This latter feature, which makes Isas popular with savers and largely immune from government interference, is nevertheless a potential downside when investing for a pension. This is because pension saving needs to be consistent, and largely without early withdrawals to give individuals enough money to live comfortably in retirement.
So the diligent Isa investor will have to develop a high degree of self-control to resist taking bits and pieces (for say a new car or a holiday) out of what could become a very large fund.
But this flexibility also gives an advantage to Isas over pensions. While pension saving is almost always opaque and confusing in its complexity, Isa saving is simple and allows young people to get to grips with investing first-hand.
Such practical lessons are likely to be valuable later on in life, giving Isa investors the potential for better investment and financial understanding, not just immunity from government interference.
Is the early-withdrawal risk sufficient to make Isas unsuitable for pension saving? In my opinion, no. The evidence over the years shows that governments cannot be trusted to protect pension savers’ hard-earned funds, and I think this nibbling-away at pension funds’ money and investment limits will continue.
With this evidence to hand, I now advise young people who ask my advice about pensions to forget them, and invest as much as they possibly can in Isas.
Neil Record is a former Bank of England economist and author of ‘Sir Humphrey’s Legacy’.