ISA official- ISAs are more popular than pensions

1 March 2012

pennies potNew figures from the Office for National Statistics (ONS) showed that people in the UK saved £1.5bn more in their ISAs than they put into personal pensions in the last tax year.

In 2010/11, savers put just £14.3bn into personal pensions compared with £15.8bn into stocks and shares ISAs. This turnaround hadn’t happened since 2001/02.

Experts suggest that ISAs are preferred over their pensionable associates owing to their simplicity compared with pensions. And they are much simpler. There’s no messing around with tax relief, you just put your simple, known in advance ISA contribution limit into your account and Bob’s your uncle. The limit is even handily calculated as a multiple of 12 so that you can easily divide it into monthly contribution amounts.

However, an investment of £10,640 (the current stocks and shares ISA limit) into an ISA would equate to a £13,350 investment in a pension, owing to the basic rate tax relief at source. Higher rate taxpayers could get additional relief against their tax bill.

So why would people choose to waive what is essentially free money by choosing an ISA over a pension? Well, the pension rules are more complicated, and the Government seem to be unable to stop messing with them, which is bound to be a factor in investors’ decision making. However, more likely is the rule that you cannot take any cash out of your pension until you are aged at least 55.

Billy Mackay of SIPP specialist firm AJ Bell, told the Telegraph “Economic and political uncertainty won't have helped – people concerned about tomorrow's income won't tie savings up in pensions when they are concerned that the Government will tinker with the rules before they are able to draw their pension."

And people are right to be concerned. The minimum age for withdrawing cash from a pension used to be age 50. When the Government changed the rules, it was hard cheese for those who had already put their cash in, and who’s to say this age limit won’t be increased to 60, 65 or more by the time you want your cash out?

But the Government has been making pensions even less attractive for some time. Last April, the rules were ‘simplified’ and the maximum tax relievable amount that can be paid in in any given tax year was dramatically lowered from £255,000 to £50,000. Currently, pundits are speculating that the Chancellor will scrap pension tax relief for higher rate taxpayers altogether.

So, given that State Pension age is being increased at an accelerated rate to cover the shortfall in funding, how is encouraging people away from long term saving, even if they might be saving smaller amounts into (instant access) ISAs a good idea? That’s politics for you.

TOPICS:   Government   Banking


  • Phil
    No surprise really. Your pension can lose half its value in the event of a downturn where as an ISA's a safe bet. Personally I have a mortgage so both are just a luxury for me currently...
  • MrRobin
    @Phil It depends on what funds you choose, risky or safe. Likewise, your pension can double in value in the good times whilst your ISA only goes up by 3%... I thought the government were introducing the ability to extract a portion of your money from a pension earlier than 55, but I haven't heard about this for a while.
  • Phil
    @MrRobin - Buts that's the point - the economy is rubbish at the moment. ISA's are safe. Might as well save for now and save for later - later!
  • mr d.
    I prefer to go out out!
  • Sarah K.
    "an investment of £10,640 (the current stocks and shares ISA limit) into an ISA would equate to a £13,350 investment in a pension" And taking the money out the pension would cost you 20% in tax unless your pension is so small it is below the tax threshold, which would leave you with £10,640. Taking money out the ISA is tax free giving you £10,640 as well. It's not "free money" in the pension, merely deferred tax.
  • Sam T.
    @Sarah Knight *coughs* tax free lump sum *coughs* compounding effect of interest *coughs* gross roll up on the above But thank you for your interesting comment. *coughs*
  • FaceOff
    @Sarah Knight Thanks - that is exactly what I was going to say, but not nearly so well. The tax argument is simply a case of swings & roundabouts, the argument about the investments you select is irrelevant as both options can be self-select, and all the other arguments such as flexibility, choice, freedom come out in favor of the ISA. No brainer. The only real wrong decision is to assume the government will give a toss about your old age.
  • FaceOff
    @Sam *coughs* tax at 40% (yes, i have saved a bit in my ISAs & pensions, so luck I did not out it all in a pension) *coughs* loss of capital in an annuity *coughs* nothing to leave to the kids
  • Sarah K.
    Posted by Sam Thewlis • March 1, 2012 at 7:58 pm @Sarah Knight *coughs* tax free lump sum *coughs* compounding effect of interest *coughs* gross roll up on the above But thank you for your interesting comment. *coughs* -------------------------------------------------------------------- You are right - the tax free lump sum can make the pension better than an ISA - though the awful rates on annuities from the other 75% of your investment probably wipe out that advantage. A pension can also be considerably better if you pay a lower tax rate when you retire than when you work - for example, saving enough to get to the top of the tax free allowance if you are a 20% tax payer. Your other two comments are examples of a very common mathematical error which leads many people to invest in a pension rather than an ISA. Whether you pay tax then get interest on your money (as in an ISA) or get interest on the money then pay the tax (as in a pension) makes no difference. As a very simplified example: say we have £80 to invest in a particular share fund and that fund doubles in value before we retire. £80 into an ISA. Doubling means there is £160 in the ISA. £80 net into a pension gives you £100 gross. Doubling means there is £200 when we retire and take off 20% tax means we also get £160 out of the pension.
  • The B.
    Sam, I've told you before, stop writing informative articles, you should be posting rubbish about Boots opening late.
  • james d.
    However sarah, its going to be quite common for people to be paying 40% tax later in their career and have a lower pension resulting in 20% tax. In that situation it makes a lot of sense. Also, you are not taking into account that when receiving a pension you also have a tax free allowance like when receiving a regular salary so a portion of that pension will attract no tax at all.
  • Sarah K.
    @james dewitt That's why I said "A pension can also be considerably better if you pay a lower tax rate when you retire than when you work"
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