Support for pension-ISA hybrid halves when tax implications explained

11th September 2015


Support for a pension-ISA hybrid may have grown but only until the tax implications are explained.


A survey by Aviva has found that support for an ISA-style pension wanes when people realise the tax advantages of a pension.


Under a review of pension, the government is considering switching from the current pension model, where contributions are exempt from tax along with growth in the pension but withdrawals are taxed (EET), to the ISA system where contributions are from taxed income but growth and withdrawals are exempt (TEE).


Before understanding the implications of the tax change, 41% of those surveyed initially opted for an ISA-style system but once it was explained that people would end up paying more tax, just 23% were keen.


Under the ISA rules, 100% of contributions are subject to income tax and national insurance but under a pension, NI is not payable on employer contributions and income tax is only payable on 75% of benefits withdrawn (as everyone is entitled to take 25% of their pension as a tax-free lump sum).


The number of people who said they were in favour of the current system of tax relief on pensions increased from 20% to 34% when it was explained to them.


Andy Briggs, chief executive of Aviva UK, said: ‘Our research again shows that people are confused. Pensions and the tax system around them can be difficult to understand and that can act as a barrier to people saving more for their retirement.


‘The figures show that two-thirds of people didn’t realise that a t least £20 our of every £100 in their pension comes from the government.’


He added that Aviva was calling for the tax relief system ‘to be made fairer and simpler’ to reduce the confusion.


‘We need to remove different rates of relief for different incomes and offer everyone a flat rate of 33%,’ said Briggs.



1 thought on “Support for pension-ISA hybrid halves when tax implications explained”

  1. Jive Bunny says:

    The salient point missed here is the extremely limited choice of funds to invest in via a pension, often you only have the choice of the funds operated by the provider whose performance is variable to say the least!

    However, with an ISA you control which funds to invest in and may choose from the whole fund universe, moreover, you have the freedom to place your funds with a discretionary portfolio manager (DPM) for a fee and they will make the investment choices for you.

    The nearest a pension gets to this kind of freedom is in the form of a Self Invested Personal Pension whose administration fees (not initial charges and fund management fees which are added on to the admin fee) are so high it is economically unfeasible to undertake a SIPP unless your pension pot is already worth at least £100,000. At this value, you would find that admin fees would be running at approximately 2% pa – a fee you won’t incur in an ISA even one managed by a DPM, although the DPM would charge fees for his/her advice. So you have to consider if you are achieving more than £2000.00 pa in tax savings on your contributions to a SIPP. If the answer is “Yes” then you are contributing at least £10,000 pa to your pension if you are a basic rate tax payer and £5000.00 pa if a higher rate tax payer.

    If your pot is less than £100,000 you are stuck with the funds your pension provider offers which will likely make much poorer returns compared to those achievable within an ISA that you operate or that you turn over to a DPM, thereby destroying your tax savings on contributions to Personal Pension scheme over an ISA and then some.

    All in all, unless you have a large pension pot, personal pensions are a no go area, strictly one for the rich.

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