Bombshell Budget 2014: George Osborne gave a boost to both pensions and ISAs, but which one comes out on top?
Savers in search of accessible, tax-friendly vehicles have long hailed the ISA as the ultimate option, seeing pensions as inflexible, complex and stuck in the dark ages.
The March 2014 Budget has done much to reinvigorate pensions, freeing them from the constraints of annuities and making it easier for retirees to access their pots.
ISAs too enjoyed a shake-up in the Chancellor’s Budget, with savers afforded more generous tax free savings limits while the obligation to split funds between cash and stocks and shares was abolished.
Questions remain as to whether ISAs or pensions are best
All this leads one to conclude that long-term savers were the ultimate Budget winners but questions remain as to whether ISAs or pensions are best.
Looking solely at the numbers, pension saving proves the clear winner.
Research from Hargreaves Lansdown shows a higher rate tax payer with a £15,000 investment paying 6% over 25 years is £23,150 better off investing in a pension than choosing an ISA. In fact all but the basic rate taxpayer who draws their whole pension as a lump sum is better off saving into a pension.
Pensions win the pure numbers game
Hargreaves Lansdown’s head of corporate research, Laith Khalaf, says: “Pensions win the pure numbers game, which isn’t surprising given the head start they get from up-front tax relief, and the fact 25% can be drawn as tax-free cash.”
Pensions also enjoy more flexibility from April next year. Retirees no longer have to buy an annuity and can access their entire pot should they wish.
David Penny, managing director at IFA Invest Southwest, says: “Potential pension contributors of working age can now look at the decisions they will be offered at retirement and realise that they are attractive, flexible and reasonable.”
But pensions still lag the ISA in terms of overall flexibility
Insurers have already forecast a fall in the total annuities market from its current £12bn per annum to just £4.4bn within the space of just a year.
But pensions still lag the ISA in terms of overall flexibility. Savers can plunder their ISA at any time whereas pensions can only be cashed in at age 55, and there is every chance the government will push the retirement age as high as 57 by 2028.
Consequently the ISA market is expected to soar in popularity. ONS figures showed ISAs to be worth a whopping £443bn in 2012/13, of which £76bn is owned by the over 65s.
Spence Johnson, which provides research on the insurance industry, says this segment of the retirement income will now ‘enjoy even faster growth’.
Essentially both pensions and ISAs have plenty to offer the savvy investor, but making the most appropriate allocations depends on circumstance and financial goals.
Prudent savers should look to make the most of both tax shelters
Khalaf says: “Prudent savers should look to make the most of both tax shelters, investing in an ISA for medium term goals like paying for school and university fees, while using a pension to save for retirement.”
The trick is to seek advice. The government has made provisions for face to face advice for retirees but it may be worth seeking independent support long before retirement to make the best of the newly flexible long-term savings market.