Updated 03 September 2020
We are in the midst of a savings revolution. In a few short years, both ISAs and pensions have been transformed beyond recognition – and more change may be yet to come. Stuart Dewin of Questa Chartered peers into the future to explore the latest options for savers.
Two years ago George Osborne announced that pensions were changing. This heralded the coming of pension freedom, but it’s widely believed that the changes are not over yet. With every Budget there comes another new announcement about pensions, ISAs or both, and a bigger picture is starting to emerge: a growing emphasis on tax-efficient saving and planning for the future.
These ongoing changes will be most felt by anyone now aged between 18 and 40. But what do they all mean, and how can you use them to your advantage?
The guessing game: what’s yet to come?
Proposed changes to pension tax relief didn’t materialise in the recent Budget – but these may only have been temporarily shelved. In future the current system (based on a person’s income tax band) may be replaced by a flat rate of tax relief. This would penalise high earners but save the Government millions, and also motivate those on more modest salaries to increase their pension contributions.
There has also been more radical talk of replacing the current system entirely with a ‘pension ISA’, where contributions are not granted tax relief, but all withdrawals are tax free. The introduction of the Lifetime ISA (see below) has been seen by some as a step towards this. Meanwhile the ISA allowance has shot up, from £6,000 just a few years ago to £20,000 by 2017/18.
The trend seems to be a gradual blurring of the line between pensions and ISAs, as the Government encourages mainstream earners to save more and be less reliant on the state. Two goals stand out above all: getting on the property ladder, and saving for retirement.
With all these recent developments on the ISA front, now is an ideal time to take a step back and look at the various different types and how they can be used.
So many ISAs – what do they all mean?
Cash ISA / Stocks & Shares ISA
Home or retirement (or both)?
With house prices so high, some young people may feel they have to choose between saving for a home and saving for retirement. For many, a home must seem like the most pressing priority.
The Lifetime ISA will make it possible in theory to do both at once, since those who use it to buy a home can then start to fill it up again for their retirement. At the moment, the Lifetime ISA seems like a useful add-on to the traditional pension, rather than a replacement for it. Whether it is the first step on the road to replacing pensions with ISAs, remains to be seen.
However we choose to do it, saving for the future has become more important than ever. House prices are at unprecedented levels, and unlike previous generations we can’t rely on the state pension to meet the cost of living in retirement. Plus, of course, we all have our ‘bucket list’ – so hopefully some of those savings can go towards achieving some unforgettable experiences. We just have to remember to save – because no-one can foresee the future.
Stuart Dewin is a Director & Chartered Financial Planner with Questa Chartered. Working closely with solicitors and accountants, he provides comprehensive financial planning on a wide range of investments. Stuart is a Fellow of the Chartered Insurance Institute, a certified Financial Planner with the Institute of Financial Planning, and an affiliate of the Society of Trust and Estate Practitioners. For more information about Questa Chartered, go here.