New stats show that we are turning our backs on pensions, and instead sticking our money in ISAs. Which is the best way to save for retirement?
Saving for retirement is a tricky subject. On the one hand we know we need to, at least if we wish to avoid eating dust in our golden days.
But on the other hand, we’ve seen financial providers collapse and the economy in turmoil. Who should we trust with our cash?
A few decades ago life was simpler. You started work, joined your company’s pension scheme and stayed put until you retired. If you were lucky, you’d still be taking home around two-thirds of your working salary.
But times have changed, and many of us currently feel we are struggling financially to survive at all, let alone find spare cash to stash away for retirement.
And interestingly, while pensions were our retirement savings vehicle of choice, we may be moving in a different direction.
We’re saving more in ISAs than pensions!
According to the office of National Statistics, 2009/10 was the first tax year in which the amount we saved into ISAs outstripped the amount we put away in company and private pensions.
Why the change?
ISAs are straightforward
ISAs are certainly easier to understand. We can currently invest up to £11,280 into a Stocks and Shares ISA, or up to half of this (£5,640) in the popular Cash ISA.
Contributions are made from your net income, but any money you draw is tax-free. They’re flexible, you can withdraw the cash when you choose and if you die, your ISA can be passed to your descendants (although it will lose its tax-free status).
Compare this to pensions, where contributions are made tax-free, but cash is tied up until retirement. You may then have to use a large portion to buy an annuity, which is taxed at normal income tax rates. And should you die within a few years, it could leave your family with nothing. Ouch.
Of course, it’s not that cut and dried. Indeed, if your employer contributes to your company pension you could find this is still potentially a far better way to save.
But if a retirement ISA is your choice, check out some of the best Cash ISAs on the market:
Top Cash ISAs (for new money)
|
Account |
Rate |
Min. initial deposit |
Access |
Bonus/Conditions? |
£85,000 compensation limit shared with: |
|
3.5% AER |
£1,000 |
Post |
Includes 2.5% bonus until 31/10/13
|
Nationwide BS, Derbyshire BS, Dunfermline BS. |
|
|
AA – Internet Access ISA (Issue 3) |
3.5% AER |
£2.5k |
Online |
Includes 12 month, 3% bonus
|
HBoS |
|
Coventry BS |
3.25% AER |
£1 |
Post/Branch/ Online/Phone |
60 day notice for withdrawals or loss of interest. Includes 12 month, 0.5% bonus. AER guaranteed to be at least 3.25% until 5/4/13.
|
Stroud & Swindon BS |
Source: eMoneyfacts
The Cheshire BS account (which is part of the Nationwide BS group) must be applied for by post. You can make unlimited withdrawals but balances below £1,000 earn just 0.25%.
The AA’s account can be opened online, but you will need a hefty £2,500. Modest savers can turn to the Coventry BS, paying a decent 3.25, although this account is best for long-term savers due to the 60 days' notice required for withdrawals.
Fancy earning 4.25%?
But wiping the floor with the rest is the Flexclusive ISA from Nationwide BS. Paying a healthy 4.25% (including a 2.25% AER bonus until 31 October 2013) on new deposits of £1+ it would top all the tables, if it wasn’t for its rather large catch – it’s only available to Nationwide FlexAccount customers who pay in at least £750 per month.
Although, with consistently high ratings from Defaqto and Which? and free annual European travel cover to boot, you could do worse than switch.
But what about those of us that wish to earn a better rate on our existing ISAs?
Top Cash ISAs (that allow transfers in)
|
Account |
Rate |
Min. initial deposit |
Access |
Bonus/Conditions? |
£85,000 compensation limit shared with: |
|
Santander |
3.3% AER |
£2,500 |
Online/phone |
Includes 2.8% bonus for 12 months |
Alliance & Leicester, Bradford & Bingley, Cahoot. |
|
Principality BS – e-ISA (issue 3) |
3.1% AER |
£1 |
Online |
Includes 1.3% bonus for 12 months |
Principality BS |
|
Marks & Spencer |
3% AER |
£100 |
Post/Phone |
N/A |
Marks & Spencer |
Source: eMoneyfacts
Santander, in this case, tops the table at 3.3% AER on deposits or transfers of £2.5k+. And Marks & Spencer, while not a market leader, warrants some respect as one of the few accounts whose rate does not include a short lived bonus.
Longer term
But what if you aren’t planning to access the cash for years?
One-year fixed rate
|
Account |
Rate |
Min. initial deposit |
Access |
Closure penalties/conditions |
£85,000 compensation limit shared with: |
|
Saga |
3.6% AER |
£1 |
Post |
Must be over-50. 90 day loss of interest on early withdrawals. |
AA, Aviva, Bank of Scotland, Birmingham Midshires, BM Savings, Halifax, Intelligent Finance |
|
Santander |
3.5% AER |
£2,500 |
Branch,post, phone |
90 day loss of interest on early withdrawals. |
Alliance & Leicester, Bradford & Bingley, Cahoot. |
Over-50s can snap up Saga’s one-year fixed rate ISA, paying 3.6% AER, while Santander is paying slightly less at 3.5% AER, with no age restrictions.
Two-year fixed rate
|
Account |
Rate |
Min. initial deposit |
Access |
Closure penalties/conditions |
£85k compensation limit shared with: |
|
Santander |
4% AER |
£1 |
Branch |
120 day loss of interest on early withdrawals. |
Alliance & Leicester, Bradford & Bingley, Cahoot. |
And Santander tops the table at 4%AER with its two-year fixed rate ISA.
As for locking your money away for more than two years - for me, the benefits do not outweigh the uncertainty!
So, ISAs or pensions?
ISAs certainly win on flexibility and I can understand their popularity.
But don’t rule out pensions completely – while they are unnecessarily complicated they can still be a lucrative option (particularly, of course if you can find a lesser-spotted final salary scheme). Plus, they have the advantage that you can’t raid them before the time comes!
More on saving and retirement:
The UK's best stocks and shares ISAs