How pension raids make ISAs more appealing
PUBLISHED: 10:17 26 October 2018 | UPDATED: 10:17 26 October 2018
Raiding pensions provide Chancellors with easy money, says Peter Sharkey, but it's much more difficult for them to pilfer from your ISA.
Whenever the Chancellor of the Exchequer refers to a particular government benefit or existing service as “eye-wateringly expensive”, you can be sure he’s intent on removing, or at best reducing it in double-quick time.
Prior to next Monday’s Budget, Phillip Hammond has made frequent reference to what he considers the exorbitant cost of pension tax relief, an observation which suggests he’s planning to cut the current annual pension contribution allowance which has been in place since 2014-15.
Worryingly, pensions have become as easy a target for cash-strapped Chancellors as booze and fags.
Ordinarily, Chancellors use their Budget speeches to deliver a tenuous case for slapping additional duty on cigarettes and alcohol in the certain knowledge that their actions will not deter one person from consuming less of either. The advantages of this strategy are twofold: it raises lots of money for the Treasury in a short period of time and second, the Chancellor can do the same the following year.
Pensions are increasingly seen in a similar light, which explains why annual contribution allowances were reduced more than six-fold between 2011-2014.
Perhaps the most obvious advantage of a having a pension is the tax relief it attracts. Open a SIPP, for instance, and all personal contributions you make receive basic rate tax relief. In other words, if you save say, £150 a month, or £1,800 annually, your pension is topped up by a further £450, courtesy of HMRC. Your total contribution is limited to the amount you earn and is currently capped at £40,000 a year.
Higher rate taxpayers can claim additional tax relief when filing their tax returns. For example, someone contributing £6,000 to their pension pot would have it topped up to the tune of £1,500 by HMRC and receive a further rebate of £1,500. It follows that the higher rate taxpayer would have a pension worth £9,000 having made a total contribution of £6,000. In our envy-driven world, this arrangement appears grossly unfair and makes any pension raid the Chancellor may plan considerably more acceptable to the electorate.
Tinkering with pensions may be relied upon to yield a reliable source of Treasury revenue, but if the actions of successive Chancellors begins to deter people from saving money, the future impact of a burgeoning pension ‘time-bomb’ expands to dangerous levels.
Earlier this year, a report by the government’s actuary department (GAD) concluded that the date at which the money set aside in the National Insurance Fund to pay state pensions is scheduled to run out, “sometime around 2032”. This might sound a long way off, but as I write (yesterday) there is, in fact, just 14 years, five months and 10 days remaining until the final day of the 2032-33 tax year when the fund is officially expected to run dry.
You can go online and check the state pension countdown on an innovative Pension Clock, where further down the same page, you may calculate how much you could save before you retire.
A spokeswoman for Moneymapp.com explained: “Prior to 2032-33, the government could raise taxes or inject billions of pounds into the NI fund every year to provide for future retirees. However, we also expect the state retirement age to continue edging higher and higher, and anticipate it being close to age 75 by the middle of the century. This is why the Moneymapp Pension Clock assumes we’ll all have to save more and for longer.”
This simple idea of displaying a countdown anyone can check is effectively underpinned with the starkest of warnings regarding the nation’s likely policy towards its future retirement age.
However, tinkering with pension contributions, levels of tax relief and a hundred other sources of easy Treasury money looks set to continue.
Fortunately, there is an alternative.
First introduced as Personal Equity Plans (PEPs) in 1987, Individual Savings Accounts (ISAs), born 12 years later, have become integral to many savers’ longer-term plans. Around 10 million accounts are opened every year, not least because successive Chancellors have actively encouraged them, steadily raising the level of permitted contributions.
Back in 1999, the annual ISA allowance was £7,200; today, it’s £20,000 and because the allowance is personal, couples can save up to £40,000 between them.
As interest rates have remained depressed, so stocks and shares ISAs have become increasingly popular. And with good reason. Unlike a pension, there’s no income tax to pay on money withdrawn from an ISA, while all growth that takes place within the ISA ‘wrapper’ is also free of capital gains tax.
Whomever follows Mr Hammond into Number 11 will, at some point, examine how to raise money by tinkering with pensions. By opening an ISA, however, readers can avoid being pickpocketed by the State.
THE WEEK IN NUMBERS
John Lewis has revealed that 70in television sets are the ‘new normal’ after sales of super-sized screens soared in response to demand for wider screens on which to watch the World Cup. The retailer reported that sales of 60in screens rose by 249pc and 80in models by 200pc.
According to Action on Salt, a pressure group, the average veggie burger contains 18.6pc more salt than a meat one. The group found that some vegetarian sausages are just as salty as the saltiest meat sausages.
MoD figures show that 18,000 members of the Armed Forces are clinically obese. A further 30,000 are considered to be merely overweight. We didn’t know there were that many Armed Forces personnel left.
More than 9,000 hybrid cars sold within 10 days earlier this month as drivers took advantage of a government-backed discount designed to encourage people to swap diesel and petrol vehicles for ‘greener’ alternatives.
For further financial advice, check out Peter Sharkey’s regular column, The Week In Numbers.