Demystifying Financial Products: A Short Guide to Pensions and ISAs
As the old adage goes - ‘save the pennies and the pounds take care of themselves’. This maxim supports the notion that maintaining a savings account and investing leftover cash can push individuals into a much better financial standing over an extended period of time. Undoubtedly, this remains solid advice and any type of saving is better than none. However, traditional savings accounts are now offering lower rates of interest than in previous years. If we’re also being realistic, not everyone has a disposable monthly sum that they can place into a savings account. Living in 2020, we are faced with a variety of daily pressures that make financial planning more difficult.
The world of financial products can be a scary one. Terms such as ‘Lifetime ISA’, ‘Instant-access ISA’ and ‘Notice ISA’ coupled with complex pension structures can make saving a daunting task for even the most money-savvy of consumers.
In 2019, 53.6% of all complaints made to the Financial Conduct Authority (FCA) were in relation to the advising, selling and arranging of financial products, illuminating the vast number of consumers who feel increasingly mislead with regards to financial decisions. These statistics also suggest that pensions and ISAs prove to be amongst the most confusing financial products for consumers.
The Chartered Institute for Professional Development (CIPD) highlighted that the proportion of over-50s in the workforce has increased from 21% to 32% between 1992 and 2019. This obviously increases the number of operating pension pots. It is estimated that within the average lifetime, an individual will work for an average total of six employers. This may mean six or more different pension providers, which means more care needs to be taken to ensure that essential funds are not overlooked or unaccounted for.
There are many apps available to help consumers consolidate and manage any pension pots that they may have. These apps work to take any funds that you may have in existing work-based and private pension pots and consolidate them in one manageable place.
There is a government website where consumers can search for contact information relating to pensions that they may have by entering previous employers’ details (You can access this HERE). Not all employers are listed by the name that they trade under, but there is a link to Companies House available on the government website where you can obtain more information if you experience difficulty.
It’s easy to lose track of policy numbers and documents due to the multitude of pension providers out there. Contacting previous employers may shine a light on this missing information but remember that companies have restrictions on the amount of time they can hold onto your information. GDPR legislation means that if you left your place of employment over 7 years ago, they must dispose of your personal data. However, your previous employer should be able to tell you which pension provider they used during the period that you worked there.
There are many comparison sites out there who can offer advice on shopping around for pensions. Getting organised now will give you peace of mind that your pension is in the right place for when you eventually need it.
There are four categories of ISA (or Individual Savings Accounts) out there;
- Cash ISAs
- Stocks and Shares ISAs
- Lifetime ISAs
- Innovative Finance ISAs.
The names of these ISA accounts may vary slightly depending on which financial institution you deal with. For the 2019-20 tax year, up to £20,000 can be put into an ISA. This figure may change in the next financial year. Specialist advice can be sought from an Independent Financial Adviser (IFA) if you are looking to invest in an ISA.
Unbiased is an independent site that asks a few simple questions and then recommends Independent Financial Advisers based on your location. You can search for an IFA by visiting www.unbiased.co.uk.
So, what are these ‘categories of ISA’ and what do they do?
Cash ISAs – A cash-based savings account that is available to residents of the U.K. This type of ISA means that consumers can save and receive tax-free interest on their savings, up to an agreed limit.
This limit varies, depending on the product in question. Cash ISAs usually have a duration of time in which withdrawal of funds cannot be made, and some with minimum monthly savings amounts. There are situations when making a withdrawal from a cash ISA can incur penalties. Consumers should always check for minimum deposits, maximum limits on savings and any penalties that could potentially apply before setting up an ISA with any financial services provider.
Cash ISAs accrue tax-free interest (up to certain limits) and many are based on a fixed rate of interest. This means that the financial ‘outcome’ of the ISA can be more easily calculated from the start.
Stocks and Shares ISAs
Stocks and Shares ISAs are different to cash ISAs in as far as the money that is put into them is invested into a range of different schemes; individual shares, investment trusts or funds and government or corporate bonds. Due to the nature of investment, stocks and shares ISAs can be riskier depending on the changing markets, and as such, there is the potential for investments to decline in value.
With this type of ISA, a clear indication of what the value will be cannot be made until the time that the ISA is due to be cashed in. However, this type of ISA is also tax-free.
This ISA is also a tax-free savings or investment account. The purpose of this ISA is to allow people aged from 18 to 39 to save for retirement or buy their first home.
For every £4 placed into the ISA by the saver, the Government will contribute to the pot of savings (Up to a maximum saver-based contribution of £4,000). Some Lifetime ISAs have the option to invest in stocks and shares and can only be used to purchase a first property up to a value of £450,000. After the age of 60, the saver can cash this in and spend on anything that they like with no restrictions.
The drawback to this ISA is that if any of the ‘cashing-in’ criteria are not met (the purchase of the first home or withdrawals before the age of 60), then there will be a 25% penalty (the equivalent of the government contribution).
Innovative Finance ISAs
This ISA differs in as far as it is a product based on lending through loans rather than saving cash. This is sometimes referred to as ‘peer-to-peer lending’ as it is a relationship between an investor and borrower – whether individuals or businesses.
The rates of interest on this type of ISA can be higher than on a traditional savings account, yet the annual tax-free allowance is the same. Peer-to-peer lending through Innovative Finance ISAs carry the usual risk of investment, paired with the outcomes of the financial performance of a third party. Care and specialist advice should be sought if this is the type of ISA that is being considered.
Where to go from here
There can be additional stipulations in the terms and conditions of specific types of ISA from different financial institutions and these should always be referred to when considering your options.
By remaining well informed with regards to the financial products on offer, you can ensure that you make the best decision for you. Shopping around, doing your research and seeking independent advice from a qualified financial adviser can pay dividends in the long run.
We have put together our top-tips for staying informed when it comes to ISAs, pensions and any other financial products that you have or intend to invest in –
- Research the product – Carry out your own research on the financial product that you are thinking of investing in. Read the reviews, look at the terms and conditions and illustrative examples that will give you an idea of what your own investment could look like.
- Shop Around – Don’t jump into moving all your pension funds to the first provider that you see. Look at the options out there, use comparison sites and take on the advice of reliable, trusted specialists when you can.
- Seek the advice of a financial adviser – There are a multitude of financial advisers out there who can give specialist advice based on your current situation. You can search online for an Independent Financial Adviser (IFA) or visit unbiased.co.uk and answer a few questions to get recommendations tailored to your circumstances.
- Don’t take no for an answer – There may be some former employers who are more difficult to obtain information from in relation to pensions. Ensure you are writing to them professionally, outlining the information that you are looking for and the reasons for this. Communicate directly with HR / Payroll as this may get speedier results.
- Remember your consumer rights – You are entitled to change your mind. Agreements made with companies in relation to financial products are no different from other situations. Check the terms and know your rights to cancellation and any constraints placed on accessing funds from the pension or ISA concerned.
Although we are unable to advise directly on any individual financial products, consumeradvice.scot are able to offer free and practical advice on a number of consumer issues. You can contact consumeradvice.scot on 0808 164 6000. We are open 9am-5pm, Monday-Friday. You can follow us on social media – Twitter: @advicedotscot and Facebook at www.facebook.com/advice.scot, Instagram: @advice.scot, or get ahead by visiting our knowledge centre at www.consumeradvice.scot.