Pensions named 'most effective savings option'

Pensions will remain the most tax efficient way to save money in the UK, despite forthcoming tax changes.

The Institute of Financial Studies (IFS) compared pension with ISAs, buying a house and buy-to-let properties to gauge which delivered the best return on investment.

Pensions came out on top thanks to the impact of new auto enrolment legislation, which means employers have to match employee contributions.

According to the IFS, workers get a 60% boost to their pension pots under the new set-up.

"Since employers rarely make equivalent offers to match employees' contributions to say, an ISA or a house, it makes savings in a pension much more attractive relative to other assets," the report said.

Comparing returns

On differences between savings vehicles, the report found:

• Pensions remain the most tax-efficient major form of saving. Employer contributions to pensions are especially strongly favoured because of generous treatment in the National Insurance system. For a basic-rate taxpayer a contribution to a pension by their employer with a net cost of £70 is worth the same as a £100 contribution to an ISA.
• Investment in owner-occupied housing is significantly more tax advantaged than investment in property to let, even before the recently announced 3% increase in Land and Building Transaction Tax (LBTT) for second homes.
• Additions to ISA limits and taking some dividend and interest income out of tax means that savers can now save substantial amounts in bank accounts and shares tax-free. 

What will the Budget hold?

However, pensions - the lifetime allowance in particular - have been repeatedly targeted by Chancellor George Osborne.

Only four years ago, the allowance was £1.8million. Now it is £1.25million and in April it will drop to £1million.

Faced with a budget deficit which could total £70billion by the end of the decade, pensions remain a juicy target for a Chancellor in desperate need of additional capital. 

Allan Gardner, Financial Services Director at Aberdein Considine, said: "It’s widely expected that pension savers – especially higher and additional rate taxpayers – will see significant change in the forthcoming Budget.

“Under the current regime those making personal contributions in to a pension plan receive tax relief on payments in at their marginal rate of income tax (20%, 40%, or 45%) – this is what makes it such an tax efficient way to save, especially for higher rate taxpayers.

“However, Mr Osborne appears to be considering the introduction of a flat rate of tax relief – rumored to be between 25% and 33%. Basic rate taxpayers would likely be slightly better off, but those currently receiving relief at 40/45% face being penalised.

“Therefore, now is a good time to seek financial advice about what is the best course of action for your personal circumstances.”

Independent Financial Advice

Aberdein Consindine has a network of Independent Financial Advisers throughout Scotland, including the cities if Aberdeen, Edinburgh, Glasgow, Perth and Stirling.

If you would like to speak to Allan or a member of his team, call 0333 0066 333 or click here.

The above is for information only and does not constitute advice. Aberdein Considine is authorised and regulated by The Financial Conduct Authority.