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Look at Australia and fear for future of ISAs

Britain is not unique in having initiated a national navel inspection over the future of welfare provision.

Although we have taken a lead in Europe, there are a number of countries which have conducted a wholesale reform and restructuring of their welfare states. We have all heard how Chile, Singa pore and Australia have introduced new pension structures.

While it is impossible to compare like with like because of different economic, social and demographic circumstances, we can certainly look at various specific aspects of the schemes and the way that they affect the wider economy.

The particular example I would like to concentrate on is the introduction of a compulsory pension contribution in Australia. This mandatory contribution amounted to 10 per cent of salary and was a charge that was shared equally between the employer and employee. In the UK, 10 per cent is the figure being bandied about by pension professionals as the minimum level at which the stakeholder pension would be effective.

However, when compulsory pensions were introduced in the Australian market, there was a secondary effect on the financial services sector. Funds flowing into the non- pension savings and investment market virtually dried up overnight.

As people were now forced to direct their spare cash into their pension, there was none left for the traditional savings products that they had invested in up until that point.

Australia&#39s experience would seem to indicate that pension and savings policies are mut ually exclusive, In this case, when one was made compulsory by central government, there were huge ramifications in the other sector.

This lesson is all the more pertinent when we consider that, as far as we can discern, the Government is consulting on and planning stakeholder pensions and the Individual Savings Accounts independently of one another. For ISAs to work successfully, both Government, consumers and providers need to be clear how ISAs and stakeholder pensions will interlock with each other and operate side by side.

Last month, ILAG was preparing its responses to the Government consultation papers on ISAs and stake holder pensions (both of which were coincidentally due in by January 31). The inescapable conclusion we came to was that it was difficult to consider a framework for ISAs without prior knowledge of the proposed stakeholder pension, particularly whether it is to be compulsory or not.

By developing the two separately, the Government risks them both competing for the same funds.

We are completely supportive of the Government&#39s aims to increase the long-term savings of the British people and of a radical shake-up of the pension system. ILAG is also particularly supportive of any effort to encourage people who might not have saved before to start now.

However, there is a limited ability among many ordinary British households to stretch the family budget to plan for both pensions and ISAs.

If stakeholder pensions are compulsory, then, in all probability, little will be left to put into ISAs.

It is conceivable that the Government may find that, while stakeholder pensions seem set to be a success, it will do little to encourage more people to save through an ISA than currently use Peps and Tessas.

If ISAs are to be the success that Chancellor Gordon Brown wants, the Government will have to give people much more of an incentive to invest in them. Therefore, our response to the Government focuses on ways in which we could make ISAs more of a viable proposition. Our main points were:

Twenty per cent top-up cre- dit on low-level contributions, that is, £1.20 input into an ISA scheme for every £1 that low-earners contribute.

Lowering the starting age from 18 to 16 to start the savings culture at a young age.

Peps and Tessas to be rolled over to a separate ringfenced account, removing the problem of lifetime limits while also releasing the Government from potential accusations of retrospective taxation.

Introduce a lock-in period to encourage long-term saving. "Easy-in/easy-out" ISAs, while avoiding the Tessa problem of being unattractive to low- income savers who want to access their cash in times of need, may simply end up being just another form of deposit account. This makes it difficult for people to build up a body of savings and almost impossible, for instance, for them to access the equity markets with their savings.

Accessibility. While the Government seems keen on our proposed Switch cards, how about using saving stamps and even National Lottery out lets? These would certainly give good access to the target audience.

The priority for the Government must be pension reform. However, ISAs have an important role in developing a savings culture. Unless the Government formulates the ISA proposals with a closer eye on stakeholder pensions, ISAs risk being another tax-exempt savings vehicle that inherits funds from other vehicles without widening or deepening the totality of British people&#39s savings.

It is worth getting it right. If ISAs wither on the vine, it may turn out to have been easier to keep Tessas and Peps after all.


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