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Pensions still the most effective savings option, says IFS | Pensions still the most effective savings option, says IFS |
(about 11 hours later) | |
Pensions will remain the most tax-efficient form of savings, despite forthcoming tax changes, the Institute for Fiscal Studies (IFS) has said. | |
The IFS compared saving in a pension with buying a house, putting funds into an Individual Savings Account (Isa), or investing in buy-to-let property. | The IFS compared saving in a pension with buying a house, putting funds into an Individual Savings Account (Isa), or investing in buy-to-let property. |
The main reason is that, under the auto enrolment programme, employers have to match employee contributions. | The main reason is that, under the auto enrolment programme, employers have to match employee contributions. |
As a result workers get a 60% boost to their pension pots, the IFS said. | As a result workers get a 60% boost to their pension pots, the IFS said. |
"Since employers rarely make equivalent offers to match employees' contributions to say, an Isa or a house, it makes savings in a pension much more attractive relative to other assets," the report said. | "Since employers rarely make equivalent offers to match employees' contributions to say, an Isa or a house, it makes savings in a pension much more attractive relative to other assets," the report said. |
The study took into account the new Personal Savings Allowance (PSA) and changes to dividend taxation that come into effect in April, as well as possible changes to pension taxation. | The study took into account the new Personal Savings Allowance (PSA) and changes to dividend taxation that come into effect in April, as well as possible changes to pension taxation. |
The government has previously said that any such changes would encourage people to save. | The government has previously said that any such changes would encourage people to save. |
Dividends | Dividends |
When the PSA comes into effect, basic rate taxpayers will pay no tax on the first £1,000 of their savings income. | When the PSA comes into effect, basic rate taxpayers will pay no tax on the first £1,000 of their savings income. |
Higher rate taxpayers will get a £500 allowance. | Higher rate taxpayers will get a £500 allowance. |
As a result the IFS said that 16m people will stop paying any interest on their savings income, and that 95% of people will no longer have their savings taxed. | As a result the IFS said that 16m people will stop paying any interest on their savings income, and that 95% of people will no longer have their savings taxed. |
However the report says the change will weaken the incentive for many people to save in an Isa. | However the report says the change will weaken the incentive for many people to save in an Isa. |
"For most people, the ordinary bank account will in effect be tax-free in much the same way as cash Isas, and there will be little incentive to save in a cash Isa," it said. | "For most people, the ordinary bank account will in effect be tax-free in much the same way as cash Isas, and there will be little incentive to save in a cash Isa," it said. |
The PSA will also mean an end to tax deduction at source on savings accounts, which will be of particular help to pensioners. | The PSA will also mean an end to tax deduction at source on savings accounts, which will be of particular help to pensioners. |
From April 2016, dividends up to the value of £5,000 a year will be tax-free, although anyone receiving a higher amount will pay higher rates than at present. | From April 2016, dividends up to the value of £5,000 a year will be tax-free, although anyone receiving a higher amount will pay higher rates than at present. |
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