Pensions still more ‘tax-efficient’ than ISAs and buying a house
Pensions are still the most tax-efficient major savings option, according to a new report by the Institute for Fiscal Studies (IFS).
The financial think-tank examined how taxes and charges can affect the attractiveness of different forms of savings.
It found that pensions remain the most tax-efficient form of savings, largely due to matched contributions from employers under auto-enrolment.
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.
Buying your own home is also “significantly more tax-advantaged” than investment in buy-to-let investments, the report said.
However, the IFS warned that savers are facing a “complex and changing array” of different tax treatments that make decisions hard for savers.
Small differences in fees and charges can also outweigh the effects of different tax treatments, the report found.
Stuart Adam, who was one of the IFS report’s authors, said that the last few years have seen “radical changes” to the taxation of savings, which will “take millions of people’s savings out of the tax net altogether”.
He said: “Ideally people might make savings decisions based on the underlying risks and returns of different assets. But taxes and charges can significantly change the relative attractiveness of different savings options. If people are unsure about how taxes and charges might change, their decisions become even harder.”