Pensions Versus Savings

EdInvestor

The A-day changes may reduce personal pension savings quite a lot, as people realise the lifetime limit has replaced the "use it or lose it" current pension tax relief arrangments, and thus there's no urgency .

We could see a switch from pensions to ISAs, which do still have the "use it or lose it" constraint.This may be something the Government wants to encourage, as it also wants to encourage home ownership.

There's after all no point in young people mistakenly tying up money in a pension which they will actually need later for a house deposit, or for paying off debt.

Brown needs to keep people spending ( but not overspending) to promote economic growth.The best way to do that is to promote home ownership which is a form of investment for retirement, and produces a lot of accompanying spending on retail stuff and other services, thus killing two birds with one stone.:)

In the old days this might have caused a problem with the life and pensions industry, which makes up a big chunk of the stockmarket and is thus important ( plus the old mutuals, most now gone, had guite a strong influence in the labour movement).But these days much of their earnings come from overseas sales and products related to (guess what) home ownership, so that is less and less of a problem.

dunstonh

The best way to do that is to promote home ownership which is a form of investment for retirement,

It also pushes up house prices even further and eliminates a whole section of the public from being able to have affordable housing.

Also, property is just as prone to price crashes as the stockmarket and on a similar frequency, albeit at different times. Historically, we are about due in the next few years for prices to drop if you go by dates alone.

Property only really becomes an investment when you dont include the one you are living in.

Nick_C_4

You assume this Nick.But it's a risk isn't it? You have no way of knowing what basic rate tax will be when you retire.It wasn't that long ago that it was much higher than 22%

But then you're taking a risk by putting it into an ISA - the basic rate of tax could go down, or fail to shoot up. I know I'm paying 40% now. And I'm fairly certain I'm going to have an income lower in real terms than my current income. I'd have to pay an average tax rate of higher than 40% on my pension income to be worse off than if I'd put my money into an ISA (other things being equal). OK, no-one can predict the future, but you've got to guess one way or the other. I merely pointed out that there were tax-breaks other than the tax-free lump sum. In the interests of accuracy I'll amend that to "probably" or "possibly", depending on which you'd prefer.

EdInvestor

dunstonh wrote:

It also pushes up house prices even further and eliminates a whole section of the public from being able to have affordable housing.

Not sure about that. House prices have been going up as long as I can remember and so has home ownership - it's now 70%, the highest it's ever been.Back in the 70s IIRC it was under 50%.

Also, property is just as prone to price crashes as the stockmarket and on a similar frequency, albeit at different times.

Perhaps Brown thinks he has now got a handle on how to control the market better? After all the last price crash was mainly caused by incompetent Govt policy.

Property only really becomes an investment when you dont include the one you are living in.

I disagree.There are several ways your home can be made to work as an investment as well as the place you live: you can downsize to release capital or do equity release/home reversion, you can earn extra income by taking in lodgers (taxfree).You can rent it out and decamp to a hot climate for a couple of years, using the rental income to pay your rent abroad.......

.... if you compare this flexibility with a pension, the house wins hands down and that's apart from the fact that you can't live in a tax wrapper .

Of course it would be nice if everyone had both a house and a (company) pension, but if only one is possible, I'd go for the house every time.

oceanblue_3

cheerfulcat wrote:

oceanblue, would you have any links on this? Because I spy an excuse to take the axe to ISAs...

Hello cheerfulcat

Here's the link:

http://www.hmrc.gov.uk/manuals/isa/isagn17.00.htm

isasmurf

oceanblue how do you link the guidance notes with your statement that "HMRC continue to voice concerns about the level of over-investment by some". I really don't see the connection.

oceanblue_3

isasmurf wrote:

oceanblue how do you link the guidance notes with your statement that "HMRC continue to voice concerns about the level of over-investment by some". I really don't see the connection.

Hello, isasmurf

The link refers to inspections carried out by the APSS Unit; the pages listed do not refer to general guidance notes, but describe the process and what it involves.

I suggest you read the PEP and ISA Bulletins on the HMRC website: there is a continuing thread dealing with oversubscription (inadvertent or otherwise) and the potential strain on the Exchequer. I am not suggesting that government policy is suddenly going to change in respect of ISA's and PEP's (although there was a withdrawn proposal to reduce the amount individuals could invest).

I reckon the government has identified a link between the inherent liquidity of the ISA, and the moral risk that presents. In fact, several posters have picked up on this very point in the way that it might tempt individuals to abandon their long-term plans to save for life after work, and simply squander the money on something frivolous.

At the same time, I agree with those posters who feel unhappy about the inherent inflexibility of pension plans...perhaps the answer lies in attempting to subscribe to both ISA'a and Pension Plans?

isasmurf

I do read the PEP & ISA Bulletins when I receive them. From memory I don't recall a continuing thread about overinvestment in them - other then the 5% test. But if I have time I'll have a look through them again at work today and get back to you tonight.


On this thread generally, I have only skimmed through it, I'll have a proper read tonight. This might have been asked already, but for those that favour savings instead of Pensions, can you tell me when you reach the age of 74, your savings run out and you realise you still have another 20 years left to live, what exactly are you going to llive on?

EdInvestor

I reckon the government has identified a link between the inherent liquidity of the ISA, and the moral risk that presents. In fact, several posters have picked up on this very point in the way that it might tempt individuals to abandon their long-term plans to save for life after work, and simply squander the money on something frivolous.

ISAs have a "moral risk"? Oh come on.This is desperation territory.

when you reach the age of 74, your savings run out and you realise you still have another 20 years left to live, what exactly are you going to llive on?

Why should your savings run out at the age of 74? Or do you think "moral risk" has set in and the 74 year old has squandered them on something frivolous?

oceanblue_3

EdInvestor wrote:

ISAs have a "moral risk"? Oh come on.This is desperation territory.

It's the liquidity of ISA's that, potentially, makes them unsuitable as savings vehicles designed to generate capital over the long-term. This liquidity creates in investors a moral risk, or temptation, to consider the short-term advantages rather han the long-term plan.

Edinvestor wrote:

Why should your savings run out at the age of 74? Or do you think "moral risk" has set in and the 74 year old has squandered them on something frivolous?

Several posters have now referred to this potential problem of choosing ISA saving rather than Pension saving in preparation for life after work. We can all see the advantages in terms of flexibility and accessibility; isasmurf has here highlighted a potential disadvantage, yet you respond with scorn. It is precisely this approach of yours that causes me to have doubts about your ability to think through these issues in a rational way.