Give me an ISA any day

The ISA has been one of the greatest long-term savings success stories – simple, easy to understand and most importantly trusted.

So it should be no surprise that people are attracted to its simplicity when thinking about their retirement savings. Our research shows that one of the biggest barriers to encouraging people to save is the complexity of the current system, and constant change which seems to be damaging trust.

The key issue seems to be that people just don’t understand how the current pension system works, and are attracted by a much simpler system for paying in, perhaps from taxed income, with tax free payments out at the end. This so called TEE (tax, exempt, exempt) system has been generating a lot of interest recently.

It’s clear that simplification is needed to help build adequate defined contribution pensions. Getting people to save into something they don’t understand is always going to be a big ask. It’s also clear that even in an ISA style system people are still going to need an incentive to save, if their money is going to be locked up until their mid 50’s.

So perhaps the way forward is an ISA style system, but with an extra contribution from the Government, that is easy to understand and value?

Our survey says a lot about the challenge facing the pensions industry today. How does the government engage with consumers and providers to design a system that is simple and fair, but also recognises the fiscal challenges that it needs to deal with? How, for example, do we deal with the unintended consequences of change - today the lower paid benefit from tax relief on the way in, and given the small size of the average DC pension, may well also have their benefits paid tax free?

Merging old and new systems would be hugely complex, and what about the public sector and defined benefit schemes? Retooling the industry after providers have invested millions to ensure the success of auto-enrolment and now pension freedoms would be a huge additional huge cost.

The pensions freedom changes introduced this year must have had a positive impact, but there is still a long way to go. Constant change in an industry that promotes long term planning is not a good thing. Let's hope that if changes are made, they result in a simple and stable system that offers sufficient incentive to taxpayers to save for their retirement.

Philip Smith | Director
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