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Give credit to value of incentives, industry urges Govt

Imagine it is 2004 and the Gov-ernment has stuck to its guns and removed the 10 per cent tax credit on dividends for Isas. How easy are you going to find it to continue to sell Isas and do your bit to bridge the savings gap?

The real effect of abolishing the tax credit would be felt by relatively few wealthier Isa investors. But removal of the benefit would be another psychological turn-off for savers already disillusioned after years of negative returns.

One investment industry insider told Money Marketing last week that the credit will be rolled over in 2004 following conversations with Revenue officials.

Investment Managers Association chief executive Richard Saunders says: “I have not heard of a change of heart at the Revenue but would be delighted if there is one. We will carry on making the case for the credit to remain.”

IFAs and fund managers are almost unanimous in supporting the retention of the credit, arguing that removal would cause an increase in the savings gap out of proportion to the benefit to Treasury coffers. The Revenue is also ignoring the fact that, without incentives, most people simply will not save.

In his report, Sandler suggests that tax breaks do not encourage saving. However, Churchill Investments managing director Jamie Ware says: “I agree with a lot of what Sandler says but on incentives he is wrong. The only reason Isas and Peps have been successful is because they have the words tax benefits on them.”

Removal of the tax credit on dividends would hit Isa sales in two ways. First, public perception of the value of saving in an Isa would worsen. Investors reading of Chancellor Gordon Brown&#39s “Isa robbery” would be less inclined to believe there is a tax benefit in saving. They would also be less susceptible to the argument that they must use this benefit before the end of the tax year.

Credit Suisse Asset Management managing director Ian Chimes says: “The two things that sell Isas are the tax treatment and the deadline. If the tax credit is not there for most people, particularly in the Government&#39s savings target group and for those who are not facing capital gains tax liabilities, there is little or no tax benefit.

“If you have not got a tax-free allowance to use up each year, you are not going to have a frenzy of buy now while stocks last. Without a deadline, people delay and delay, waiting for things to get better.”

IFAs would perhaps be more positive about change if it was not coming on top of a root-and-branch overhaul of the way they conduct business and a bear market that has seen the FTSE fall back to where it was in 1997.

As Isa investors receive their six-monthly statements this autumn, many will see returns still in the red after five years. Chimes argues this means that IFAs are going to have to look deep into the psychology of the investor and do more to persuade them that equities are worth having.

He says: “We have a raft of people who may never come back to buying equities. We will see a buyers&#39 strike of people who came in 2001 and 2002, thinking they were buying cheap, and are massively down. In the past, intermediaries have said: &#39Give it a few years.&#39 But now, more than ever, the phone call to the client, before they receive the statement, is going to be a real challenge.”

Ware argues that many investors will have long enough memories to take a long-term view on equities. He says: “Our clients are being sensible. Many of them are old enough to remember downturns in 1973/74, 1987 and 1991.

“We thought after 1987 that downturns would be faster and more ruthless. But this time around, things have gone on so long, people need to be reminded of the historic performance of equities.”

All this goes to explain why the industry is so opposed to any changes that add to the slow drip of bad news for the savings sector. Many IFAs see the removal of the tax credit as pointless anyway, as investors will simply switch the way they invest.

Franklins Financial Services partner Neil Franklin says: “Removal of the credit is petty and goes to the heart of the idea of what an Isa is but people will switch the nature of their investments. The Government does not intend to change the treatment of bonds so, while we will see a shift to capital growth, many investors will simply switch to corporate bond funds.”

When pondering the fate of the tax credit on dividends for Isas, the Treasury and the Inland Revenue need to decide whether they want to remove one of the few incentives that make the Isa season what it is and consider that its removal may compound the problem of the savings gap.


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