Could new limit see investors pick ISAs over pensions?

A recent poll by Fair Investment Company revealed that 14 per cent of respondents have no pension, and of those, a third plan to fund their retirement using ISA investment.

"Our poll shows that although most people do have a pension, many are looking at alternatives, particularly, ISAs. And with the limits going up again in April, more could follow suit," says George Ladds, head of investment and pension research at Fair Investment Company.

"It's a long running debate - which is better, pensions or ISAs, and the short answer is, they both have their benefits," says Mr Ladds. "But, ordinary savers tend to want simple products that they can access any time and pensions tend to confuse people. And, because they are not accessible until 55 many savers, but particularly youngsters, are put off pensions. ISAs, on the other hand, are very simple to understand."

With ISAs, you can pay in up to £10,200 each year, with a maximum of £5,100 in cash (from next April, the limit will be raised to £10,680, up to £5,340 in cash), you do not have to pay income or capital gains tax on anything you earn and you have easy access to your money.

There is also an extra benefit of ISAs when it comes to retirement - when used as a source of income, ISAs do not affect age related allowances for the over 65s. But, says Mr Ladds, that does not mean pensions should be shunned.

"Unfortunately, because pensions are seen as complicated, many of the benefits are not properly understood," says Mr Ladds. "Yes, the cash is inaccessible until you are 55, and yes, you are taxed when you draw your pension, but you get tax relief on your contributions - so a basic rate tax payer only pays in £80 but gets £100 in their pot while a higher rate taxpayer pays in just £60 for £100. Plus, by the time you draw your pension you are more than likely going to have a smaller income, so will be taxed at basic rate."

One of the other major benefits of a pension, says Mr Ladds, is that you can pay so much more into it than you can into an ISA. With a pension, you can pay in 100% of earnings up to £255,000 (changing to 100% of earnings up to £50,000 in April 2011) and most employers match or in many cases, exceed your own contributions.

With ISAs, there are much smaller limits and employers cannot contribute. Plus, with pensions, you can opt for 'salary sacrifice'.

"Obviously, there are pros and cons of both ISAs and pensions, but what we don't want to see is people being put off pension savings and then not having an alternative, or saving into an ISA but not saving enough for retirement."

Mr Ladds says what he would like to see is some sort of ISA/pension blend so that people can take the best of both.

"The tax and contributory benefits of pensions combined with the flexibility and accessibility of ISAs could be a much more attractive retirement savings option, especially for younger people," he said.

"We have had successive governments who have done nothing. Let's hope that this government is serious about pension reform. They need to make pensions simpler and more flexible, then people will start to see their benefits, which could be the way to get people interested in saving for their future."