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Investors neglect pensions and flock to ISAs

The secondary annuities market is likely to further increase the level of investment in ISAs

3 February 2016

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One in four private clients are choosing to invest in ISAs over private pensions as the pension freedoms give them access to new investment funds.

Twenty-four per cent of investors are completely shunning private pensions due to the greater autonomy investors have in accessing money held in stocks and shares ISAs, research from The Share Centre has revealed.

The government has gradually been increasing the tax free allowances available on ISAs, while capping the pensions lifetime allowance and reducing the tax free allowance, which has reversed the attractiveness of the two saving mechanisms.

'We may be seeing the beginning of the death of the private pension,' said Richard Stone, chief executive of The Share Centre.

'The pension freedoms have got investors thinking about the flexibility they want from their long term savings vehicles and the fact that a quarter of wealthy investors are looking at ISAs, and ISAs alone to finance their future speaks volumes about what investors want from their investment products.'

The level of investment in ISAs is likely to increase because from 6 April 2017, the pension freedoms will be extended to include people in retirement who have already purchased an annuity.

More than five million people will be given the freedom to sell their annuity, as a new 'secondary annuity market' is created.

Announcing the changes, economic secretary to the treasury, Harriett Baldwin commented: 'People who've worked hard and saved hard all their lives should be trusted to make the right decision for them and with the help of the regulator, we will ensure these people have the right information to do that.'

Currently, anyone already in an annuity faces a tax charge between 55 and 70 per cent - this will be removed as part of the new annuities market.

As a result of auto-enrolment and upcoming changes, Richard Stone believes that the workplace pension might become the only pension scheme people will invest into in the future.

'These changes include £1,000 of tax free interest income, the £5,000 dividend allowance, substantially reduced caps on pension contributions and the lifetime allowance. These all mean the main benefit of the ISA is to accumulate a tax free savings pot over time using multiple years' allowances, in essence, as a long term savings vehicle.

'Since pension freedoms came into place, we've seen inflows into ISAs increase by more than 11 per cent. So while many media commentators touted that investors would splash their cash on Lamborghinis, it might be that they actually splashing their cash on stocks in their ISAs instead.'


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Tax & Wealth structuring Pensions