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Your Money > Banking Articles > ISA, ISA baby
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By Sarah Modlock It's not hard to tell that an election getting closer. Whether it is a leadership election or a general election, anything that makes a chap look like a firm but fair sort of candidate is sure to help his chances. Of course giving bite-sized boosts Changes to the ISA (individual savings account) regime have just been announced. Savers, finance companies and journalists have been banging on about the need to increase ISA flexibility for years. Pre-Budgets and Budgets come and go with not so much as a mention. But for the child who has been denied sweets for so long, the merest hint of a chocolate button becomes a source of delight. So what's our sweetener? Treasury minister Ed Balls (for it is he) has announced that people with cash accrued in ISAs from previous years would now be able to transfer it into new stocks and shares ISAs. Savers who do this would still be able to invest a further £7,000 a year in their ISA. Mr Balls said he hoped to encourage savers to 'diversify their assets and benefit from the potentially higher returns offered by stocks and shares over the long run.' New balls At present, investors can put the full £7,000 annual allowance into a stocks-and-shares maxi ISA. Alternatively they can take out two mini ISAs -up to £ 3,000 can be invested in cash and the remaining £ 4,000 can be invested in equities. The new rules will scrap the mini and maxi elements so that there is just a single ISA wrapper. Investors will be able to switch any money they have in cash ISAs into equities - potentially £110 billion of existing cash savings. But they will not be able to do the reverse, a move which some experts believe is back-to-front as it does not take account of those saving for retirement who may want to move their investments into cash. 'Anyone shifting their cash ISA into equities must be made aware that they cannot reverse the decision,' advises Adrian Coles, Director General of the Building Societies Association. 'Making transfers one-way-only, as the Minister proposes, means that errors of judgement or bad advice could never be rectified, while still retaining the ISA tax exemptions,' he adds. 'The concession announced by Mr Balls benefits only higher rate taxpayers: there is no tax benefit to those on lower incomes holding equities inside - as opposed to outside - an ISA. Cash ISAs give tax breaks to all taxpayers, including those on lower incomes'. It's not yet clear when this is likely to come into effect - expect confirmation in the Pre-Budget report on 6 December, with a view to enjoying the greater flexibility in the 2007/08 tax year. ISA rules will continue to allow you to make withdrawals without losing the tax relief. But once you have deposited the maximum £3,000 allowance into the account in a tax year, you cannot deposit any more money in the account that year, regardless of how much you have withdrawn. Strict limits About 16 million adults - one in three of us - have accumulated nearly £215 billion in ISAs since they began in 1999. A saver who has used their £3,000 cash ISA allowance every year since their launch would now have £24,000 plus tax-free interest. But barely a third of the money is held in stock market assets. The move to increase flexibility follows an announcement earlier this month in which the government confirmed that ISAs were to be made permanent. Initially launched for just 10 years, the tax-free savings policies will now stay in place indefinitely. However, the £7,000-a year limit - unchanged since ISAs were first introduced in 1999 - remains firmly in place, despite intense pressure on the Chancellor. Spoilsports. Investors have lost out on the chance to shelter about £1billion a year from the taxman because the government has refused to increase the annual ISA allowance in line with inflation, which would have allowed investors to save £8,318 a year tax-free. Before Labour came to power, savers could invest £9,000 a year into a personal equity plan (PEP) and up to £9,000, spread over five years, into a tax-exempt special savings account (Tessa). See what I mean about chocolate buttons? The government says it wants people to save more, but it isn't giving them the incentive,' says Bestinvest's Justin Modray. 'We would like to see the ISA allowance increased to £ 10,000. This would indicate that the government really is taking the issue of encouraging people to save more seriously.' Analysts think the likelihood of the government deciding to increase the ISA limit is slim because most people fail to invest the maximum £7,000. A rise in ISA sales this year - up 60% - was viewed as a signal that private investor confidence was returning. From 2000 to 2004, ISA sales slumped as global stock markets fell in value. At one stage, in early 2004, ISA sales were so bad that they had become a virtual irrelevance, particularly when compared to the billions being pumped by investors into buy-to-let property. But following a stock market recovery, starting in spring 2003, it seems that the tide of investor confidence has turned although sales still have a long way to go to reach the dizzying heights of 1999 and 2000 when thousands rushed to beat the deadlines. If Brown and Balls are hoping for an ISA renaissance then they will have to offer us more than chocolate buttons. Useful links: |
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