Difficult Choices – ISA or Pension Savings?
Reporting on savings trends in the 2010/2011 tax year, the Office for National Statistics (ONS) said savers put £14.3bn into personal pensions in that tax year, compared with £15.8bn into stocks and shares ISAs. This compares with the £12.5bn invested in stocks and shares ISAs and £14.4bn in personal pensions in the previous tax year. It was the first time this had happened since 2001/2002.
Comments from across the pensions and savings sector suggest that there are a number of factors contributing to the imbalance. Most frequently mentioned is that ISAs are more simple and understandable to a saver, when pension saving appears to be subject to far more complex rules and arrangements.
Choosing and arranging a stocks and shares ISA for their savings may be seen to be much easier by the saver and not so much ‘set in stone’ as a pension savings arrangement. This latter point may be particularly significant in the light of evidence that some savers invest in ISA plans early in the tax year but may withdraw funds later in the year. This compares with pension savings which cannot be touched for years – for example not before age 55.
Savers accept the risks attached to savings when choosing stocks and shares ISA packages, where over time they are subject to the economic uncertainties of fluctuations in the stock market, the value of commodities and
general uncertainties in the worldwide economies.
With pension savings there are now the additional perceived risks of political uncertainties to prey upon savers minds. People become concerned that Government will tinker with the rules before they are able to draw on the benefits of any long-term pension savings plan.
Before the 2012 Budget there was speculation that the Chancellor would axe pension tax relief altogether for higher rate taxpayers or cut pension contribution limits. Following the Budget, top earning pension savers have at least another year to get full pension tax relief on their contributions, but this situation is not helped by the Chancellor and rumours that there might be ‘tax raids’ on higher earners in future years. Despite saying that tax relief is an important incentive for investors and encourages long-term saving, he has already effectively cut the maximum possible tax relief for the highest earners, from 50% to 45% in April 2013. Despite assurances from politicians, other potential pension savers on lower incomes may not see their long term pension savings as being assured!
If the Government wants pension saving to be successful it must sustain and guarantee a consistent set of rules and build confidence that the product will not be the target of continuous government attacks.
The evidence of ISA product purchasing is that people like simplicity and consistency and year-on-year if the economic situation changes, they are not locked in without being able to change their savings choices.
The sad experience
of many private and public sector employees over the last decade or more has been to see their own pension pots decline and in some cases disappear – together with much of the trust in providers and Government.