Pensions 'not better than ISAs'

Millions of Britons could be better or equally well off investing in an Individual Savings Account (ISA) rather than a pension, a report has said.

The report from website Everyinvestor.co.uk goes against many experts' view that pensions are best because contributions enjoy tax relief.

However, the report said that the fact that pension income was taxed in retirement negated the tax relief.

And unlike pension savers, ISA holders are free to use their cash at any time.

But critics branded the report "superficial" and suggested that the case for ISAs over pensions was being played-up.

Comparison

Everyinvestor compared the merits of saving in an ISA with a personal pension, where there were no contributions from an employer.

It used the example of two basic rate tax payers each contributing the after-tax relief equivalent of £200 per month, one into an ISA and the other into a personal pension.

"They (Everyinvestor) have assumed the best case for the ISA and worst for the pension and this undermines the research"
Tom McPhail, Hargreaves Lansdown

After 20 years the pension holder had a larger fund than the ISA saver.

However, when the pension fund was used to buy an annuity - a retirement income for life - it was roughly equivalent to what the ISA saver could earn through keeping their money invested in an account paying 4.5% interest.

In other words, the ISA saver got more bang for their buck.

What is more, the report argued, ISA saving is more flexible.

For example, once a pension fund is used to buy an annuity it becomes, in effect, the property of the annuity provider and not the saver.

"Given these figures it is no surprise that regular pension saving continues to decline," said Chris Gilchrist, Everyinvestor spokesman.

But Tom McPhail, head of pensions research at Hargreaves Lansdown, described the Everyinvestor report as "superficial."

"They have assumed the best case for the ISA and worst for the pension and this undermines the research," Mr McPhail said.

"ISAs give more short term flexibility but pensions give you a tax advantage even for basic rate tax payers," he added.

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