Pension, LISA or stocks and shares ISA?

[NeverHomeAlone]

I'm only really starting to grapple properly with longterm finances now that I'm in my 30's, so apologies if I ask some silly questions.

I have been working or claiming carers allowance since my late teens so I know I'm on track for the state pension. I have been auto-enrolled in my works pension scheme so have a small amount in there too. I am a basic rate taxpayer.

I am keen to really start putting more away for retirement. Would I be better increasing my pension contributions, putting the money in a LISA or in a stocks and shares ISA or maybe a combination of the three?

Say if I had a spare £100 one month, would be best putting the full £100 in my pension? Or maybe the LISA? Or go for a 60/20/20 split?

I hope that makes sense.

Any advice very much appreciated.

Pension vs ISA.

Pension is likely to win mathematically, though we do not know the future, so we do not know how a pension will be taxed in the future. Even so, due to employer contribution and tax relief, with a long time period to grow, the pension mathematically wins. See the video.

You may not be able to access a pension for 30+ years. You may not be able to access a Lifetime ISA (LISA) for 20+ years without penalty. These investment wrappers are for long term money.

Some money you may want to access sooner, so the ISA is useful for that.

Thanks for the link, very helpful.

Depends what you earn
Over 100k it's pension every time.

My ISAs are doing better than my pension funds but you can also self invest.

My DHs pension has increased by almost 50% since lockdown. Mine is doing about 6-8%

Depends on your tax band and how financially literate you are.
I pay more into my SS ISA and only when I’ve maxed that out, do I contribute more to my SIPP. LISA would be if I’ve maxed out annual pension contributions too but tbh I’ve not got that far ever.
The reason why is because I am a higher rate tax payer and would pay that tax when I withdraw my pension and who knows what the tax will be like at that stage as I’m also in my 30s.
SS ISA I have Full control over, withdraw whenever I like (although I’m disciplined to never have done so previously), and I pick my own stocks which I regularly can achieve over 20% annual return as a minimum (far more in recent years). The money is also all mine with no worries that the government could raid it in the future

I work p/t and earn about £24k.

Can I ask why your DH's pension has increased so much compared to yours? Just trying to understand it all.

OP it depends what the pension is invested in. If you leave it to a broker who chooses in your behalf (majority of pensions), they may pick poorly performing stocks so your return will be much lower. Hence why it’s always best to educate yourself first about stocks and choose your own wisely so you have full control.

You say you're auto enrolled in your works pension, are you contributing the maximum that they match? If not do that first as its free cash

It is just a basic pension, I work for a small company. They use nest and contribute the minimum 3%.

I am in the basic tax band and not very financially literate, although I am trying to improve on that.

@NeverHomeAlone

I work p/t and earn about £24k.

Can I ask why your DH's pension has increased so much compared to yours? Just trying to understand it all.

Mine is just with Aviva in some fund via my employer. It comes out of salary and no effort on my part. Its therefore in a spread of lower and higher risk things.

My husband has a SIPP, which is a self invested pension he picks exactly what it goes into. He is heavily invested into shares in tech, biotech, pharma companies all of which went a bit mad in the last year.
He actively manages it i am too lazy

I see. Thank you for explaining.

Be careful because a Lisa, and I assume an ISA, can be considered an asset if you apply for benefits at any point. A pension is not counted and would be protected. As a basic rate tax payer you get your tax back as you pay into a pension, so it would lower your net wage. If you put the money into an ISA you will have paid tax as you receive your salary but you will not be taxed when the ISA pays out. Clear as mud? As it stands you're probably better off putting more money into the pension.

Someone upthread posted a link to a Pete Matthews Meaningful Money video. I highly recommend listening/watching his season 14 'New Accumulators' to help with your decision making. The episodes are available on his YouTube channel or as a podcast.

If you do decide to put more money into your pension, ask your employer if you can salary sacrifice additional contributions as these are then paid before tax, NI and student loan repayments. In my case £100 paid into my pension through salary sacrifice results in a reduction of only about £60 to my take home pay.

Thanks again. I really do appreciate all the input.

Nest Pensions only has a small collection of funds in which you can invest. If you want more choice then once you have got your maximum employer contribution (sounds like you have with them doing 3% and you doing 5%) then you can open a low cost SIPP and use that to get access to more fund choices and lower fees. Nest Pensions takes quite a chunk off payments going in, including off the tax relief received as their fee. Their ongoing fee though is 0.3% which is good.

Personally I have Nest from an employer but I personally contribute to a SIPP with Vanguard.

Ethical Investments for example with Ethex are my choice, with projected return of 6%.

So it would be better to open a separate pension rather than ask my employer to increase my contributions with nest?

@NeverHomeAlone Due to your employer using Nest Pensions, the initial contribution fee that Nest takes currently means that more of your money would be going in to pension if you have a low cost SIPP with say Vanguard, less towards fees.

Nest takes 1.8% of money going in, as their fee. It is a one off payment. Then there is a 0.3% annual fee.
Vanguard if you use a Lifestrategy fund will take around 0.37% annual fee. So more of your money going in is going in to investments, so has more opportunity to grow.

Does Nest become cheaper over the long term? I don't know, it might. Would love to have someone do the math to calculate that, given the lost opportunity cost.

However whilst fees are important, it is not as important as you actually putting money in. So if you do not want to open a SIPP then don't, just make additional payments to Nest (they take debit card, or you can setup repeating payments). If you setup repeating payments, review that every 3 months and try to nudge up the amount.

Yep definitely better to set up a SIPP
Both AJ Bell and Vanguard are nice and easy to use.

Thank you all. Such a helpful bunch!