Why “pensions ISAs” must be more than ISAs

ISA and Pension

Ros Altmann has recently commented that simply topping up ISAs and calling them “Pension ISAs” is not going to help solve our long-term retirement problems. The danger of using the ISA structure is that it ignores the fundamentals- that people run out of money in later life because they underestimate their capacity to survive, don’t plan for the costs of healthcare (especially long-term care) and forget about the corrosive impact of inflation on their savings and income.

With at least 10m new pension savers arriving as a result of auto-enrolment, pension schemes are no longer clubs for middle and senior management. Everyone’s in, including quite a few non-taxpayers.

So the pension system needs to work for these new savers without alienating the existing lot. Inevitably this will mean getting existing savers to recognise they will not get quite the free ride EET provides them today. But the current congregation cannot be treated with kid gloves, we are in a new world and it is not exclusively their’s.

The new savers, and those who did little saving till now are unclear about retirement. We know this because we talk to many employers and their staff as part of our Financial Education Programs.

Few understand the real cost of insuring against old age, nor the advantage of doing this collectively.

Few understand why individual annuities are so expensive nor the costs of drawdown. Few understand the costs of long-term care nor the impact of inflation on savings.

Few understand the advantages of investing for the long-term in real assets nor the benefits of diversification.

In short, as a nation, we are very short of the levels of financial education needed for us to manage our pensions ourselves. We will need others to do this for us.

Ros Altmann is right, we cannot expect people to save into incentivised ISAs and then invest and spend the savings in a controlled way.

Sensible , independent minded people are fast coming to the conclusion that while we should be free to do what we like with our savings, we need a fall-back position , if we find ourselves out of our depth.

That means a controlled or “targeted” income stream that people can buy into with their retirement savings. Something simpler and cheaper than drawdown and better value than annuities- something in between.


Here is my break-through moment.

Until now I have struggled to find the trigger to incentivise the use of such a product. But Ros Altmann’s article has given me an idea which makes sense (at least to me).

The incentives that Government gives (the top-ups) should be available to pension ISAs but not to ordinary ISAs, in return for the incentives, those who use them should committ to spending their pension ISAs wisely. That means buying into controlled means of spending (decumulating) their money. That might mean buying a guaranteed annuity or buying into a drawdown program or buying into one of these default mechanisms run along collective lines.

People will be free to spend their money in other ways- to buy to let for instance, but in doing so, they will see a proportion of their savings taken back by the Government.

I see this , not as another tax, but as a clawback of incentives given but not earned. Infact, the clawback would simply return people to the position they would have been had they invested in a pure ISA (not a pension ISA).

The principle that people should be incentivised to behave well, is a good principle. People get the idea of being rewarded for long-term saving and sensible spending.

What we need to do now, is press on with the business of helping people with better ways to spend their pensions (or pension ISAs). That is why it is critical we continue to develop the secondary Defined Ambition legislation.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Why “pensions ISAs” must be more than ISAs

  1. scoutmandan says:

    Couldn’t agree more. One of the key dangers in Drawdown vs Annuity debate that is often ignored is that simply, no matter how skilled an actuary you have, no one can predict how long an individual will live.

    Get a thousand people in a room, you can take a good stab at the average and get 10,000 and a skilled actuary can get frighteningly close.

    The risks outlined above of not having a spending discipline in retirement are absolutely on the ball and we have to ask- until people are sufficiently prepared for this, what can fill that gap? Equity Release? Downsizing a home?

    It’s clear that good, relevant financial advice can be more crucial than ever

  2. brianstansted62@hotmail.com says:

    Intellectually very pleasing but in practical terms there would be a whole host of consumers with an “I was never told that rage/attitude” if they lose their pension savings incentives over a course of action that someone else deems to be irresponsible. The current EET regime is a better set up to encourage people to be responsible at the other end (retirement) and quite clearly demarcates pensions from ISAs. The control mechanism is the taxation of benefits at their marginal rate of income tax. Even a completely rash or totally stupid consumer would generally understand the folly of taking too much money out of their pension pot at once, and could be encouraged to save in more flexible but less tax advantageous ISAs for cash needs in future. Freedom is great but surely the role of government is to govern not to allow a free for all in the retirement playground? Discipline in saving and also discipline in decumulation is important and the principle of tax relief on pension contributions is to encourage and reward those who save for retirement income more than those who save just to spend cash later. If responsible people choose to use drawdown to pass on to their families and are capable of responsible withdrawals then why should they be compelled to buying a CDC target pension? And so whilst I agree with the principles of what you are saying I do not necessarily agree that CDC is the panacea implied. From a worried and excited adviser

  3. henry tapper says:

    Worried and excited adviser!

    You sound very school masterly!

    People in older age really don’t want to worry about things- and i hope they will recognise they have the right to spend their retirement savings.

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