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Do you want a £40,000 annual ISA allowance?

A joint pensions and ISA allowance has been proposed by one pension expert, but is it workable?


by Michelle McGagh on Nov 27, 2012 at 09:50

Do you want a £40,000 annual ISA allowance?

The merit of pensions versus ISAs has long been debated, but a proposal from a think tank could put the argument to bed.

In a report from the Centre for Policy Studies (CPS), a think tank, entitled ‘Costly and ineffective: why pension tax reliefs should be reformed’, pensions expert Michael Johnson has set out a number of proposals to reform pensions tax relief which he believes will save the government money and be more beneficial to savers.

Pensions currently offer a big tax break. Every time you make a contribution you receive tax relief on it – 20% if you are a basic rate taxpayer and 40% if you are a higher rate taxpayer – which is paid back to you in the form of a contribution top up.

This relief has come under scrutiny because it mostly benefits the wealthy who get relief at 40%. Rumours are swirling that it will get the axe in the Autumn Statement on 5 December.

Another element of pensions that chancellor George Osborne could target is the annual allowance for pension contributions. Every year you can contribute a maximum of £50,000 to a pension up to a limit of £1.5 million over your lifetime – although most people don’t get anywhere near their annual or lifetime allowances.

Marrying pensions and ISAs

Johnson thinks the government should make radical changes to both pension tax relief and the allowances on offer and incorporate the much-loved ISA, which currently has an allowance of £11,280.

Both pensions and ISAs have their benefits; pensions give you a tax break in the form of tax relief, but you get taxed when you take the income; ISAs on the other hand provide a tax break on the way out as you don’t pay tax when you take your money out, although you do have to pay income tax on the money before it is saved.

Johnson recommended the introduction of a combined allowance of between £30,000 and £40,000 a year for pensions and ISAs. Each year you could decide whether to use the allowance to contribute to pensions or an ISA and receive the relevant tax break.

The pension and ISA pots would remain ring-fenced from each other but we could witness a situation where pensions are side-lined in favour of ISAs, which are more popular as they allow people to access their money when they like.

Johnson also recommended scrapping higher rate tax relief and replacing all income tax relief with a 25% or 30% single rate which would encourage those paying the basic rate of income tax to save more.

A poor retirement

Tom McPhail, head of pensions research at Hargreaves Lansdown, said Johnson’s proposals were not ‘anchored in reality’ and would see people entering retirement with little to live on.

‘You have to strike a balance between ISAs and pensions. We get a lot of investors saying that the fact that the money gets locked away in a pension is a good thing. There is a real risk that if you give people the option not to lock the money away then people will get to retirement without anything to live on,’ he said.

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26 comments so far. Why not have your say?

Simple Simon

Nov 27, 2012 at 14:04

Brilliant idea - stops all the big insurance companies (or the government after 75) getting hold of your hard earned cash and leaves you in control.

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Nov 27, 2012 at 15:55

YES provided ISAs are NOT included in the pensions life time allowance.

But we've got to stop this nonsense of auto entrollment every three years. If you've opted out because you've got a protected LTA why on earth should an employer be putting this at risk?

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Nov 27, 2012 at 17:15

Increasing/combining the ISA & pension limits sounds extremely sensible to me....If people decide to spend their savings, whether for retirement or other, that is up to them. Anyone smart enough to save at all understands the repercussions of spending those funds.

Of course the pensions industry will be up in arms about it!

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peter hart

Nov 27, 2012 at 17:25

Excellent idea.

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john powell

Nov 27, 2012 at 17:29

Considering the financial mess where in, I can see no chance of the chancellor allowing £40,000 of tax free investments. Should it come to pass I would be delighted to be able to invest in an isa for 13/12. Regarding sipp or isa let the investor make up his own mind depending on his/hers circumstances.

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Alan Halfacre

Nov 27, 2012 at 17:32

Potential to work well for pensioners who have saved over a lifetime and have the 25% tax free cash to invest with enhanced returns.

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Dividend Income

Nov 27, 2012 at 17:33

Yes, please, the sooner the better!

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Nov 27, 2012 at 17:55

Sounds like another pensions grab to me.

All this taking money from pensions is simply another way of borrowing from the future to pay for the present. So transferring money from the people who are working to the people who are already retired.

Annuity rates (based upon basic research so if someone has a better figure please let me know) works out at about 5% - remember you loose the entire pot upon death.

So - to generate £10,000pa requires a pot of approx £200,000.

The standard has always been 2/3rd of income upon retirement.

Therefore a £10,000pa pot would be based upon an income of £15,000pa.

I would suggest it unlikely that someone earning £15,000pa would save £200,000pa over their working life - thats £4,500pa over a 45 year working life. In other words - you will need to save 1/3 of your income for your entire working life to cover your pension.

If we change this to ISA type where the money comes AFTER tax - the figures get worse.

The figures simply scale up.

Is there something I am missing - or have I missed something?

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Dr Jimbo

Nov 27, 2012 at 18:12

I would just like the Government to keep its sticky fingers out of all of my savings altogether. Its my money and I want direct access to it whenever I want it. I am fed up with this constant interference and nanny state control which is just designed to ensure I do not have to call on the State for support in old age. Why can't I pull £10k out of my SIPP for an operation for example?

A 40K limit has just been plucked out of the air to benefit the wealthy - how many people could possibly afford this? The Government has already enabled people with large SIPP funds to escape the GAD rules by buying £20k's worth of annuity/pension. They can then have instant access to as much of their pot as they like.

Have a look at to see what really hapens to someone with a £100k SIPP between the ages of 65 and 85. Its not the headline drawdown rate in year 1 that is the killer. Its the effect of GAD rates on a steadily eroding SIPP fund and the artificially low interest rates the Government has created.

If I could just transfer the whole of my SIPP into an ISA I would do so now and I would never save into a pension fund again.

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Lyndon Edwards

Nov 27, 2012 at 18:15

Can't see the insurance companies liking this. ISA funds go back to the deceased's estate and will be included in any IHT assessment. (Is this the hidden agenda Mr Osborne?)

The gilts that pension providers use to buy the annuity income with your pension fund stay with the insurance company after the annuitant and any qualifying dependants have died. Nice little earner for the companies. . .

Direct holdings of gilts are exempt from IHT, by the way, but I don't think are eligible for ISAs except in a collective. Seems like some opportunities opening up here. . . .

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Nov 27, 2012 at 18:30

Andy - Firstly, you don't have to buy an annuity. You haven't had to since 2006, whatever IFAs may tell you.

Secondly, I can see politicians thinking this was a good idea, because it would almost certainly lead to more money floating around the economy, thus pulling us out of recession.

But the insurance companies will hate it. Nobody would buy their overpriced annuities.

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Martin Hicks

Nov 27, 2012 at 19:06

What's wrong with VCTs?

Investment in newly created and growing companies, where our future lies.

Up front tax relief and tax free dividends.

No brainer.

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Jeremy Bosk

Nov 27, 2012 at 19:21

I would have liked for even one year of my life to have had an income as high as £40,000. The vast majority of people struggle to save hundreds a year, let alone thousands.

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Mister Curry

Nov 27, 2012 at 19:26

Brilliant - would however like to be able to afford to use the allowance (!). In addition it would pretty much nail the coffin lid on pensions - increased regulation/interference plus cr*ppy returns = a turnoff. Ok, by saving via an ISA at present is not quite so tax-efficient but frankly I'm happy to lose that for the element of control which the ISA has over the pension. I have some DB pension from a former employment which has been interfered with in terms of the 'revaluation in deferment' rate - what a super way of borrowing from the future!! And, hey, it'll be worth LESS when I retire - so - yep - less to spend, less to help the then economy etc etc. They can keep feathering their NEST on their own - I too will not be saving via a pension ever again...

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Nov 27, 2012 at 19:32

Martin Hicks - You forgot the most important line :

No risk.

Sorry, I do know sarcasm is the lowest form of wit . . . .

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Nov 27, 2012 at 20:06

Hang on, stop the 25% lump sum and replace it with a 5% top up !

Is that 5% of the value of your lump sum or the value of the whole pension pot?

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Martin Hicks

Nov 27, 2012 at 22:57


Actually, I believe there to be lower risk in VCTs than in many alternative collective funds, because most conventional fund managers choose to invest in large sclerotic industries, heavily regulated utilities or non-productive commodities. Banks, BP, M&S and numerous other household names; you name them. Where have they gone in the past 5 years but nowhere or downhill.

I think it is imperative that older people, which I now am, invest in new companies employing fresh, usually younger, people who have new ideas and every incentive to work hard to develop the products and services for their future.

VCTs spread their investments over an ever-increasing number of these smaller companies and input skilled advice to their managers to enable them to grow. Some of these companies do fail or underperform, but others succeed in spades. The famous(or infamous) risk/reward curve at work.

Yhe tax reliefs offset some of the risks for investors, and I am regularly receiving over 7% tax free dividends as well as my income tax returned from HMRC. Better return than an annuity and I get to keep the capital.

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Dislexic Landlord

Nov 28, 2012 at 06:12

I would only invest in a Personal Pension if there was 40% Tax relife

ISA is far better and the allowance for that should be a great deal higher

I do think a big draw back with pensions is your fund dies with you this is a disgrace

ITS YOUR MONEY after all

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Anonymous 1 needed this 'off the record'

Nov 28, 2012 at 09:39

The System works well at the moment, only an idiot tampers with something that is working well.

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Brian Pearson

Nov 28, 2012 at 09:41

I must admit, I like the idea of a company providing both pension and ISA vehicles. This might mean that an individual might be able to contribute to both, however small that contribution is AND of course the comapny will also contribute, initially in a pension, but why not in an ISA, so long as you dont go over the yearly allowance. Normally, comapnies can negotiate a lower charging package from the pension providers (assuming the pot is big enough) and this should effect contributions again. The main benefit I see is having the flexibility to save in the vehicle of your choice. All we need to do now is up the ISA limit.

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Nov 28, 2012 at 09:54

Yet again, we see those who have had the 'luck' to earn more, and the responsibility to save for their pension, being targeted by Government supported by the politics of envy. Of course there are those who receive ludicrous pensions contributions... trade union leaders, CEOs, MPs, BBC execs... who prosper through failure, but they are the exceptions. The vast majority work hard and save for their retirement, then see their pension fund decimated by e.g. Gordon Brown, loss of GAD+20%....

The Government needs to focus on where the real problem is... the public sector pension black hole, but they are too afraid of the impacton if they do something radical there. Instead, they hit the private sector yet again, because we are an easy target, and gain brownie points by punishing those 'rich' 40%ers!

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Michael Stevens

Nov 28, 2012 at 11:08

Keep it simple.

ISA Max £12,000

Pension £50,000

No carry back allowance

If you do not use it in each tax year you loose it.

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G Best

Nov 28, 2012 at 12:44

Lyndon Edwards, not sure where you came up with the idea that gilts are exempt from IHT. If this was the case anyone with a pre 87 scheme which has a big proportion of their pot available for tax free cash, would take the cash now, stick it into gilts to avoid IHT. This is not the case and as a result people who can afford to defer taking benefits,have defered taking drawdown in case they die,as the none drawdown funds are exempt from IHT up to the age of 75.

You need to check your information.

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Nov 29, 2012 at 09:35

If everything is up for consideration; what happens to AVC's - where they are available - which are a bigger saving to the pension pot of the higher earner getting a greater tax relief/

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Mark C Digby

Dec 02, 2012 at 11:32

Pensions and SIPPS are a way of ensuriing that you never get your money back as charges and negative view of life expectation diminish your returns. At least you can sell ISAs any time you wish or change the investments in same with normal dealing charges. SIPPS are only for large amounts invested, my charges (GAD) take an increasing proportion of the sum allowed to be taken, useless!Yes please bring in an increase in the ISA limits!!

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Dec 02, 2012 at 11:34

A basic comment. When I moved from staff contract to freelance some twenty or more years ago, I asked my Bank should I buy my own pension.

Answer: As a high rate taxpayer the pension offers the tax advantage, but as an investor in a PEP (and then Single Company PEP £9000 pa total) you lose the tax ingoing but reap the benefit later as the cash invested is yours and when you die, instead of the amount disappearing it is part of your estate.

Did that, and it has been very successful and the growth has been good, reinvested income has helped and the money is under my control. Satisfied with now a comfortable base pension and so far no need to call upon the PEP/ISA arrangement.

The suggestion under consideration seems to be a good one to get away from more Government meddling.

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