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Merger in mind

Should the Isa and pension regimes be merged to provide a single, long-term savings vehicle?

Ken Wrench, Chief executive London and Colonial
Ken Wrench, Chief executive London and Colonial

There is an inherent danger in the debate around Isas and pensions being merged in retirement legislation. They are two very different types of saving vehicle and should be treated as such because they have different tax treatments and there is a reason for this.

Isas are designed to encourage long-term saving. Since Isa savings effectively translate into investment and so directly or indirectly benefit the economy, they attract tax incentives from Government.

Pensions are designed to provide an income in retirement and, in effect, are deferred pay – people give up a proportion of their salary through the years to ensure they have an income after they stop work. A focus on that objective is more important than ever as people are living longer and state provision is becoming increasingly expensive.

The big difference between ’We could damage incentives to provide inc-ome for retire-ment. Isas may resonate more with those under 35 but they can be plundered’the two savings concepts, of course, is that Isa money is accessible to the saver and pensions saving cannot be touched until retirement.

The danger we face in reviewing and reforming this area of savings is that we could damage the incentives to provide income for retirement. Isas may resonate more with those under 35 but they can be plundered.

’We could damage incentives to provide income for retirement. Isas may resonate more with those under 35 but they can be plundered’

We need to reset the idea of pensions with the public and provide greater incentive to put money away for retirement that cannot be raided and, therefore, will be there to provide for the increased longevity in society. To try to merge the two savings con-cepts and to retain the tax relief on input that is currently allowed on pensions will require complicated rules and regulations.

The current debate is suggesting that retirees can draw income from their pension assessed to a minimum level and then they have the freedom to do what they like with the rest of their pension pot.

Sooner or later, the Treasury will look at it and consider perhaps that they should not be giving these incentives. In fact, we are seeing that already in respect of tax relief for higher-rate earners.

As soon as you start to merge the concepts of savings and income after work and allowing money to be taken out of the pension pot, you start to undermine the reasons the tax relief was given in the first place.

George-Ladds, Head of investment and pension research Fair Investment
George-Ladds, Head of investment and pension research Fair Investment

We should all be saving money for our retirement but many of us are still not. Ask any young person about saving for a pension and their eyes will glaze over.

There are a number of reasons for this – young people can’t see the benefits of saving for something so far off into the future and think it is irrelevant to them, many don’t understand pensions or think they are too complicated and others may think they can’t afford to give any significant amount of their salary up in order to pay into pension. In reality, young people have other priorities.

But it is important to try and encourage people to understand that saving for retirement is vital if they are to ensure they don’t end up having an impoverished standard of living in their old age and one way of doing that is showing that there are other, simpler, flexible and relevant options.

Just because you have to save for your retirement does not mean ’If you get people thinking about pensions early, they will join employers with better schemes paying more money into their pension’you have to do it through a pension – Isas can provide a good alternative and a great way to get people to start thinking about saving for retirement.

’If you get people thinking about pensions early, they will join employers with better schemes paying more money into their pension’

If you consider the maximum annual allowance is £10,200, many young people are not going to be able to save anything like that, so this is why Isas are great way to start saving. Just saving £50 a month at a young age can make a big difference and all the investments are invested in a fund that has the same tax benefits as a pension fund, so they grow in a similar way.

The big difference is in the flexibility. With an Isa, money can be taken out at any time and an income can be taken tax-free whereas with a pension, benefits cannot be taken until you are 55 and only 25 per cent can be taken as cash.

So, what does this mean in practice? Well, as an example – if you were a 65-year-old man and had £100,000 in a pension pot, currently your best annuity quotes are around £550 a month, which is then taxable. There is a school of thought that annuity rates will decline over the next few years, especially as people live longer. But with an Isa fund of £100,000 invested in a high-yield income fund paying, say, 6 per cent a year, this would provide a taxfree income of £600 a month.

If you get people thinking about pensions early, they will join employers with better schemes paying more money into their pension. They may also benefit from higher-rate tax relief so pension saving becomes more relevant to them. So I would like to see Isas blended with pensions and state pensions – this could make for an attractive proposition to encourage young people to save.

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