It is not so long ago that many commentators were talking about the Isa taking over from a traditional pension as the preferred savings vehicle for financing retirement. However, the raft of announcements on the new pension freedoms is introducing a level of flexibility that could reverse this trend.
Isas are incredibly popular and have become the savings success story of modern times. The tax-free nature of the product, aligned with simplicity of operation, have made Isas a natural home for short and medium-term saving. Equally as important is the ability to easily access the money when needed – although many choose to keep their cash within the Isa wrapper.
For those looking for a tax-efficient way to manage their longer-term investments, the stocks & shares Isa has established itself as an ideal choice. Flexibility in the form of the ability to move investments or cash in if needed is again of paramount importance. At the end of the 2014 tax year Isas totalled £469.6bn in value, of which approximately 51 per cent is held in the stocks & shares component.
At the same time as Isas were growing in popularity, so pensions seemed to be in decline. Negative press comment, the closure of defined benefit schemes – indeed, unwillingness from some employers to offer any form of pension scheme - was increasingly pushing people to take personal responsibility for their financial wellbeing in retirement, or leave it to chance.
Those who still enjoyed employer contributions into their pension fund were questioning whether they should continue to top up with additional voluntary contributions. The crux of the issue was the inability to access these funds until retirement. Isas offered an attractive alternative, and the money belonged to the investor to access whenever they needed it.
From a tax perspective, many were also realising that an Isa could offer them a better option for their personal circumstances. It soon became commonly held that the bulk of inflows into stocks and shares Isas were from those looking to create an additional pot to supplement their income in retirement. For many, inheritance issues played a key part in their decisionmaking and the ability to pass on their savings to the next generation was a major factor in choosing an Isa over a pension.
It is also important to consider the financial priorities of the younger generation. Often saddled with student debt, high costs of living and wanting to build up a deposit for a property purchase, the idea of committing money to a fund that cannot be accessed for 35 years remains a complete anathema.
A more flexible solution is required which enables them to save for their short and medium-term needs, while being able to access longer-term savings in an emergency. New developments to the Isa regime announced by the chancellor last year are reinforcing the attractiveness of Isas. The ability to transfer from stocks and shares into cash is particularly important for those wanting to draw down their investments in the most tax-efficient way to create an income in retirement.The signs are that moves to include peer-to-peer lending as an Isa qualifying investment will also be particularly well received.
