August 2008

Weighing up the balance with ISAs

While the vast majority of people choose a pension for their primary retirement savings vehicle I was surprised to learn that many people are also choosing ISAs as a means of accumulating a retirement fund. In this month's issue freelance journalist Matthew Craig writes about the pros and cons of adopting this approach (pages 8-9).

There have always been benefits from using ISAs as part of retirement planning. Savers often put money into an ISA for several years before transferring it all in bulk into a pension and benefiting from tax breaks. In the article Fidelity's Rob Fisher says that saving for retirement is the most popular reason people are taking out ISAs and as such they form an ideal complement or even substitute to pensions in retirement planning.

So while both vehicles work well together why are some savers looking to choose one vehicle over the other? Of course they both have their tax advantages for savers so how can they be differentiated? The fact is that many savers see pensions as inflexible and outdated, they don't like the fact that their money is effectively locked away until retirement and of course there is an effective compulsion to purchase an annuity with this money at age 75. Contrast this with an ISA where the money is often readily accessible so the saver can dip in to pay debts or fund a house deposit as needed. As the money is held within an ISA of course there is no compulsion to buy an annuity so the saver genuinely feels that the money is theirs to do with as they wish. Of course herein lies the major issue with ISAs as the temptation of being able to access the money may prove too much meaning that savers may deplete their retirement savings markedly. While savers may resent effectively locking their money away in a pension at least their funds won't suffer from regular withdrawals.

The decision to choose either a pension or an ISA is a finely balanced decision. However, the fact that people are weighing up these options in the first place is a good sign in itself.

As Ian Price from St. James's Place says in the feature "... As long as people are saving somewhere for retirement then that's better than nothing."

The fact that people are giving serious thought as to how to save for their retirement should be welcomed as it shows people are engaging with this vital issue and are attempting to make informed decisions about their financial future.

Helen Morrissey
Editor - Retirement Planner
Incisive Media