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Age cap holds back Isa rise

After years of pressure from the financial services industry, the Government has finally decided to raise the annual Isa allowance by £3,000.

In last week’s Budget, Chancellor Alistair Darling set out the rise in the allowance to £10,200 on the back of last year’s £200 increase, meaning savers will be able to hold up to £5,100 in cash.

The £10,200 limit will be available to people aged 50 and over from October 6 this year and will apply to all other investors from April 6 next year.

Advisers question the need for such a rule.

Technology and Technical founder and director Kim North says the requirement to verify age on Isas will prove a significant burden as £290bn is held by 18 million Isa savers. In particular, she questions whether providers will be fined if someone is ineligible for the full allowance and where the responsibility for checking dates of birth will lie.

North adds that the move will be contrary to the traditional financial planning model with money moving up instead of down through the generations in order to benefit from tax breaks.

She says: “All of a sudden, anyone with any sense is going to hand the money to their parents and grand-parents aged over 50.”

Whitechurch Securities managing director Gavin Haynes also questions the need for the age limit, calling it “spin to attract older voters”, while Skandia head of tax and financial planning Colin Jelley welcomes the rise but believes the age cap will add complexity.

Fidelity International managing director of retail and DC business Gary Shaughnessy says simplicity has been at the heart of Isa success and the new rules are not only complex to administer but also may result in this misplaced initiative getting off to “a confused and faltering start”.

He says: “Before the Budget, both the Chancellor and Prime Minister indicated that they wanted to focus on the plight of individuals who had seen their savings income all but disappear as a result of measures taken to reverse the decline in the economy.

“Increasing the Isa limit for future years fails to meet the needs of hard-pressed savers today.

“We have urged the Chancellor to reinstate the dividend tax credit within the Isa as a way to immediately boost Isa income, especially for basic-rate taxpayers. Increasing the maximum limit to £10,200 is jam tomorrow for the minority of people who invest the full annual allowance.”

JP Morgan Asset Management head of UK retail Jasper Berens says the firm understands the challenges faced by the Government but argues the savings and investment message in this year’s Budget is inconsistent.

He says: “Increasing Isa limits indicates that the Government appreciates their appeal to investors and understands the need for us, as a nation, to save and invest more and is making some changes to facilitate this. This and more encouragement is needed, given that the savings ratio in the UK is at a 50-year low.

“However, by limiting tax relief, albeit only on high-earners, the Government is penalising those already making an effort to save and invest for the future, as well as limiting the appeal of another effective long-term savings mechanism.

“This will not encourage more people to build up their savings at a time when we desperately need to do so.”

BlackRock managing director of UK retail Tony Stenning approves of the Government’s Isa decision but hopes the Government will maintain the real value of Isas in the years ahead by increasing savings limits in line with earnings.

He says: “Even better would be to impose a lifetime limit, rather than an annual one. Similar to the structure adopted in pension investing, a lifetime limit would give savers greater flexibility to shift lump sums to meet personal circumstances.”

T Bailey head of marketing and communications Philippa Gee questioned the decision to keep the cash limit at 50 per cent.

She says: “The Government is essentially endorsing the view that a 50 per cent cash holding within a portfolio is entirely appropriate, when this is far from a healthy strategy for virtually every investor.

“Also, given the exceptionally low level of interest rates, this is actually a way for the Government to save on tax while the investor suffers.”

Chelsea Financial Services managing director Darius McDermott says: “We welcome the news that the Isa limit is being raised but the rest of the debacle around savings has just been fudged together. Not only is the over-50 rule pointless, given that income from cash is nominal at present, but the introduction of a tax credit in investment Isas, which would reportedly cost £200m, would have been a huge benefit to investors.

“As it is, the increase in the limit only brings us back to the levels we had when the Labour Government took power. It benefits existing investors but does little to encourage new savers.”

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