Individual Savings Accounts (ISA)

Individual savings accounts (ISAs) have been reprieved, and are set to remain a part of the savings landscape for the foreseeable future.

The tax-free savings schemes had previously been guaranteed only until 2010. However, the Treasury minister, Ed Balls, announced last week that these handy ways of beating the taxman would be extended indefinitely.

Speaking at an investment conference, Mr Balls said, "Our task is to entrench a culture of savings for people of all ages. Today's announcements - the largest-ever reform to the ISA regime - will simplify personal savings and help more families to save for their future, to deliver our objectives of ensuring everyone can share in rising prosperity."

"The government is committed to ISAs, and we are keen to build on their success," he added.

This is indeed welcome news for savers, as the Government stands accused until now of doing nothing to help people save and, on account of its economic policies, encouraging vast swaths of the nation sink under a welter of debt.

Among the proposed changes to the Individual Savings Account rules are: the abolition of the distinction between "mini" and "maxi" ISAs, which many members of the public never understood anyway; the inclusion of personal equity plans, the investment predecessor of ISAs, within the ISA wrapper; and the possibility of rolling over the Child Trust Fund (CTF) savings scheme for children into an ISA once the fund matures as the child turns 18.

ISAs were introduced in 1999 by Chancellor Gordon Brown as a replacement for the existing Personal Equity Plan (PEP) and Tax Exempt Special Savings Account (TESSA) regimes which had been introduced by the Conservatives. The new scheme was immediately dubbed unnecessarily complicated and confusing for savers, and a typical example of Labour meddling, compared with its popular predecessor.

However, the complexities did not stopped upwards of 16 million people - more than one in three adults - subscribing to an ISA since they were invented, with nearly £190 billion saved in all schemes. This compares with a total of seven million TESSAs and PEPs in 1997, when Labour took office.

Simplification will be most welcome, and the ability to switch between cash savings and stock market investment is an innovative move. It also makes sense to dovetail the Child Trust Fund, another of Labour's saving schemes, into the ISA framework, so that a flood of cash from young people's savings does not suddenly explode from its tax-free protection, with no obvious place to go, offering account holders the temptation to fritter it away.

Children over the age of 16 may already open a cash ISA, but children are otherwise currently excluded from the ISA regime. Bringing the Child Trust Fund and Individual Savings Account schemes into line will be seen as a positive move.

Abbey's Head of Savings, Reza Attar-Zadeh, said, "The pledge to simplify the ISA regime promises to bring huge benefits to UK savers. Abbey has been calling for the simplification of ISAs for some time, as our research shows that a large number of people still aren't getting the full benefit of tax-free savings, because they don't fully understand ISAs."

The Building Societies' Association also welcomed the removal of the mini/maxi distinction, which it had called for in its recent evidence to the Treasury. But it said it wants to see a rise in subscription limits. The failure to announce any such rise disappointed both savers and investment industry experts. The limit on total ISA subscriptions in any one tax year has remained at £7,000 since ISAs were introduced in 1999.

Indeed, there had been a proposal to cut the limit to a total of just £5,000 for both cash and shares together this year, though this was quietly dropped. However, there has been growing pressure for an increase and there is speculation that the Government may be forced to raise limits as a crowd-pleaser in the run-up to the next General Election.

Adrian Coles, BSA director general, said, "We look forward to the detail on [the revised ISA regime], but would be disappointed if it did not include an increase in the annual subscription limit for the cash ISA from the current level of £3,000. In its recent evidence to HM Treasury, the BSA called for the limit to be increased to £5,000."

Malcolm Dodds, PEP and ISA manager at Alliance Trust, cautioned that the Government's steps to encourage ISA saving were being undermined by the eroding value of the tax breaks. "At first glance, the Treasury has announced some much-needed steps to make the ISA product more attractive to savers," he said. "However, our research shows that, if the initial £7,000 ISA limit had risen in line with headline inflation since launch, investors would be able to squirrel away £7,677 tax free this financial year, and £8,310 by 2010."

Richard Wastcoat, UK Managing Director of investment manager Fidelity International, said, "Now that the Government has confirmed their ongoing commitment to ISAs, we would like to see this taken a step further, with an increase in annual limits. The £7,000 ISA limit has never been increased, despite this being a lower amount than for the PEPs they replaced. If the Government is serious about their intention to foster a long-term savings mentality among the British public, then they need to make it worthwhile for them to do so."

© www.Moneyextra.com
 

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