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Pensions are no good any more, are they? 

ISAs are no good anymore, are they?

Sometimes people ask me what I do for a living, and when they do I tell them.  This often results in the ensuing conversation turning to their impression that pensions and/or Individual Savings Accounts (ISAs) are no good anymore.  This sweeping generalisation has the effect of dissuading people from building up their long-term savings using the highly valuable tax breaks available from these products.  This is a shame as we all need to plan for our financial security.

Pensions and ISAs are just savings and investments in a special “tax-wrapperâ€�.  The underlying investments or cash deposits in a pension and an ISA benefit from the same tax advantages.  All income received into these 'tax wrapper' investments, except dividends from company shares, is exempt from Income Tax and all realised profits are exempt from Capital Gains Tax.

Pensions gain from tax relief upon the contributions made, initially at 20%, but the benefits, other than the Pension Commencement Lump Sum (“tax-free cashâ€�), drawn upon retirement, are taxed as income.  ISAs contributions don't attract tax relief, but, conversely, income and/or lump sums can be withdrawn at any time in the future with no personal taxation implications.

So, why have pensions and ISAs gained such a poor reputation?  I believe that it is because of poor investment performance.  Often I have seen the  “tax tail wagging the investment dogâ€�; in other words the adviser's and/or client's focus has been achieving the tax benefits rather than care over the selection and subsequent review of the underlying investments.

Any investment decision should start with a thorough understanding of investment risk and returns and your tolerance to short-term market movements.  Of key importance in this discussion is the length of time your money is likely to remain invested before being called upon.  This will make a difference as to the type of investments you need to consider.

Generally, the most suitable investments considered for long-term arrangements such as pension and ISAs are multi-asset portfolios which are actively managed.  These portfolios give the investment manager considerable scope to seek out good investment returns wherever they may be.  Furthermore the manager is also able  to anticipate and react to changes in the economic and investment climate.   Such arrangements can be tailored to the precise risk profile for any client and at any stage in their personal investment life cycle.

Caution needs to be tailored into any portfolio, particularly within the last 5 years before investments are likely to be withdrawn.  This is where regular reviews with the financial adviser is essential as a gradual move to lower risk investments may be required.

So, in conclusion, with proper advice, pensions and/or ISAs should still be considered as a part of the over-50s financial plan.