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On thin Isa

The Isa will be 10 years old in just under a fortnight but I am not so sure there will be much to celebrate. Sales have fallen sharply in recent years, relegating the Isa season to nothing more than a sideshow.

There are many reasons for the failure of Isas, not least that equities have been the worst-performing asset class over the past decade. And let us not forget also that the technology boom in their first year scared off a generation of novice investors.

Poor performance aside, many fund management groups believe that the decision to scrap the tax dividend credit in 2004 was the hammer blow.

Fidelity has fired a letter to the Treasury calling for its reinstatement, saying that more than £5bn has been withdrawn from Isas and the Government’s treatment of savers is “iniquitous” while “punishing” the prudent members of society. “We urge you to address this unfairness with the reinstatement of the tax credit”, the letter says.

Other groups reckon that Isas are simply not flexible enough.

BlackRock, for instance, suggests a lifetime limit rather than an annual one would help their plight. Similar to the structure adopted in pension investing, a lifetime limit would give savers greater flexibility to shift lump sums to meet personal circumstances, it says.

One of the problems is that Isas have been a mishmash from day one. The Government got rid of the ridiculous mini/ maxi Isa distinction a few years ago but it should have brought the cash Isa limit in line with equity Isas long ago. It was easy to encourage savers to invest in the stockmarket in 1999.

But the Government forgot an important point when it came up with the rules – that cash is an asset class in its own right and is particularly useful when markets crash, as they inevitably do. It is why cash is popular today.

Last month, Fidelity’s most popular fund was its cash fund, attracting 8.7 per cent of all investments. Fidelity’s Isa Cash Park was the fifth most popular destination for direct investors, attracting 4.4 per cent of assets.

The Government will undoubtedly suggest that Isas have been a huge success in next month’s Budget. Any tweaks to the rules will go some way in appeasing aggrieved savers, who have been the big losers in the interest rate cull. But raising the Isa limits for some will not be enough on its own.

If cash Isas are really going to work, the Government needs to put pressure on the bailed-out banks to offer competitive rates on all cash Isas, existing and new. As it stands, rates of around 0.15 per cent are an insult to savers and make a mockery of a scheme designed to encourage us all to save.

The horse has long since bolted but the Isa rules should also allow savers to switch out of an equity Isa into a cash Isa – not just the other way around – without losing their tax-free allowance. And, yes, reinstate the tax dividend credit too. It only swells Government coffers by £200m a year – small fry in the grand scheme of things.

Many Britons have more than enough on their plate to worry about how much they can save and whether it is tax-free or not but it will not always be that way. Despite the headlines, not all the population are knee-deep in debt and misery. The majority have cash to save.

If the Government is to make good the pledge it made a decade ago to kickstart a savings culture, it needs to take the plight of Isas seriously. Tinkering around the edges will not be enough.

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing

50 Poland Street London W1F 7AX

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