Merging ISAs and pensions could damage the incentive to provide income for retirement and is a dangerous idea, says London & Colonial.

The firm’s chief executive, Ken Wrench, said that complicated rules and regulations will be necessary should the two savings vehicles be merged, in order to maintain the tax relief that is currently permitted on pensions.

But that would be a minor technicality compared to the possibility of retirement savings sitting in ISAs being ‘plundered’ in a similar fashion to 401k plans in the US, he warned.

“We need to reset the idea of pensions with the public and provide greater incentive to put money away for retirement that cannot be raided and therefore, will be there to provide for the many more of us who will live to a ripe old age.”

The debate surrounds whether, if retirees can draw income from their pension assessed to a minimum level, they should have the freedom to do as they wish with the remainder of their pension opt.

“The problem with this is people will have been incentivised to save into a pension but they will not be using the savings for the reasons intended or supported by that incentive.
“If that occurs, sooner or later the Treasury will look at it and say ‘perhaps we shouldn’t be giving these incentives or only to a minimum level’. In fact, we are seeing that already in respect of tax relief for higher rate earners.”

Wrench warned that the end consumer is the one who will lose out, as by merging the concepts of savings and income after work, and allowing pension pots to be dipped into, you begin to undermine the reasons the tax relief was granted in the first place. “That opens the door to possible loss or reduction of pensions tax relief,” he said.

“The danger we face in reviewing and reforming this area of savings is that we could damage the incentives to provide income for retirement,” commented Wrench. “The effect of an ageing population and the strain it will put on individuals and society are not being fully realised as yet.”

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