Investment company calls for more flexible approach to saving for young people

Blending ISAs with pensions could create a much more attractive and flexible investment environment for younger people, it is claimed.
 
The Fair Investment Company is urging the UK government to make some real changes to help make saving for retirement less bewildering.
 
According to George Ladds, the company’s head of investment and pension research young people in particular do not see saving for a pension as a high financial priority particularly when their main focus is often saving up for a deposit on their first house.
 
‘Saving for retirement is important, especially when you consider the basic state pension is just £5000 a year. There are not many people who could survive on that especially when you consider fuel costs and other basic needs. We should all be saving money for our retirement, the sooner the better, but many of us are still not,’ he said.
 
‘Ask any young person about saving for a pension and their eyes will glaze over. There are a number of reasons for this. Young people can’t see the benefits of saving for something so far off into the future and think it is irrelevant to them, many don’t understand pensions or think they are too complicated and others may think they can’t afford to give any significant amount of their salary up in order to pay into pension. In reality, young people have other priorities,’ he explained.
 
‘But saving for retirement is vital if they are to ensure they don’t end up having an impoverished standard of living in their old age and one way of doing that is showing that there are other, more simple, flexible and relevant options. Just because you have to save for your retirement doesn’t mean you have to do it through a pension ISAs can provide a good alternative and a great way to get people to start thinking about saving for retirement,’ he added.
 
He reckons that saving just £50 a month at a young age can help people develop good habits and make a big difference. ‘All the investments are invested in a fund that has the same tax benefits as a pension fund, so they grow in a similar way. The big difference is in the flexibility. With an ISA, money can be taken out at any time and an income can be taken tax free whereas with a pension benefits cannot be taken until you are 55 and only 25% can be taken as cash. The rest has to be taken as a taxable income. Of course there are arguments that pension contributions offer tax relief (so £100 costs just £78 for basic rate tax payer) but I would argue a tax-free income in retirement is highly attractive,’ he said.
 
In practice this means that a 65 year old man with £100,000 in a pension pot, currently has an annuity quotes of around £550 a month which is then taxable. ‘There is a school of thought that annuity rates will decline over the next few years, especially as people live longer. But with an ISA fund of £100,000 invested in a high yield income fund paying say, 6% a year this would provide a tax free income of £600 a month. However you should keep in mind that an annuity is guaranteed for life, whereas with an ISA, your income and capital is at risk, although you do still have access to your capital,’ he added.
 
He believes that people should be encouraged to save and it should be made easy. ‘If you get people thinking about pensions early then as people forge careers they will join employers with better schemes paying more money into their pension, they may also benefit from higher rate tax relief so pension saving becomes more relevant to them. I would like to see ISAs blended with pensions and state pensions. This could make for an attractive proposition to encourage young people to save,’ Ladds explained.
 
‘I think this added flexibility of being able to access the cash in an ISA is why ISAs can be a much more attractive retirement savings option for younger people. As long as they are sensible and only use the fund for major lifestyle events such as buying a house or a child going to university and not just raiding it for any old thing, it could be the way to get people interested in saving for their future.’