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Chancellor prescribes Pep pill for industry

News that the polarisation regime is set to be unwound inevitably took the shine off the better news in last week&#39s pre-Budget report by the Chancellor.

Nevertheless, many of the changes that IFAs and fund managers have been lobbying for over the past year were finally acknowledged. In fact, aside from the changes to polarisation, the report was as near to ideal as most of the investment industry could have hoped.

The extension of the £7,000 Isa limit for the next five years was perhaps the most welcome proposal. Since their creation last year, Isas have been a cata lyst for strong growth in the fund management ind ustry, as well as the springboard for the dev el opment of a broa der range of savers and inv es tors.

Recent NOP financial res earch shows more than one in five mini cash Isas were taken out by investors under 35, compared with only one in six Peps and Tessas.

Best Investment deputy managing director Jason Hol lands says: “The ann oun ce ment that the Isa allowance is to be fixed at £7,000 for a fur ther five years is clearly good news for investors and is a wel come dose of stability after the shambolic handling of the allowance in the last Budget.

“At that time, the Chan cellor decided to retain the £7,000 allowance just days before the end of the tax year. The cost of reprinting literature was substantial for many fund groups and IFAs. How ever, there is even more good news in the documentation supporting the announcement.”

In a measure which will broaden the range of savers even further, the report red uced the age limit for cash Isa investors to 16 from 18.

Mer rill Lynch Investment Mana gers says it is particularly pleased with the relaxation of the age restrictions, having campaigned hard for the change over the last year.

Perhaps second on the inv estment industry&#39s wish list was a harmonisation of the Pep and Isa regulations, which the Chancellor also found time to accommodate.

In the past, Peps were res tricted on which geographical areas they could invest in. At least 75 per cent had to be in funds that invested at least 50 per cent in the EU, which made Peps an unattractive option for those looking for grea ter exposure to US or global mar kets.

Although Isas are not subject to the same restrictions, the rules have continued to apply to the Pep transfer market. By relaxing the restrictions, the Chan cellor is allowing investors to transfer their Pep money into any funds.

There will also no longer be a distinction between general and single-company Peps, allowing investors to merge Pep money if they wish.

Bates Investment analyst Lynda Eyton says: “We think it is good news for investors. Lifting the geographical res trictions will allow Pep inve stors to create a portfolio which reflects the more geographical nature of investing today.”

Further changes to the Pep rules mean investors will no longer have to to make a written request to their Pep manager if they want to withdraw funds. Instead, requests will be able to be made by telephone, fax or the internet, which may prove difficult for smaller fund managers which do not have the infrastructure to cope.

This is one of two alt er ations to the Pep rules which may prove costly for some fund managers. The other is a suggestion that bundling is set to be outlawed.

Currently, a number of fund managers only allow Pep investors transfer out all their Pep money at once, as op po sed to providing a trans fer facility for individual years of Pep investments.

This has largely been due to these firms&#39 administration systems, which automatically bundle clients&#39 ann ual Pep allowances tog ether.

If the Inland Revenue legislates against this, many companies could find themselves facing seven-figure bills to rebuild their administration systems. In some cases, it may be impossible to unbundle clients&#39 accounts.

Invesco UK sales director Stuart Alexander says: “It would be an inconvenience but not just to us. We use the Rufus administration system, just like a number of other fund managers. It would affect a number of our competitors.

“We would not be able to unbundle with our current system at all. We would have to look at a completely different administration system. We would want to have our say in this debate before the Government went ahead.”

The final change which is set to have an effect on the investment industry is the Revenue&#39s promise that it will crack down on illegal Isas.

The Revenue estimates around 85,000 investors have taken out both maxi and mini Isas in the same tax year, aga inst Isa regulations. These investors will be pursued and have to repay tax concessions on the second Isa taken out.

While the pre-Budget rep ort has granted many of the industry&#39s wishes, most cannot help being left with a slightly sour after-taste with the proposed changes to polarisation.

Hargreaves Lansdown head of research Mark Dam pier says: “It does seem for once Gordon Brown has actually listened to the industry.

“Obviously, we welcome the extension of the Isa limit and the relaxation of Pep res trictions but, unf ortunately, multi-ties are pro bably going to do a lot of damage.”


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