Is a possible ISA pension a good idea?

Enable’s IFA's in Bishop's Stortford have spotted that the government is still thinking of tinkering with the structure of pensions as another consultation, we look at changes to tax relief offered on pension contributions and a more radical option to scrap pensions in favour of a pension-ISAs with a new tax regime.  Under the mooted plans pensions could be moved from the current system of taxation, as exempt-exempt-taxed (EET), which means contributions are tax-free and so is growth in the pension but withdrawals are taxed as income, to an ISA-style regime. ISA-style taxes are known as taxed-exempt-exempt (TEE): contributions are taxed but growth and withdrawals are tax-free.

At first glance it might look like a simplified way of taxing pension savings by doing it in the same way as ISAs are, but  Hugh Pemberton of the University of Bristol said over the long-term savers would lose out by up to 17%.  The main problem identified by Pemberton with the TEE system is the loss of compound interest on the tax relief paid.

Current Tax relief boosts pension contributions by the highest rate of income tax paid by the saver, so either by 20%, 40% or 45%, meaning more money is put in the pot at the outset. Then this tax relief is invested along with the rest of the contributions boosting the pot further. And the Investment returns made on existing returns is known as compounding – which Pemberton said “was described by Einstein as the eighth wonder of the world thanks to its ability to turn small sums of money into much larger sums over time.”


Issued by: Enable Independent Financial Life Planners 
25c North Street, Bishops Stortford, Herts CM23 2LD
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