To save in a private pension, an ISA or not at all?

New IFS research examines individuals' choice between saving in a pension, saving in other vehicles and not saving at all. The research finds that:

• In the long-run pension tax relief is more generous than that available on Individual Savings Accounts (ISAs) for most feasible cases;
• For many individuals the tax system provides an incentive to save in an ISA before Ѥrip-feeding' their funds into a private pension in the run-up to retirement;
• Individuals who prefer to have access to their funds will find saving in an ISA relatively more attractive especially when dividends are high;
• People who expect to retire onto means-tested benefits will need to think particularly carefully about whether to save for their retirement at all, and if so whether to save in a pension or an ISA.

The Government has chosen to make means-tested benefits for older individuals more generous (for example through the Pension Credit), and this will reduce the financial incentive to save for some individuals. Particular groups are especially likely to end up on means-tested benefits in retirement. These include those approaching retirement who are low earners, have little savings or live in rented housing. These people might judge that the sacrifices involved in saving today outweigh the likely future gains.

Carl Emmerson, one of the authors of the report, said: Ӊt is clear that, for higher earners and those whose employers will contribute, private pensions remain a tax-favoured form of saving for retirement. For others, including many of those in the Government's Stakeholder Pension target group, private pensions appear less attractive.Ԋ

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Notes to Editors

1. "The Tax and Benefit System and the Decision to Invest in a Stakeholder Pension" is available online.
2. For press enquiries and advance press copies, contact Emma Hyman (020 7291 4850 or @email).
3. All discussion of the relative merits of different saving strategies refers only to the broad picture and the current tax and benefit system; individuals should consider carefully their own situation.