ISAs/Lifetime ISAs/SIPPs ARE NOT INVESTMENTS!!!!
Discussion
I posted this on another thread but it is such a recurring issue I am putting it here as a reference point if required:
LISAs get a 25% uplift from HMRC (after a year) on net (after tax) contributions. You need to be older than 18 but below 40 to invest and cannot make additional contributions from 50. You have to wait until you are 60 to start drawing anything out or suffer a penalty of 25% of any amount withdrawn (note: 25% of what is taken out is more than the 25% added - unless you have made a loss. For example, £4,000 invested would be worth £5,000 after the 25% uplift but a 25% penalty on a £5,000 withdrawal is £1,250 meaning you get back £3,750 and lose £250 of your cash). Investment limit is £4,000 a year. Withdrawals are tax free (with the exception of the pre-60 rule above). LISAs have no lifetime limit (currently).
SIPPs also get 25% uplift from HMRC on net contributions - but pretty much immediately (so it is working for longer for you). Higher rate taxpayers can also get further 25% (of the net contribution) back from HMRC on their tax return. You can be any age to invest and make additional contributions. You have to wait until you are 10 years before the state pension age (so currently 55) to make withdrawals (though the state pension age - and therefore this - is increasing). Investment limits with the HMRC contribution(s) is restricted to your relevant earnings (although children and non-tax payers can invest, or have invested on their behalf, £3,600 a year gross with no relevant earnings) and is currently capped at £40,000 a year. 25% can be withdrawn tax free and the balance is taxed at your marginal rate in any given tax year. SIPPs also allow investment into physical assets (commercial property/land/gold/etc.) that LISAs/ISAs do not allow. SIPPs have a lifetime limit of £1m (currently) and this includes any investment growth (not just contributions) so is pretty bloody shameless if you ask me.
ISAs get no uplift from HMRC. You can be any age to invest and make additional contributions. You can invest £20,000 a year (minus anything you - not HMRC - have placed into your LISA, so £16,000 if you have put £4,000 into a LISA). You can make tax free withdrawals whenever you like. ISAs have no lifetime limit (currently).
All income and growth in any of these is free of any personal tax. What must always be remembered though is;
NONE OF THE ABOVE ARE ACTUALLY INVESTMENTS...! HEY ARE TAX ALLOWANCES/WRAPPERS!
What you invest in inside of your chosen allowance/wrapper is the only thing that effects the investment returns you are going to get (well, that and charges). The LISA/ISA/SIPP wrappers/allowances have no impact on the performance/returns you will/will not get from the investments held within them (other than ensuring no personal income or capital tax gains are ever due - which is pretty incredible in itself).
So... Use the best wrapper for your requirements and then pick the investments you want to hold within them.
LISAs get a 25% uplift from HMRC (after a year) on net (after tax) contributions. You need to be older than 18 but below 40 to invest and cannot make additional contributions from 50. You have to wait until you are 60 to start drawing anything out or suffer a penalty of 25% of any amount withdrawn (note: 25% of what is taken out is more than the 25% added - unless you have made a loss. For example, £4,000 invested would be worth £5,000 after the 25% uplift but a 25% penalty on a £5,000 withdrawal is £1,250 meaning you get back £3,750 and lose £250 of your cash). Investment limit is £4,000 a year. Withdrawals are tax free (with the exception of the pre-60 rule above). LISAs have no lifetime limit (currently).
SIPPs also get 25% uplift from HMRC on net contributions - but pretty much immediately (so it is working for longer for you). Higher rate taxpayers can also get further 25% (of the net contribution) back from HMRC on their tax return. You can be any age to invest and make additional contributions. You have to wait until you are 10 years before the state pension age (so currently 55) to make withdrawals (though the state pension age - and therefore this - is increasing). Investment limits with the HMRC contribution(s) is restricted to your relevant earnings (although children and non-tax payers can invest, or have invested on their behalf, £3,600 a year gross with no relevant earnings) and is currently capped at £40,000 a year. 25% can be withdrawn tax free and the balance is taxed at your marginal rate in any given tax year. SIPPs also allow investment into physical assets (commercial property/land/gold/etc.) that LISAs/ISAs do not allow. SIPPs have a lifetime limit of £1m (currently) and this includes any investment growth (not just contributions) so is pretty bloody shameless if you ask me.
ISAs get no uplift from HMRC. You can be any age to invest and make additional contributions. You can invest £20,000 a year (minus anything you - not HMRC - have placed into your LISA, so £16,000 if you have put £4,000 into a LISA). You can make tax free withdrawals whenever you like. ISAs have no lifetime limit (currently).
All income and growth in any of these is free of any personal tax. What must always be remembered though is;
NONE OF THE ABOVE ARE ACTUALLY INVESTMENTS...! HEY ARE TAX ALLOWANCES/WRAPPERS!
What you invest in inside of your chosen allowance/wrapper is the only thing that effects the investment returns you are going to get (well, that and charges). The LISA/ISA/SIPP wrappers/allowances have no impact on the performance/returns you will/will not get from the investments held within them (other than ensuring no personal income or capital tax gains are ever due - which is pretty incredible in itself).
So... Use the best wrapper for your requirements and then pick the investments you want to hold within them.
Basic rate relief at source on any personal pension other than a LISA would be 20%, not 25%. If you pay tax at a higher rate than that you'd be claiming it back at 20 or 25% on top, depending on the rate you pay.
https://www.gov.uk/tax-on-your-private-pension/pen...
https://www.gov.uk/tax-on-your-private-pension/pen...
Croutons said:
Basic rate relief at source on any personal pension other than a LISA would be 20%, not 25%. If you pay tax at a higher rate than that you'd be claiming it back at 20 or 25% on top, depending on the rate you pay.
https://www.gov.uk/tax-on-your-private-pension/pen...
I would suggest you read that report more carefully. https://www.gov.uk/tax-on-your-private-pension/pen...
£800 x 25% = £200. So whilst you are getting 20% tax relief the figure you multiply the net contribution to arrive at the amount of tax relief is 25%.
I explained it in this way to show the uplift on a LISA is in fact identical to that on a pension as some people believe as you have said.
The calculation is the same for the higher rate claim. For the highest rate (45%) you multiply the net contribution by 31.25% (i.e. £800 x 31.25% = £250).
- Edited to be more constructive and friendly.
Edited by JulianPH on Monday 17th April 08:33
Gassing Station | Finance | Top of Page | What's New | My Stuff