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Pensions still the most effective savings option, says IFS

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Pensions will remain the most tax-efficient form of savings, despite forthcoming tax changes, the Institute for Fiscal Studies (IFS) has said.

The IFS compared saving in a pension with buying a house, putting funds into an Individual Savings Account (Isa), or investing in buy-to-let property.

The main reason is that, under the auto enrolment programme, employers have to match employee contributions.

As a result workers get a 60% boost to their pension pots, the IFS said.

"Since employers rarely make equivalent offers to match employees' contributions to say, an Isa or a house, it makes savings in a pension much more attractive relative to other assets," the report said.

The study took into account the new Personal Savings Allowance (PSA) and changes to dividend taxation that come into effect in April, as well as possible changes to pension taxation.

The government has previously said that any such changes would encourage people to save.

Dividends

When the PSA comes into effect, basic rate taxpayers will pay no tax on the first £1,000 of their savings income.

Higher rate taxpayers will get a £500 allowance.

As a result the IFS said that 16m people will stop paying any interest on their savings income, and that 95% of people will no longer have their savings taxed.

However the report says the change will weaken the incentive for many people to save in an Isa.

"For most people, the ordinary bank account will in effect be tax-free in much the same way as cash Isas, and there will be little incentive to save in a cash Isa," it said.

The PSA will also mean an end to tax deduction at source on savings accounts, which will be of particular help to pensioners.

From April 2016, dividends up to the value of £5,000 a year will be tax-free, although anyone receiving a higher amount will pay higher rates than at present.

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