes change, so give yourself options.

Choose as global and low cost an investment as possible. Just one fund keeps it simple.

Some books you may like to read if new to investing:
The Simple Path To Wealth - JL Collins
The Meaningful Money Handbook - Pete Matthew

I chose a LISA at a similar age as there is a way to get the money before retirement, if we really really needed it. Lots of things can change in your 20s, 30s and 40s with kids, relationships etc. Yes there'd be a penalty that would essentially wipe out the 25% add on from the Government but I could get to it (and really hope I don't need to!) A pension is locked away until 55 at the earliest.

Just an additional thing to consider.

The fact that the pension is locked away till your retirement is the advantage, in my view.

You don’t want to wake up at 56 and realise you dipped into your nice tempting accessible retirement fund so often that you now have little left. The good thing is that you are thinking about it now.

So you think you can save £300 a month/£3600 a year. Why not put the £2880 a year into pension to get the tax top up, and the rest into accessible savings?

https://www.thisismoney.co.uk/money/pensions/article-11101783/Should-pay-Lifetime-Isa-private-pension.html This article is good on the pros and cons.

Yes I do own a property (jointly with DH) (did use a LISA then, and still have it open).

Thanks for the link to the article @ShandyQuaffer - exactly what I needed to read.

Two thoughts ,

Nobody knows what the future holds but if you end up in a situation where you need to claim means tested benefits, I don’t think your pension is counted as savings but a LISA might be.

Also, at the moment I think a pension is outside inheritance tax calculations

Good points thank you. I'll look into seeing if a LISA is counted towards UC entitlement (I think it is!), thank you. Obviously not something I need to consider now but a good point as you never know what might change.

If you've used your LISA already towards purchasing your first home, surely it's a closed account now? Like, it's been used for it's specific purpose? Would you still get the 25% bonus each year if you've used thd account slready for your first home purchase?

Yes, you can use the account for both first home purchase and retirement, so the account can continue to be used and receive the gov top up.