Spear, who is managing director of Spear Financial Limited, says that while pensions should not be completely written off, everyday investors need to have closer contact with their savings. "While fundamentally I don’t want to completely write off pensions, ISAs are such a huge draw for the majority of investors," he said.
Spear’s main reasons for choosing an ISA over a pension are:
- The easy accessibility of ISAs
- Record low annuity rates
- Possible tax raids on pensions
- The flexibility to switch from an ISA to a pension, but not the other way around
He withdrew his previous comment that he has seen no real improvement in pensions legislation, although he says the products still have major faults.
"We have seen some sort of improvement to their flexibility, but my major issue with them is the lack of access," he added.
The adviser says another problem is that they do not reflect the financial needs of the everyday investor.
"We have to be real about the issue – perhaps before we think about retirement, we need to think about university fees, a deposit for a house and wedding costs. What I am saying is that people, at a very young age, are being sold pensions and their money is being locked away. When can you access them?"
Spear added: "They say at 55, but in reality it is going to be nearer 60 to 65."
Not only is this a problem that his clients have to face, but Spear himself has been in situations where he has had to use his ISA cash to cope with unexpected problems.
"You have to put it in the context of real life, people may need to get on the property ladder or buy a car – for instance my son plays the cello and to replace that could cost £12,000 – but how do I access this money if I have put it all in a pension?"
"I'm not saying that pensions don't have a place, but I remember when my wife was at university with a number of trainee teachers," he added.
"The man from the Pru was selling pensions to them – 18 to 21 year olds, before helping them to build up a pot that could set them off in life rather than waiting until age 60-plus."
He added: "The major draws of a pension are that they give you the benefit of tax relief planning and the discipline of saving, which can be both negative and positive."
"However, annuity rates are at 300-year lows and I think the flexibility of an ISA is such a powerful argument."
"I would always look into an ISA first for a client, but if you feel you have made a mistake and you want a pension instead, then you can easily move it across, but you can’t do it the other way around," he said.
Despite Spear’s preference for ISAs, he says that as a tax tool he certainly sees the advantages for certain clients of holding a pension.
"I tend to use pensions for tax reasons, particularly higher-rate, additional-rate tax payers, or for mitigating capital gains tax. In particular I would advise them to soften inheritance tax or reduce areas such as chargeable gains on investment bonds."
"Basically, all tax-driven reasons," he added.
"I’m hesitant to completely write off pensions, because I do recommend them to certain clients for certain times – but that is because they are a useful tax tool. What we are talking about is real-life planning for real-life people."
"Where do normal people take out that sort of money – borrowing via mortgaging their house? This is where an ISA is so important and they can also generate income. For instance a lot of my clients hold Invesco Perpetual Income, which can give a yield of over 6 per cent a year," he added.
Whitechurch’s Ben Willis understands why many investors have turned to their ISAs for retirement savings, but he warns that pensions should not be written off.
"I do think that investors should utilise all the tax breaks on offer," he said.
"I have also seen a lot of people who are disgruntled, such as private investors, clients, colleagues and friends and are therefore shooing their pensions but are keeping their ISAs."
"There is merit in that as many don’t want to just lock up their money just in case tomorrow turns out to be one of those rainy days."
"However, though you might not get the desired flexibility, your pension contribution is important. There will always be the temptation to dip into your ISA and if you do that you are not protecting yourself for retirement."
"There are pros and cons with pensions, but they are still very important," he added.