The previous Chancellor, George Osborne, reduced the annual and lifetime allowances for pension savings and at the same time increased the allowance for Individual Savings Accounts (‘ISAs’). This led many to assume that he intended that in the long term ISAs should become the principal means of saving for retirement.
This would have reduced the enormous cost to the Treasury of providing tax relief at taxpayers’ highest rates on pension contributions. However, in his November 2017 Budget, contrary to expectations, the current Chancellor, Philip Hammond, made no changes to the current regime. “The dog that didn’t bark”.
This leads to the question of whether ISAs are achieving their objective.
The funds in which ISA and pension contributions are invested enjoy similar tax advantages, but whereas all but 25% of personal pension withdrawals are taxable, withdrawals from ISAs are completely tax-free. This makes ISAs a preferred first source of retirement income.
It appears, however, that in the government’s zeal to promote ISAs they have muddied the water by creating too many variants and have in consequence succeeded in confusing savers.
Apart from the standard ISA, which permits £20,000 to be invested either in cash or investment funds, help-to-buy, innovative finance and lifetime ISAs are now available and there has been talk of a workplace ISA.
As far as concerns help-to-buy ISAs, the government had expected to pay out bonuses of £700 million up to the end of 2018, but the actual figure to date is only £77 million. This may have been due in part to the introduction of the Lifetime ISA, which similarly provides benefits to home buyers. But Lifetime ISAs have also fallen short of expectations, where forecasts of the bonus payments, which had been flagged as a key attraction of these ISAs, have been reduced by 40%.
Meanwhile, innovative finance ISAs have proved to be a dead duck, with investment levels at a mere 2.5% of what had been predicted.
Overall, the number of ISA accounts has declined from 14.6 million in 2012/13 to 11 Million in 2016/17. Most of these accounts are cash ISAs, whose attraction has been undermined by another government own-goal, namely the new £1,000 tax-free personal savings allowance for interest received from deposit accounts.
By contrast, savings into personal pensions increased from £20.9 billion in 2014/15 to £24.3 billion in 2015/16. This may of course have been prompted by fears of further reductions in pension allowances and these are still possible. For the time being, however, pensions are clearly the preferred medium for retirement savings, though for those who can afford ISAs as well, these are a ‘must’.
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The value of investments can go down in value as well as up, so you could get back less than you invest. It is, therefore, recommended that you seek full, personal advice in respect of your needs where all appropriate risks will be explained.