Can the Isa regime be reformed to make people save more?

26th July 2011

Suggestions include allowing Isas to be rolled into pensions more easily or finding ways to incentivise employers to offer ‘corporate Isas' alongside pensions and other staff incentives. 

The Government might for instance encourage employers to pay into an Isa for its employees through some form of tax incentive similar to pensions.

However there seems to be little call for big changes from those who already have savings and investments.

What has been ruled out is a full merger of Isas and pensions which will disappoint some advocates of change including the Centre for Policy Studies senior fellow Michael Johnson who has been campaigning for a dramatic simplification of the tax regime for savings as reported here on trade website Money Marketing.

The trade paper quotes Johnson saying the following – "We need to merge the Isa and pension worlds. Isas are popular, so why deny it? To make them part of pension legislation needs a big leap of faith but we need to encourage people to get the savings habit."

With pensions offering tax relief on contributions and Isas offering to shelter savings from taxes such as capital gains tax when you come to withdraw money, the two tax wrappers do very different things. Indeed given that you can already roll Isa money into a pension, it remains to be seen what the Government will come up with that would make a big impact.

There are already at least three big pension changes planned, – one to the state pension, a new system of auto-enrolment in which employees will be opted into a company pension unless they actively opt out and of course, for the moment, the most controversial reform of many public sector pensions which has already provoked strikes.  

Some have therefore questioned the necessity of another change. 

Many financial advisers argue that people already have a choice between saving and investing in the medium term, in which case they use Isas, or investing long term in which case it may be better advice to use a pension though of course this all depends on individual circumstances and preferences.

However others are suspicious that the Government could use any change as an excuse to cut back on tax relief on pensions. Although this has been increasingly restricted for higher earners in particular in the last couple of years, it still remains relatively generous. 

More from Mindful Money:

Junior Isas: Is this the best way to save for our children?

ISAs: Plans to allow savings that help society too

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