I wrote earlier this week that it seemed to me to be a good idea to concentrate on building up Isa savings over pension savings. One of the reasons I often give for this view is political risk.
Governments endlessly fiddle with pensions. They cut allowances, change the tax breaks at will, and, more often than most people notice, annex what you consider to be private funds for public use. What easier way to improve public finances than to announce that, henceforth, all pension assets are state assets, or that they are at least to be used to buy public debt?
Look at it like that and it seems to me that you shouldn't save much more than the amount needed for a very basic income into a pension. But here's the question people keep asking me: why do I think that pensions are more at risk from government interference/theft than Isas surely as they are both wrappers set up under the UK tax regime, they are equally at risk?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
I don't think they are. First, look at how the tax treatment works on them. The money you put into a pension goes in tax free - no tax has been paid on it at all. As far as the government is concerned, that makes it fair game what they have given they can easily take away. In the minds of HMRC, they still 'own' the tax-relieved portion of your fund; its just a matter of figuring out how to get it back without you noticing.
There is also a lack of immediacy about pensions that means that there is less complaint about changes to them. Look how few people made a fuss about changes to dividend tax treatment under Gordon Brown and how little outcry there has been about the shifting of annual and lifetime allowances under George Osborne. Most people don't understand pensions and it's a lot easier to take away benefits people aren't fully aware that they have than those they already cherish.
Isas are seen entirely differently. The tax on any money that goes into an Isa has already been paid. It goes in net of tax. That means that neither the Isa holder nor the government has quite the same sense that the state has given anything, or that anything is owed by investor to government. Isas are also very simple and very well understood (you put your money in a wrapper, they can't get at it, and that's that).
What's more, over 20 million Britons have them already. Who'd be fool enough to mess with something that popular?
Pensions aren't as easy to have a go at as they used to be (today's ageing population is pretty clued up), but attacking them has still got to be a lot easier than having a go at Isas.
You can read previous posts on this endlessly fascinating subject (to me anyway) hereand here.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Our pension system, little-changed since Roman times, needs updatingOpinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
-
We’re doing well on pensions – but we still need to do betterOpinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
-
Older people may own their own home, but the young have better pensionsOpinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
-
How to avoid a miserable retirementOpinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
-
Young investors could bet on NFTs over traditional investmentsOpinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
-
Negative interest rates and the end of free bank accountsOpinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
-
Pandemics, politicians and gold-plated pensionsAdvice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
-
How the stamp duty holiday is pushing up house pricesOpinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
