ISAs are simple. Once the money is in there is no further tax to pay on it. There are no forms to fill or tax to reclaim. You can also withdraw your money whenever you like without paying any further tax.
Pensions just don’t come close. The real problem is uncertainty Any government can arbitrarily change the rules and move goalposts making many of the positives negative. Paying into a pension doesn’t avoid paying tax on your contributions, you just defer the day. When you take income from your pension, through either drawdown or an annuity you will be taxed on the income will be taxed on the income. At present you can take a pension once you reach 55. There are no guarantees the age will not be raised again as it was from 50 to 55.
Currently you can take up to 25% of your pension pot as a tax-free lump sum – a great incentive, especially as you approach 55. But will this still be possible in 5 or 10 years? No one knows. Politicians are already giving consideration to limiting the amoun, perhaps capping it at £36,000.
Then there is the tax relief on contributions, again under review. Pension contribution tax relief deprives the treasury of around £35bn a year. It is suggesting that relief could be limited to 30% rather than the highest 40% as currently.
Finally, you are compelled to buy an annuity or drawdown. In most cases you would need to survive for 20 years just to get your pension pot repaid to you. Not surprisingly, annuity providers make huge profits on pension annuities. Standard Life for example has disclosed their profit margin is 18.6%. This is in addition to the fees charged over the years you build up your pension, taking a large slice of the growth in the form of their annual charges.
ISAs may not be 100% safe from a raid by the taxman. But as around 23 million people have one and will protest at any attempt to confiscate any of it, they are a lot safer than pension.
Ask anyone that saved into an Equitable Life pension!
