For the last seven years, the tax-efficient personal savings industry has had the financial equivalent of the Berlin Wall running through it. On the one side of the Wall lies the Personal Equity Plan (PEP), introduced by the last Conservative government but which was abruptly stopped in 1999 when the Wall went up. The other side of the Wall is ruled by the Individual Savings Account (ISA), which New Labour introduced in that year to replace the old regime.
New Labour’s refusal to integrate the PEPs of its former adversary into the ISA regime has meant two sets of rules and long made matters overly complicated. That’s why the markets have been cheered recently by Treasury Minister Ed Balls’s statements about simplifying the PEPs and ISAs regime – and maybe even merging them.
Speaking at a conference of PEP & ISA Managers Association (PIMA), Mr Balls laid out a ground plan for bringing tax-efficient saving into the 21st century. He spoke about plans to extend the lifespan of ISAs; to abolish the distinction between Maxi and Mini ISAs; and even (gasp) to allow some intermingling of PEP and ISA investments. He also made some radical proposals about wedding the ISA system to the child trust funds, introduced in 2005, which the Government hopes will give parents yet another incentive to save for their children’s futures.
Mr Balls has much to be proud of. ISAs, he says, have increased their take-up among the population since they were introduced as a New Labour branded PEP replacement. one in four people from lowincome groups now have an ISA, compared with one in seven who had a TESSA or PEP. And the proportion of young savers with an ISA is now three times as high.
But we should stress that Mr Balls has still not done very much more than lay out the groundwork for a vast programme of interrelated reforms which will eventually encompass everything from child savings to pensions. We should learn more in the next month or two, when the Department for Work and Pensions publishes its White Paper. There seems little chance that the reforms being considered will happen before the end of this tax year. In the short term, what we do have is a commitment to make things better.
Why ISAs won’t die in 2010
By far the most important news, for many investors, is the extension of the ISA scheme beyond April 2010, the date when it was previously slated to end. Until now, we’ve had to work with the assumption that we only had £28,000 worth of contributions left, per adult, before the scheme was wound up (i.e. four tax years’ worth at £7,000 a year). But now we can relax a little, as it becomes, hopefully, a permanent feature of the UK savings landscape.
There is, however, no sign of the £7,000 annual investment limit being raised, Though accountants, BDO Stoy Hayward, call for an increase to £10,000. They reason that, if the initial £7,000 ISA limit had risen with inflation, investors would be able to invest £9,380 today.
It appears the Treasury also plans to scrap the distinction between mini and maxi ISAs. At present, investors have to make a mix-and-match selection between minis and maxis, with additional constraints on how much cash investment can go into a maxi ISA (£3,000 a year), or how much should go into equity funds (£4,000 with a mini ISA, £7,000 with a maxi). This division between minis and maxis has always been confusing, and the prospect of investors being able to move more freely should prove beneficial.
Putting PEP into your ISA
A second important change, according to Mr Balls, is that PEPs will soon be “brought within the ISA tax wrapper” (or words to that effect) and is hinting that before long savers will be allowed to merge their Peps into ISAs. But so far it hasn’t actually said so definitively.
So it looks as though there’ll be a welcome simplification of the rules for people who own the same company’s shares in both a PEP and an ISA. Presently, if you’ve owned say Shell or Glaxo in both a PEP and an ISA, you’ve had to make two separate share transactions – one sale for the ones in the ISA and another for the shares in the PEP. But the idea is that you’ll soon be able to handle the two sales within one transaction should save on transaction costs for investments held with the same PEP/ISA manager.
Despite loud calls from the industry, it looks as though AIM-listed stocks will continue to be excluded from eligilibility in your ISA. The Alternative Investment Market is regarded as a no-no for various reasons – not least of which is that most AIM stocks are too small and illiquid to be workable for the average ISA provider. And besides, AIM holders get significant other tax privileges anyway, including enhanced taper relief and exemption from inheritance tax. The Chancellor is entitled to argue that blurring this dividing line would create more complications than it resolved.
Swith your CTF into an ISA at 18!
One of the most interesting points to emerge from Mr Balls’s address was the news that children are to be entitled to roll over their child trust funds into ISAs as they mature – typically on the child’s 18th birthday. That ought to add a further savings incentive to a sector of society that the Government is desperate to attract into the savings habit.
Child trust funds, which were introduced in April 2005, are essentially fund-run tax wrappers, rather like managed ISAs, which parents can open on behalf of their children when they are born to build up a tax-free nestegg for when they reach 18. For children born on or after 1 September 2002 the child trust fund receives cash from the Government and investment growth in the fund itself is free from capital gains tax and income tax.
A CTF ends on the child’s 18th birthday. Until now there’s been no incentive for the child to reinvest, but in future a CTF beneficiary will be able to roll his or her lump sum into an ISA without making a dent in his/her annual ISA entitlement. This is a one-off concession,which could prove very valuable as it’s not beyond the bounds of possibility that the child trust fund could be worth a considerable sum if it’s been fully subscribed.
For example, the table below is an illustration of how a fully-subscribed fund could grow if it were started at birth and averaged 6% p.a. growth after costs. In addition to government funding, a child’s parents, family or friends are allowed to contribute up to a maximum £1,200 a year, and the Government tops it up by £250 when the fund is opened, plus another £250 when the child reaches its seventh birthday. (The handouts are doubled for children from less affluent families; and the Government also announced last April that it was considering a third payment.)
|
Birthday |
Government Grant (£) |
Parental Contribution (£) |
Total Assuming 6% Growth (£) |
|
0 |
250 |
1200 |
1450 |
|
1 |
1200 |
2737 | |
|
2 |
1200 |
4101 | |
|
3 |
1200 |
5547 | |
|
4 |
1200 |
7080 | |
|
5 |
1200 |
8705 | |
|
6 |
1200 |
10427 | |
|
7 |
250 |
1200 |
12503 |
|
8 |
1200 |
14453 | |
|
9 |
1200 |
16520 | |
|
10 |
1200 |
18711 | |
|
11 |
1200 |
21034 | |
|
12 |
1200 |
23496 | |
|
13 |
1200 |
26106 | |
|
14 |
1200 |
28872 | |
|
15 |
1200 |
31805 | |
|
16 |
1200 |
34913 | |
|
17 |
1200 |
38208 | |
|
18 |
Final Value |
40500 |
It is clear the CTF presents an opportunity to build a significant sum of money, meaning an ISA conversion option could be very valuable for beneficiaries. Though, as with all government sponsored schemes, things could and probably will, change in future. Presently though, for the regular saver, things appear to be moving in the right direction.
Michael Wilson is a financial journalist with over 20 years experience
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