Sound Financial Group Blog

ISAs to the rescue? “ISA ISA Baby”... The very annoying Halifax ad’ on TV has thankfully long gone, but in terms of retirement planning ISAs have a key role to play...

In my previous blog I mentioned the double whammy for those at or near retirement in terms of falling pension plan values and the continuous fall in gilt yields (they fell to just 2.75% in September), which lowers pension income from annuity purchase as well as income drawdown.
There is a third reason that income drawdown plans are set to deliver lower incomes in the near future and this relates to the rule changes from April this year which have resulted in the maximum withdrawal levels being cut from these plans – down from 120% of an equivalent annuity – to 100%. There have been calls from within the pensions industry to the Government to reverse this decision, however the noises coming from the Treasury are not encouraging to those who want to see such a u-turn.
The financial press has been highlighting the implications of these changes for income drawdown investors and considering alternative ways of providing income. Individual Savings Accounts (ISAs) have again been at the forefront of their stories.
If there was any good news emanating this week from the rise in inflation to 5.2% CPI and 5.6% RPI (it’s highest for 20 years) it is that ISA limits will rise in the next tax year (2012/13) from their current level of £10,680 per person to £11,280 – or £600 per person if you prefer. 
We have long been advocates of not having all of your eggs in the pension’s basket and substantial funds can now be built within ISAs to supplement retirement income, which would be free of both income and capital gains tax. A couple who each save the maximum into ISAs (assume equity linked funds averaging growth of 6% pa and increases in the ISA allowance of 3% pa) over a 20 year period could accumulate combined funds in excess of £1.1M.
At a modest withdrawal level of say 4% pa they could supplement their pension income by around £3,700.00 per month or £44,000 per annum – tax free!    
As always forward planning is the key and having more than one string to your bow is an absolute must for those serious about their planning their financial freedom.
If you wish to discuss your own retirement planning strategy or would just like a second opinion on your current arrangements, please contact us and take advantage of a no cost or obligation meeting.