The Big Question

Each month we ask leading industry figures to answer one big question

ISA limits have been raised to £10,200 with the over 50s able to benefit from the change this tax year. What impact do you feel this will have on how people are saving for retirement and do you think the government has gone far enough?

Peter Carter is head of product marketing at MetLife UK

Anything which provides an incentive to save is to be welcomed and the extension of the tax-free ISA limits for the over-50s to £10,200 is a step forward.

From April 6th 2010, tax-free limits increase for all savers. Individuals will be able to invest up to £10,200 with a maximum of £5,100 in a cash ISA. It would have been preferable to extend limits for all immediately.

Of course it all rather glosses over the fact that interest rates are at a historic low.

Two years ago cash ISAs were paying 7% whereas currently you are lucky to receive 3.5%. It also glosses over the fact that stock market volatility has a much bigger impact on shares ISAs than tax-free allowances.

The Government cannot legislate for volatility but it should do more to encourage saving for all.
We need to make it easier to save as individuals are on their own in planning for their retirement.
Saving is the only way to plan for retirement and it should be made more difficult to borrow and much easier to save.

Andrew Gadd is head of research at the Lighthouse Group

The simple answer is that the increase in the annual ISA allowance for the over 50s from October this year has more to do with the fact that the General Election must be held by Thursday June 3rd 2010 rather than any sensible investment reasons.

Splitting the start date for the new ISA allowance between those over and those under 50 was designed as an election bribe which has resulted in added administration which product providers and IFAs could do without.

When are we going to see the ability to switch from stocks and shares back into cash within an ISA wrapper?

Although having said that, any increase in the ISA allowance is always welcome.

Paul Goodwin is head of pensions marketing at Aviva

Any changes that make it easier and more cost-effective for people to save are to be welcomed but this is only a start to increasing retirement saving. All major providers have a responsibility to influence government legislation, design products and provide information that makes it easier for customers to save for retirement.

Aviva research shows nearly half (47%) of surveyed pensioners in their first year of retirement said they wished they had saved more for retirement. This shows the continued need to help people save into suitable products and get the message of saving for retirement in everyone’s mind.

The government needs to encourage private savings and we believe these can be achieved through allowing early access to pensions funds, harmonising tax relief and introducing alternative work-based savings plans.

Nigel Hare Scott is managing director at Home & Capital Advisers

With annuity rates and prospective pension incomes in freefall, there is at last some modest good news for those at or approaching retirement. Although the increase in the ISA allowance to £10,200 is very welcome, most elderly people will find it tough earning a meaningful tax free return on their investments in the current low interest rate environment.

Peter Jordan is head of proposition marketing at Skandia

The raising of the limit for over 50s reinforces ISAs as useful tax-efficient savings vehicles but it is likely to affect the management of assets in retirement rather than affect savings potential, as most of this market segment is closing in on retirement.

In April 2010, when the increases will be made for younger subscribers, we may see increased savings activity; however, for most basic rate tax payers the old limits will remain sufficient.

The increase in subscription limit will be attractive for higher rate tax payers and helpful for those wishing to build assets outside of the restrictions of pension plans. Despite new ISA limits, pension contributions will continue to be more tax efficient and as most people will not exhaust their pension allowances the impact on overall savings rates might not be as dramatic as first thought.

Paul Kennedy is director of tax planning at Fidelity International

The ISA limit increase is a positive step forward for retirement saving and we have already seen many investors utilising the extra £3,000. We encourage those who are currently eligible to make the most of the increased allowance since for the vast majority of people the ISA is the most tax efficient way of saving outside of a pension. For those who don’t get the increased allowance until next tax year they should still seek to use the £7,200 allowance wherever possible.

However, we don’t think that the Government has gone far enough. In today’s economic climate many people may become reticent to lock their savings away in a pension because you simply cannot access it until retirement.

We believe that the Government should do more to incentivise medium term savings in addition to pensions. We would like to see the Government actually add a small amount to everyone’s ISA contribution as well as reinstating the dividend tax credit for ISAs. This would benefit all ISA investors, not just those lucky enough to be able to afford to invest the full limit each year.”

Billy McKay is marketing director at AJ Bell

Consumers’ attitude to saving for retirement has changed with many taking a more holistic approach with a range of tax wrappers used. The changes to the ISA allowance will be welcomed by many but this change has to be considered along side all others that affect retail savers before we can pass judgement on Government policy.

If we are to help breed confidence and reinvigorate interest in savings, we must have a stable environment and this includes incentives. This has not been the case.

The events surrounding the global financial crisis have bruised consumer confidence. Looking at the bigger picture, there is little doubt that the recent changes to pension regulations suggest that the system, set up to encourage savings, is once again a football in the political game that precedes an election.

An Inland Revenue press release on pensions simplification in December 2002 outlined that one of the aims of the Labour Government was “to increase individual choice and flexibility and reduce administrative burdens, thereby making it easier and more efficient to save.”

The change to the ISA allowance is far from bad news.

However, looking at the Government’s track record over the last term many will say it is all very much a case of give a little in one hand and take a great deal back with the other.

Mike Morrison is head of pensions development at Axa Winterthur Wealth Management

Anything that attempts to incentivise saving must be a good idea and, for a small part of society, ISAs and their predecessors (PEPS and TESSAs) are a ‘must have’ part of an annual financial plan – but it is still a relatively small proportion of people.
Immediate access to the money is both a strength and a weakness, because it can mean that it is possible to spend the entire ISA fund.
The ISA limits are unlikely to be enough to provide an income in retirement on their own and so they must be part of a bigger savings plan, probably including pensions and other forms of saving.

Nigel Orange is technical support manager (pensions) at Canada Life

While it is always welcome news when ISA limits are increased, pension providers and advisers may be more sanguine in their views.

There is no doubt using ISAs as a means to save for retirement has gained in popularity over recent years and therefore increasing limits seems a sensible idea.

However, in practical terms I believe it will have a negligible impact on the overall amount setaside for retirement provision.

Individuals with sufficient disposable income are likely to take advantage of the new limits and use ISAs and pension plans in equal measure. It is though a rather small minority. For the masses saving £10,200 per tax year out of income is fantasy so the increased limits will seem irrelevant!

Utilising the new ISA cash limits might be more realistic but it will attract those who have already accumulated savings in deposit accounts. A significant number will have already retired so little new savings here.

The biggest beneficiary may be those who use ISA proceeds to fund pension contributions as they approach retirement. This maximises tax relief while keeping access to funds as long as possible.

Increasing ISA limits further will only favour the better off and do very little to encourage the masses to save for their retirement despite their growing popularity.

Bob Perkins is technical manager at Origen

The increase in the ISA limits is a valuable one for retirement planning, especially for those who would prefer to have control of their cash rather than being restricted to drawing it down as a taxable ‘income’. Of course, the thing that has brought ISAs even more sharply into focus is the introduction of a 50% tax band from 2010/2011 and the restriction of tax relief for those on high incomes of £150,000 or more.

Though the vast majority of individuals will not be affected by the 50% rate, they may feel that it is only a matter of time before other tax advantages connected with pensions are watered down. The use of ISAs to provide regular income or a source of tax efficient capital withdrawals has had an appeal even before this year’s budget and for older investors that will have grown.
Unlike pension savings, there is no tax relief on the amounts invested but there is potential for virtual tax free income and tax free capital growth.

The income that arises from ISAs will not increase taxable income and so will not contribute towards the ‘relevant income’ limit for higher rate tax relief on pension contributions, the £100,000 limit for retaining the full basic personal allowance or, for that matter, the age allowance income limit.

For the few who are 50% taxpayers, the virtual income tax freedom will be even more attractive and in sharp contrast to pension savings where they get 20% tax relief but pay tax on income generated by 75% of the fund value, at 50%.  
Whether the Government has gone far enough remains to be seen but it is possible that they are beginning to realise that individuals may be prepared to forego income tax relief on their regular savings where the ‘trade off’ is greater access to and control over, their accumulated funds.

Adrian Shandley is managing director at Premier Wealth Management

The ISA limits have seen a significant increase, which is most welcome, but the fact that this increase is targeted at the over 50s leads me to wonder if it is just an electioneering ‘sweetener’ for older clients who have seen their income from investments fall dramatically.
Initially, there may be some take up of the ISA allowances but the marginal difference between a taxed and tax free rate of interest is currently only modest.

Meanwhile, unit linked ISAs continue to have little appeal unless clients have significant holdings so as to make the capital gains tax savings worthwhile.

The main advantage for the over 50s in saving for retirement will be the fact that the increased ISA limits allow them to build up more flexible lump sums that are still tax efficient.

For the over 50s market, saving into capital investments can be better for retirement than saving into pensions simply because all of the funds held within ISAs can be accessed if required or used for income.

Paul Smith is a chartered financial planner at Perspective Financial Management

The impact, for those over 50 and approaching retirement, I believe will be significant. People these days are leading lifestyles which demand greater flexibility and their retirement and investment portfolios need to reflect this.

With all the negative press and constant legislation changes made by the present Government, clients are looking for alternative routes to save for retirement income other than traditional pensions.

The increase in ISA limits may make them far more attractive to investors than pensions. Perhaps the flexibility and lack of complexity will be seen as more beneficial than tax relief on contributions to a pension plan.

As to whether the Government has gone far enough is debatable. Undoubtedly it is a step in the right direction. The increase in limits coupled with the ability for investors to switch between ISAs will provide a much needed boost. Let’s hope the momentum continues.

Steve Urwin is a senior sales and marketing executive at Newcastle Building Society

It makes sense that any tax free savings allowance should be used first and foremost and increasing the existing limit can only be a good thing.

However, the rules around stocks and shares and cash ISAs are confusing in that you can invest the full £10,200 in stocks and shares, but only half this amount in cash. Also, you can transfer previous ISAs from cash into stocks and shares, but not the other way around.
In an environment where many people want the safety of cash, the changes could have gone further to address this; indeed there are no guarantees about how or when ISA limits will be looked at again in the future.

The increased limits will also have restricted benefit if providers are not more flexible inallowing retirees to invest in more than one type of ISA product in a tax year. When considering retirement income, people are thinking about both what they need for the future and their everyday needs, so not everyone will want to lock away their total ISA savings to get a potentially better rate, but they may want to lock away some and opt for monthly income on the rest.

Paul Wilcox is chairman of the WAY Group

The two overriding benefits of ISAs are illusory for most investors who are neither higher rate taxpayers nor CGT payers and may just as well save in any other medium.
However, for well off investors saving for school and university fees or simply for future security, those twin benefits can be very attractive.
Regardless of into which category investors fall, the mere fact of there being a supposed tax break will encourage people to save and with an increased tax break hopefully people will save more.
I am also cynical about the push on persuading elderly people to fund ISAs when they subsequently suffer the full impact of IHT. Of course the Government is unlikely to advocate IHT mitigation but that is where most older investors should focus.
Bearing in mind our current economic woes I would prefer to see the Government revisit tax breaks for investors in small companies because that is what we need both now and going forward – and what is missing from the banks. 
This would encourage investment but would focus it towards sectors which are hugely important to our future. While the IHT concessions are still there the re-imposition of CGT is very negative.