Do I put my money in a LISA or a SIPP?

[QuimReaper]

I'm very ashamed of this, but I'm 33 and only just starting to think about and even try to engage with these things. I only really recently re-entered the workplace after spending most of my 20s in education. I now have about £13,000 just sitting in a bank account, which I know isn't much, but a family friend recently put a rocket up my arse about finances and I'm now trying to get to grips with what I should be doing with it.

• It looks to me like a LISA is a no-brainer with the 25% bonus, given my age; I could probably commit to £4,000 for at least the next few years.
• In my position though, would you also get a SIPP (I'm looking at the ones with Vanguard)? Or is there any argument for forgetting the LISA and just focusing on a SIPP? (There seems to be but I can't follow it.) (I do have a tiny workplace pension.)
• And finally I feel like I'm missing a trick not opening a S&S ISA, but I can't for the life of me work out a good balance of contributions between the three.

I am completely new to this and a bit overwhelmed, and keep going in circles with researching it, and a lot of it seems like there's a degree of 'some people prefer...' involved, so looking for opinions as much as anything.

Thanks!

What do you want the money for?

If it's for a house deposit (and you are a first time buyer) or you don't need it until you're 60, a lisa would be good.
You can deposit 4k per year so you could also put some in a sipp.

I have a lisa. My thinking is that I might appreciate a large sum of money at 60 to make sure the house will last me for my retirement- roof, boiler etc.

SuperLoud I've started to think about retirement; however, also about not just leaving my money languishing in cash!

It might be smart to split it, then, rather than either/or.

Can you imagine yourself needing some of it before you hit 60?

Have you had a look at the moneysavingexpert pages?

The other thing to consider is how much you like risk.
I am quite risk averse so in real terms my money might be worth less over time but I prefer that to sudden dips.
My parents lost quite a bit of money when they needed to withdraw from stocks and shares isa type accounts at a time when the funds were performing poorly and it really put me off.

SuperLoud excellent point, thank you. Another source of confusion for me is that I've been looking at the Vanguard S&S ISAs which have varying risk levels and I can't even decide how risk averse I am!

Splitting it is my instinct too, I just can't figure out what the best split would be, or whether it even really matters

There is no one right answer which is why it’s so confusing!

If you want to buy a first home a LISA is definitely a very good bet.

If you just want the money for retirement then which is better will depend on the highest rate of tax you pay. A LISA gives you 25% extra, a SIPP would be 20% or 40% depending on tax rates.

A S&S ISA is the most flexible option if you are likely to need the money for anything other than retirement or a house purchase. But if you are saving specifically for retirement it’s likely to be the worst performer of the three as you don’t get any form of top up, just get your increases tax free (which is an advantage but much less of one).

Also not to disagree with your family friend but keeping some of your £13k in a bank account is actually a really good idea so you always have some emergency money. I’d keep 3-6 months of essential spending somewhere I could withdraw it quickly whenever it’s needed. When you are happy that your emergency fund is big enough, you can feel more confident in locking away the rest.

ChewChew oh yes thank you, I hadn't thought of putting it all in there. I thought I'd start with about £10K and keep the rest as emergency funds; then from now on make smaller payments into each of the pots, however many I end up with...

And thank you for confirming there's no one right answer, I'm glad I'm not being too dense

@QuimReaper

I'm very ashamed of this, but I'm 33 and only just starting to think about and even try to engage with these things. I only really recently re-entered the workplace after spending most of my 20s in education. I now have about £13,000 just sitting in a bank account, which I know isn't much, but a family friend recently put a rocket up my arse about finances and I'm now trying to get to grips with what I should be doing with it.

• It looks to me like a LISA is a no-brainer with the 25% bonus, given my age; I could probably commit to £4,000 for at least the next few years.
• In my position though, would you also get a SIPP (I'm looking at the ones with Vanguard)? Or is there any argument for forgetting the LISA and just focusing on a SIPP? (There seems to be but I can't follow it.) (I do have a tiny workplace pension.)
• And finally I feel like I'm missing a trick not opening a S&S ISA, but I can't for the life of me work out a good balance of contributions between the three.

I am completely new to this and a bit overwhelmed, and keep going in circles with researching it, and a lot of it seems like there's a degree of 'some people prefer...' involved, so looking for opinions as much as anything.

Thanks!

Put some of your savings into a LISA, but only if you can afford to not need to touch them until you retire. Keep a rainy day savings so you can cover should you lose your job.

When it comes to a pension the best way to put money in is from earnings as that is then tax free, additionally most employers match contributions up to a percentage. So when you save into a pension from your from your earnings, not only do you not pay income tax or national insurance on that amount, but if you pay in 5%, your employer will also match that, so it becomes 10%, but then with the tax back that can work out at being 12-15% of your salary into a pension, from only a 5% reduction in your net income.

Thanks Matilda - my employer do have a matched contribution scheme, although I'm not clear at all on whether their contribution is fixed at 3% or they can increase it in line if I increase mine. I need to find out.

Sorry, should have said - at the moment they don't fully match my contribution but as you say, it's worth me increasing mine anyway.

99% of people don’t need a SIPP.
Firstly, you need a rainy day fund. I’d suggest 6 months of your spending money. Keep in cash or premium bonds.
I wouldn’t suggest a LISA if you don’t already have a S&S ISA, so that would be the next step. With a LISA, your money is locked until 60 or until you become a home owner. If you are saving up for your first home, then it may be reasonable to consider a LIsA for that purpose only.
You will have to DYOR re which shares/funds but it will depend on your risk appetite, your financial knowledge and how long you want to keep the money invested for.

Also don’t get fixated on the % contributions into your pension. It’s what the pension is actually invested into is what counts. Make sure you know this so you can take appropriate steps to safeguard your pension

I'm 33 too and if I were you I'd forget the SIPP and increase your contributions to your workplace pension, as a PP said you're then not paying tax on that amount so you get more bang for your buck, so to speak.

If you're not a homeowner and never have been then I think the LISA is a good idea for saving towards your own home.

Keep some of your money as emergency savings, I personally keep £10k as a minimum in Premium Bonds so they're accessible if an emergency hit but I have a chance of winning some money with them (better than earning almost zero in a bog standard savings account IMO.)

I do save into a S&S ISA, just £100 a month but I view this as long term savings, 10 years plus. I personally like spreading the money around so although I may not be making massive contributions to my workplace pension, S&S ISA, savings accounts etc I have a bit in each one and hopefully they grow.

I should have also said I'm in the higher risk fund for my pension, just my personal choice but I feel that in my 30s I am far enough away from retirement to take a bit more risk and (hopefully) be rewarded for that. It depends on your risk appetite though.

I think your employer should be paying in more than 3%, unless you are new to the company perhaps. We contribute 8% into our employees auto-enrolment pensions, having started at 1% then 3%, 5% and I think 8% is the ceiling.

When I worked in pensions, in the US and many years ago, the advice that was usually given was to start with the higher-risk equity fund, plus some into a lower-risk bond fund... so in my 20s, I allocated 60% to equity funds and 40% to fixed income... and then to tilt the allocation back with each passing decade of work and savings so by the time retirement knocked, most of your fund was in safe, low risk investments with a little on the side to counter inflation, which is going to become much more important again soon.

The logic is, as FireworkParrot said, the further away from retirement the longer your money can grow. Also in almost every period of 10 years since 1920, money invested in equities (shares) has outperformed fixed income securities.

If you become interested in managing your own portfolio, then there are some sensible books to read. I recommend Investment Made Easy by Jim Slater: it is very old indeed and probably out of print, but the ideas/advice remain relevant and will help you understand the basics, decide your tolerance for risk and develop a strategy.

Thanks XingMing - that sounds exactly like the Vanguard 'Target Retirement Age' pensions I was looking at, which automatically scale back your risk as you approach your target age; and in fact in the end I went for the LifeStrategy 80/20 one (meaning 80% equity funds, 20% bonds, so a bit riskier than you propose). So all in all excellent advice, thank you!

Good luck QuimReaper (love the name)... it sounds a really sensible plan and Vanguard are well-respected. It's a long time since I did that job, but 40 years on, I'm grateful for everything I learned doing it. The rules in the UK aren't the same, but the principles are universal.