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Wealthy investors hit by cuts to pensions tax relief are turning to individual savings accounts (Isas) to fund their retirement, according to the UK’s largest brokers and wealth managers, with one saying that 10 per cent of its customers planned to do so.
The annual Isa allowance swelled from £15,240 to £20,000 in the current tax year, while those saving into a pension suffered a further cut to tax relief, slicing the amount the wealthiest can save into a pension to just £10,000 per year.
Wealthy pension savers have also been hit by the drop in the lifetime allowance from £1.8m in 2012 to £1m today. In 2011, the annual allowance was £255,000, but it was progressively reduced to £40,000 by 2014, and is even less for those with income over £150,000.
Brokers say investors who are “capped out” of pensions are turning to Isas instead. According to Interactive Investor, one in five customers managing a pension on the DIY platform has already invested the maximum £20,000 Isa allowance this tax year.
“This is a clear indication of the increasing reliance that pension investors are placing on Isas in order to give them maximum flexibility in retirement and also to ensure that they don’t get caught out by the £1m lifetime limit,” said Rebecca O’Keefe, head of investing at Interactive Investor.
Online wealth manager Nutmeg asks its customers to set goals for their investment pots and said one in 10 customers had set “pension” as the goal for their Isa. Nutmeg said more than two-thirds of its male customers had said they were likely to use Isas to provide income in retirement.
Hargreaves Lansdown, the broker, said an estimated 364,000 people had been affected by the tapered annual allowance on pensions, based on data from the Office for National Statistics (ONS). This means £1 of their £40,000 annual allowance is withdrawn for every £2 of income earned over £150,000.
About 131,000 workers in the UK earn more than £150,000 a year according to the ONS, but when dividends, property and other sources of income are included, a far greater number will be caught.
Hargreaves said those on higher incomes were more likely to maximise their Isa allowances and pensions and said it anticipated that trend would rise as the Isa allowance increased.
Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “We are seeing higher earners and people with large pension pots looking at Isas to supplement their pensions.”
According to HMRC, 41 per cent of stocks and shares Isa investors invested the maximum into an Isa in the 2014-15 tax year, rising to 51 per cent for those with incomes of more than £100,000 and 61 per cent for those earning £150,000 or more.
Brokers said they had also seen a rise in investors using their increased allowance to pay money into their Isa regularly — akin to pension saving — rather than investing lump sums at the tax-year end.
According to Hargreaves Lansdown, the number of people saving regularly into an Isa — rather than with a one-off annual payment — rose by 40 per cent between January 2016 and November 2017 to 74,010 customers. Bestinvest said the number of investors saving via monthly direct debits increased this year by 19 per cent compared with the previous tax year.
Hargreaves added that the higher Isa allowance played a part in its 43 per cent rise in net new business in the first half of the tax year.
Charlie Musson of investment platform AJ Bell said: “Until a few years ago you could put £255,000 into a pension each year and have a maximum pot of £1.8m. With those numbers reducing to £40,000 and £1m respectively, those with significant disposable income have had to look elsewhere. The increase in the annual Isa allowance to £20,000 over the same period has provided a welcome new home for some of their savings.
“We have certainly seen a jump in the average Isa balances on our platform and we have almost 20 Isa millionaires and hundreds of investors with more than £500,000 in Isas. We even have some accounts with over £1.5m invested, which demonstrates the value that can be built in Isas by wealthy savers.”
To read FT Money’s guide to Isa season 2018, click here