Isas have been in the headlines a lot recently. First, Treasury select committee member Andy Love warned that the Government may consider reducing tax incentives on Isas in its spending review this month. Then, Investment Management Association statistics showed that inflows into Isas were at the highest level since their introduction in 1999, following the increase in investment limits.
But with the Government looking to save cash and the popularity of Isas increasing, are they safe?
Love made his comments at the Labour conference. His rationale was that the dismantling of the two other major tax initiatives introduced by the previous Government – child trust funds and the savings gateway – made an attack on Isas more likely. He cited rumours that Isas may be targeted in the spending review, in spite of external Government assurances that Isas were safe.
One of the key tests for Isas will be whether or not they are seen to be doing their job – encouraging saving.
Recent sales figures from the IMA suggest that this is the case. Gross inflows have averaged over £400m a month net since October last year, when the Isa allowance was raised for the over-50s. IMA research says 47 per cent of investors would put even more into savings if limits were raised further.
In particular, this money has gone into stocks and shares Isas – investment in this type of Isa has almost doubled.
Fidelity International investment director Tom Stevenson says in general this has gone into corporate bonds, absolute return, equity income and Asia excluding Japan, reflecting both the search for income and a nervousness about conventional equity markets.
Of course, if this increase in Isa investment has come at the expense of pension investment, it may not be serving the Government’s actual purpose.
Tax Incentivised Savings Association director general Tony Vine-Lott says there is certainly increased disillusionment with pensions.
He says: “A lot of higher-rate tax payers are completely confused as to what to do for retirement. People want certainty in retirement. Defined-contribution schemes do not provide that – they have no idea what their pot will be worth, the annuity rate or the tax level they will be paying. Isas offer far more control and certainty.”
However, whether people are investing in Isas over pensions is debatable. Stevenson says there is no evidence to suggest this is the case, although he agrees there is increasing resistance to pension savings because it ties up people’s money for longer.
Another problem is that Isas may not be encouraging new savers. Stevenson says: “We have found that the new limits have tended to encourage people who are already saving to put more in, rather than bringing new people to Isas.”
TD Waterhouse reports a similar phenomenon. Investor centre representative James Daly says although the company has seen a consistent and steady increase in people investing in Isas over the years, the new limits have tended to encourage existing investors to invest up to the new limit rather than bringing in a wave of new investors.
Cost is also a consideration in the vulnerability of Isas. Government figures are hard to come by but Vine-Lott suggests that the tax relief cost around £1bn a year. Other Government figures have shown that as much as £2.2bn was spent on Isa tax relief in 2008/09 and £1.6bn in 2009/10.
It is not necessarily money that would be saved if the relief were withdrawn. People may simply choose not to save if the incentives were removed and so the saving to the Government is difficult to calculate.
Nevertheless, if it costs around £1bn, this is a big enough saving for it to hit the Government’s austerity radar. The child benefit cuts on which the Government has expended so much political capital are only likely to save around £1bn.
However, there are a number of factors that suggest the Government remains supportive of the Isa structure. The Treasury is understood to be consulting over plans to launch junior Isas. These would allow tax-free investment in cash or stocks and shares up to an annual limit and would be owned by the child but locked in until they reach 18.
Stevenson says: “I think Isas are safe. The Government understands the saving crisis and is extremely unlikely to backtrack. It would be taken very badly.”
Vine-Lott agrees: “I am pretty confident they are safe. We have had no dialogue with the Government about their removal. In fact, Treasury financial secretary Mark Hoban has said the Government sees Isas as the cornerstone of savings.”
This is supported by comments made by Hoban to Money Marketing at the Conservative conference.
However, it does not mean that Isas might not be subject to some tinkering. Vine-Lott suggests the Government may impose a lifetime cap, reduce the allowance or backtrack on the introduction of indexation.
But Hargreaves Lansdown head of advice Danny Cox says: “Isa allowances are expected to index in April. There have been suggestions this indexation will not or should not happen or the Isa allowance will be cut as part of austerity measures. The Isa allowance only increased for all investors in April of this year and the increase in allowance was to try to help savers caught by poor interest rates.
“I think it is unlikely this will be reversed so soon after an increase, particularly as the majority of the tax saving relates to money already held in Isas and therefore a reduction in contributions would have little impact for the Treasury.
“We also have to remember that Isas are a significant success story and savers continue to suffer with poor interest rates and a reversal would be politically difficult.”