The clamour from some quarters in the industry and government to pitch Isas as an alternative to pensions when saving for retirement can at best be described as naïve and at worst irresponsible.
When it comes to tax- incentivised saving schemes, personal pensions - in particular Sipps - can often be portrayed as the ugly sister and somehow ‘broken’. Issues such as failed esoteric investments, pension liberation and ongoing legislative changes, the reduction in lifetime allowance have all contributed to a sense of pensions somehow failing.
Since their ‘birth’ in 1999, Isas, on the other hand, have been blessed with their Cinderella status - helped in no small part by not being at the mercy of election cycles and a revolving door of ministers charged with their care.
Without doubt the pension system can be improved. Leaving it be for longer than any one term in government would be a good start - for a long-term investment it seems to bear the brunt of short-sighted political ‘fixes’.
It nonetheless remains a key tool in the retirement planning kit. True, saving for retirement no longer begins and ends with a pension. People can take advantage of Isa allowance, capital gains tax allowance and their pension saving - both to grow funds for income in retirement and tax-efficiently manage drawing an income from the funds once retired.
How best to support saving for retirement and how income is taken throughout retirement is a complex issue - not just for savers but for the Exchequer, too.
Striking the right balance of tax wrappers and where to draw income from to get the most from savings in all their forms could make all the difference when realising your ambition of a comfortable retirement and being able to leave money to dependents.
And here’s why.
Don’t pay now, pay later - the benefits of deferred taxation
The cost to the Exchequer of providing pension tax relief in 2011/12 was estimated to be £34.9bn, around 20 times higher than the cost of funding the tax benefits available on Isas. Although this is perceived to add fuel to the fire for those who wish to see pension contributions lose higher rate tax relief, it ignores the potential cost to the government in the longer term if individuals are not incentivised to save for retirement; not only with respect to future tax take, but also the cost of care for those who have made little or no provision.
The impact of higher rate relief on contributions, with regard to the overall return on savings can be quite substantial. For example, Table 1 shows the value of a person’s pension fund at the end of 40 years. For every £100 of net income saved monthly, the gross amount saved per month will be £166.67 for a higher rate taxpayer. The rate of growth is assumed to be
5 per cent gross per annum and is calculated on a compound basis, capitalised annually.
