ISA official- ISAs are more popular than pensions
New 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.