When considering a decision, it’s important that we compare ‘apples with apples’ in order to avoid comparing apples with pears.
In the past, ISAs and Pensions were quite different ‘tax wrappers’ and trying to compare them was indeed like comparing apples and pears.
Simplistically, an ISA is used to accumulate funds on which tax has previously been paid whereas pensions are used to defer income (and any resulting tax) until later.
Whilst ISAs could be used to provide both capital and income, pensions were most commonly used for creating a lifetime income in retirement. Add to that their very different tax positions and this results in an apparently simple question of ‘what is best an ISA or a Pension’ needing a very long answer – and ultimately the conclusion is often ‘you won’t know until you get there!’.
Things are about to change, however, and from April the benefits both ISAs and Pensions can provide are essentially the same – both will be able to provide income and both can be accessed for capital – and therefore they are now much more like each other.
However, it would appear that the media and other commentators have not picked up on this yet.
Let’s look at a possible ISA lifespan: whilst working someone funds it whilst they can afford to – perhaps taking some risk in order to hopefully achieve investment growth – and then perhaps once they retire, they reduce the risk and start to draw an income from it (perhaps with the odd lump sum to pay for a cruise or something similar!). How long that income will be paid will depend on his the fund grows and the income levels taken.
Now let’s consider pensions: under the new rules, whilst working someone funds it whilst they can afford to – perhaps taking some risk in order to hopefully achieve investment growth – and then perhaps once they retire, they reduce the risk and start to draw an income from it (perhaps with the odd lump sum to pay for a cruise or something similar!). How long that income will be paid will depend on his the fund grows and the income levels taken.
Spot the difference – nope – there isn’t any – and therefore whilst there is a tendency to worry about peoples pensions running out under the new rules, I’ve never read an article which discussed the risk of ISAs running out!
The key issue is that both ISAs and Pensions enable monies to be set aside for the future – ISAs are funded from taxed money, Pensions are funded from tax deferred monies (and therefore taxed on the output) – both equally carry the risk of running out.
If the big picture focussed on the importance of planning for income for the rest of someone’s life, they are more likely to become engaged with the strategies needed than if they read about the ‘risks’ and ‘dangers’ of their pensions running out. (….this article was written a little while back however an example of this ‘fear’ can be seen here – http://bbc.in/1AVSJUT)
Over the next few months the way individuals can plan and fund for their retirement will change dramatically given that the manner in which funds can be dawn will become much more flexible and, for many, potentially more tax effective –therefore the hope is that this will result in individuals taking a much closer look at their longer term needs and how they can fund them rather than worrying about doom, gloom and scare stories.
Let’s therefore hope that these changes engage people to plan for their retirement rather than give them even more to worry about!