I wrote earlier this week that it seemed to me to be a good idea to concentrate on building up Isa savings over pension savings. One of the reasons I often give for this view is political risk.
Governments endlessly fiddle with pensions. They cut allowances, change the tax breaks at will, and, more often than most people notice, annex what you consider to be private funds for public use. What easier way to improve public finances than to announce that, henceforth, all pension assets are state assets, or that they are at least to be used to buy public debt?
Look at it like that and it seems to me that you shouldn’t save much more than the amount needed for a very basic income into a pension. But here’s the question people keep asking me: why do I think that pensions are more at risk from government interference/theft than Isas – surely as they are both wrappers set up under the UK tax regime, they are equally at risk?
I don’t think they are. First, look at how the tax treatment works on them. The money you put into a pension goes in tax free – no tax has been paid on it at all. As far as the government is concerned, that makes it fair game – what they have given they can easily take away. In the minds of HMRC, they still ‘own’ the tax-relieved portion of your fund; its just a matter of figuring out how to get it back without you noticing.
There is also a lack of immediacy about pensions that means that there is less complaint about changes to them. Look how few people made a fuss about changes to dividend tax treatment under Gordon Brown and how little outcry there has been about the shifting of annual and lifetime allowances under George Osborne. Most people don’t understand pensions – and it’s a lot easier to take away benefits people aren’t fully aware that they have than those they already cherish.
Isas are seen entirely differently. The tax on any money that goes into an Isa has already been paid. It goes in net of tax. That means that neither the Isa holder nor the government has quite the same sense that the state has given anything, or that anything is owed by investor to government. Isas are also very simple and very well understood (you put your money in a wrapper, they can’t get at it, and that’s that).
What’s more, over 20 million Britons have them already. Who’d be fool enough to mess with something that popular?
Pensions aren’t as easy to have a go at as they used to be (today’s ageing population is pretty clued up), but attacking them has still got to be a lot easier than having a go at Isas.
You can read previous posts on this endlessly fascinating subject (to me anyway) here and here.