Axa Wealth has warned against Isa-like pensions, stating that tax reliefs at the beginning are critical to helping people build up a bigger pension pot and incentivises them to think longer term.
Following the summer Budget, the Treasury published a green paper which proposed that pensions contributions could no longer be tax free, but withdrawals would be.
While David Thompson, managing director of business development and proposition at Axa Wealth, believes that much needs to be done to get people thinking about their finances over the longer term, moving to an Isa-style ‘taxable-exempt-exempt’ system is not the answer.
“Isas and pensions are likely to be the first, if not only, saving and investment products most people in the UK have. Both have their place in a financial plan and their different features make them suitable for different people at different times.
“When it comes to thinking about where and how to invest, most people will start with a cash Isa. Over 75 per cent (or £61bn) of Isa savings in the UK are in cash Isas.
However, Mr Thompson said that for the medium to longer term, investing in cash is not necessarily best, even if it is popular. “While stocks and shares Isas allow for people to invest for the medium term, five to ten years for example, pensions can come into their own for long term planning.”
He pointed out that the breadth of investment choice for pensions, compared to cash Isas, gives people the opportunity to have a diversified investment strategy to drive growth and protect them against market movements, adding that the industry has seen plenty of those recently.
“The tax reliefs at the beginning are also critical to helping people build up a bigger pension pot and incentivise them to think longer term.
“Moves to simplify pensions by making them more like Isas could alter the types of investments people should be thinking about for the longer term – with a risk that people will not diversify their investment choice.”
Mr Thompson said that while pensions still have some way to go in being better understood, with advisers being crucial to helping savers make the most of them, “from an investment perspective are Isa-like pensions such a good idea? I don’t think so.”
At the end of August, Royal London’s chief executive Phil Loney warned against taxing pensions in the same way as Isas, stating it would pose considerable risk to the government’s aim of creating a savings culture in the UK.
Last week, the Tax Incentivised Savings Association said it was also against moving towards a TEE system. Charles McCready, programme director for The Savings and Investment Policy project said that the TEE system makes pension saving more expensive for both employees and employers, acting as a disincentive.
He said that this system would remove the natural mechanism that stops people spending their pension pots too quickly after retiring, pointing to the Australian example, where many have run out of money within 10 years.