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Challenging urban myths

Urban myth number one centres around the removal of dividend tax credit as being a major cause of the declining popularity of Isas as a savings vehicle.

This appears in almost every article about Isas, most recently being espoused by both Philip Scott and Thomas Carruthers in separate articles in the February 10 issue of Money Marketing. I seem to recall, however, that in several of the peak years for Isa investment, the dominant funds were European, technology, corporate bond, and UK all-company funds. Excuse me for pointing out the obvious but only the last of these sectors would have provided investors with dividends to be affected by the withdrawal of the tax credit.

It is indeed ironic that the most affected funds, equity income, only became the best sellers in 2004 after its removal. In my opinion, it is more likely that Chancellor Gordon Brown removed dividend tax credit because the industry consistently ignored it as a factor in favour of Isa fund recommendations.

I believe that the decline in the popularity of Isas is due more to the fact that investors became completely disillusioned after seeing their successive investments in European and technology funds head rapidly south and decided that their 14,000 would be far better used as a deposit on a buy-to-let property.

Urban myth number two concerns the amount lost and consequent effect on pension scheme funding from the removal of ACT in 1997. It is now generally accepted that this cost 5bn in every single year since but is this true?I attended a presentation by Ned Cazalet in which he stated that with-profits funds, inc-luding pension funds, have seen a reduction in their equity portions from 65 per cent to 35 per cent in the last few years, prompted by a combination of the fall in equities and much tougher requirements from the FSA in how life companies account for liabilities.

Similarly, several big pension schemes have moved out of equities into fixed interest (for example, Boots) while many others have seen both the value of their equity holdings and the proportion of the fund invested in them drastically reduced.

I cannot, therefore, see how this measure can have cost 5bn in each and every single year. To do so would have required a massive increase in the dividends paid by UK plc to compensate for the falling value of equities held by pension funds.

I know that the industry needs to make complex issues clear and more easily under-stood by clients but simplifying them to the extent of the above urban myths merely confuses matters by making problems easy to solve with one wave of a magic wand.

Kevin NeilParker Kelly Financial Services,Liverpool


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