“ISAs and pensions have long been the building blocks of savings in the UK and both have their place in a financial plan. Their different features, including the way they are taxed, have made them suitable for different people at different times.
“ISAs – probably one of the first savings or investment products people have after a bank account – have done a great deal to encourage short term savings. And their simplicity has made them incredibly popular.
“It’s therefore easy to understand the appeal of making pensions more like ISAs. The tax treatment of pensions at the moment is more complicated – you get tax relief upfront. But for a lot of people that’s industry jargon and they don’t know what it means for them in real terms. For ease of numbers: if you put £80 into your pension, with basic rate upfront tax relief this becomes £100 at the beginning – it is this amount that grows over time. Without upfront tax relief, the £80 is £80. And if you’re a higher rate tax payer it’s only £60.
“Why does that matter: without upfront tax relief the size of people’s pension pots could be significantly smaller. And with everyone living longer people need more money saved to ensure their savings don’t run out before they die.
“Could and should pensions be simpler? Yes absolutely. One way to do this might be to have a flat rate of tax relief for all. Whatever the idea, we need to be doing as much as possible to remove the barriers that prevent people from saving – but we also need to make sure people understand the benefits of different products and how they can work for them.”
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