Investors shun pensions for simplicity of ISAs
More money has been saved into stocks and shares ISAs than personal pensions for the first time in almost a decade.
Savers stashed almost £16 billion into their stocks and shares ISAs in the 2010/11 tax year, new figures from the Office for National Statistics show, compared to £14.3 billion invested into personal pensions.
It is the first time this has happened since 2001/02.
While sales of personal pensions have remained broadly flat compared to the 2009/10 tax year, ISAs have rocketed in popularity. In 2009/10 only £12.5 billion was saved into ISAs.
Billy Mackay, marketing director of pension and ISA provider AJ Bell, says the figures are a "clear endorsement of the success of ISAs, which are simple and easily understood", compared to the "dangerous complexity" of pensions.
He comments: "This is a ticking time bomb for the UK. The government needs to do everything possible to make pensions attractive and simple."
According to Mackay, tinkering to the pensions rules by each government and at nearly every Budget has meant people have lost faith in the retirement schemes.
"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," he says.
Pension savings could slump further due to the change in annual allowance for pensions, from £255,000 to £50,000, which came into effect in April 2011. This is the amount that can be contributed into a pension each year that receives tax relief. Anything above £50,000 is taxed between 20 and 50%.
The last fortnight has also seen renewed speculation that the chancellor will axe pension tax relief altogether for higher-rate taxpayers.
"Introducing further restrictions in next month's Budget would have a hugely negative impact on the confidence of pension savers," notes Mackay.
"The lesson we learn from the success of ISAs is that the public likes simple products; a consistent set of rules; and confidence that the product will not be the target of continuous government attacks. If the government wants pension saving to be successful it must embrace those principles."
This article was written for our sister website Money Observer
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.