In June’s Emergency Budget, the government promised to increase the yearly ISA allowance by the value of this September’s measure of retail price index (RPI) inflation.

Last week it was confirmed that the annual ISA allowance will increase from £10,200 to £10,680 from 6 April 2011 – the new limit was calculated with RPI at 4.6 per cent and rounding up to the nearest £120. At the same time, the coalition also announced it is to slash pension limits; currently you can pay 100 per cent of your salary into a pension up to a limit of £255,000. From April 2011, this limit is cut right down to £50,000.

Although for the vast majority of savers, putting 100 per cent of their salary into a pension is simply unrealistic, and with the average wage at £26,075 (source: Halifax), very few will hit the £50,000 limit anyway, the decision has still been making waves, with many savers turning away from traditional pension to fund their retirement.

“Just because you have to save for your retirement doesn’t mean you have to do it through a pension – ISAs can provide a good alternative and a great way to get people to start thinking about saving for retirement,” explains George Ladds, head of investment and pension research at Fair Investment Company.

Mr Ladds says the lower pension limit and higher ISA limit could see people make different investment choices, but it is hard to say which is the better option because there are pros and cons of both ISAs and pensions. He says combining the two would be the best plan and urges the government to do something about it.

“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.”

Fidelity Investment Managers also want to see a system that combines pensions and savings, and is calling for a single annual savings allowance covering both pension and ISA contributions with an annual cap on tax-advantaged savings of around £55,000. This would replace both the current annual ISA allowance and the coalition government’s planned annual cap on pension contributions.

Fidelity also urged the government to incentivise ISA contributions by offering a cash bonus when people open an ISA, with annual payments for the life of the account saying it would :discourage ‘raids’ on Isa savings and encourage younger savers who may traditionally shy away from saving.

“Some radical decisions need to be made to encourage a whole-of-life approach to wealth accumulation which will prevent people falling back on the state in retirement,” said director Tom Stevenson.

© Fair Investment Company Ltd