View more on these topics

Seven up puts fizz into Isas

The long-term raising of the Isa contribution limits and the widening of eligibility to 16and 17-year-olds in Chancellor Gordon Brown&#39s pre-Budget statement highlight some major points.

It puts the spotlight on the success of this product and cements the position of the Isa as one of the cornerstones of the financial services market for the foreseeable future. It also illustrates the Govern ment&#39s commitment towards encouraging regular savings among a wider range of the UK&#39s population.

It should also be seen as the reward for the 18 months and more of hard work by financial advisers and providers who seized the opportunity to encourage the savings habit with a whole new audience of people who had not previously enjoyed regular tax-efficient savings.

There is still a great savings opportunity and, particularly with a buoyant economy and greater disposable income, maintaining the £163;7,000 savings limit provides a strong incentive for customers to maximise their savings and make greater provision for their future needs.

As people lead more and more diverse lifestyles and demand greater flexibility in their financial arrangements, the ways in which people fund lifetime events is changing. Only a few years ago, it was a clear cut decision that particular products were the most appropriate way to prepare for certain life stages, such as retirement or saving for a child&#39s education. But the new breed of flexible, transparent products – typified by Isa – provide, with the right guidance, far greater diversity in how these needs can be met.

Just as Peps developed and evol ved over their lifetime, taking the world of equity-based savings to a much wider client base, then the changes to Isas announced by Chancellor Gordon Brown this month should be seen as a further stage in their evolution.

These moves should be warmly welcomed as a step in the right direction but further changes should be expected in the coming years to allow Isas to reach their full potential.

Certainly, the low limit for the life component is preventing it from fulfilling its full potential and raising this in line with the stocks and shares component would help further simplify the system.

But the extension of the eligibility criteria to allow 16and 17-year-olds to hold Isas brings issues which will need to be addressed. It is only fair that a 16-year-old who is able to go out to work and pay taxes should be able to save in a tax-efficient environment. But should they be restricted to only one of the investment options – the cash component – available to those aged 18 and over who invest within Isas?

As financial literacy increases, particularly as personal finance finds its way on to the school curriculum aided by the initiatives from the Government, organisations such as the FSA and the ABI and individual providers, the case for excluding the life and stocks & shares components will hopefully become less convincing as people become more comfortable in investing in equities at an early age.

There is also an issue for the many 16and 17-year-olds who do not pay tax as, arguably, cash is the component which benefits least from the tax benefits that Isas offer. Although some of the top cash Isas offer rates which beat non-Isa offerings, non-taxpayers can reclaim the tax paid on deposit accounts.

Compare this with the extra growth that Isas can offer by allowing fund managers to reclaim the tax credit on share dividends and, even more significantly, allow a life Isa to build on this benefit by avoiding tax on the fund itself.

The pre-Budget statement was as important for the changes that were not made to Isas as for those which were. Although the life com ponent had faced criticism from some sectors of the industry, its ongoing position within the Isa regime is a clear sign that the Government recognised its value as a halfway house between cash and pure equities, allowing Isas to cater for the full spectrum of attitudes to risk, and for the way it attracted who had not previously saved tax efficiently – the core objective of Isas.

CIS&#39s experience as a mass-market provider of life Isas certainly proved an influence on Government thinking as a result of us providing detailed information about how we had made the product work for customers across the length and breadth of the UK. This open approach led to 68 MPs supporting an early day motion in the House of Commons congratulating the success of the Isa across all three components.

One thing is certain, the Chancellor&#39s announcement shows that Isas are here to stay in their current form. Now is not the time for providers or trade organisations to try to reinvent the wheel by calling for fundamental changes based on narrow factional interests.

The current regime allows for Isas to cater for a broad spectrum of savings and investment objectives through a range of different investment vehicles appropriate to individual&#39s circumstances – with this flexibility clearly demonstrating the role and value that financial advisers have in guiding customers to the most appropriate options for them.

Recommended

CTC launches e-3PA to mark 10th anniversary

Software systems and administration services provider CTC has launched a third party administration and technical support service to mark its 10th anniversary. Called e-3PA, it will offer a wide range of services to employers, scheme trustees, fund managers, product providers, consultants and solicitors. It specialises in scheme administration, product line administration, calculation and actuarial services […]

The right line for loans

Over the last few weeks, there has been a stream of announcements from service prov iders and life offices as they launch their electronic new business services.It is not only in the life and pension industry that significant advances are being made with the adoption of e-commerce. About a month ago, IFonline went live with […]

The Express route to Northern Ireland

Mortgage Express is taking its specialist lending products to Northern Ireland after demand from intermediaries.Northern Ireland has a different legal system from Eng land and Wales and Scotland. This means the Bradford & Bingley specialist lending arm has had to draft new documentation to make its products applicable in Northern Ireland.Borrowers can access Mortgage Express […]

Terms of engagement

Most ethical or socially responsible funds consider responsible forestry practices to be important. By contrast, the seemingly endless raft of stakeholder pension legislation appears to have become a means by which we can rid the planet of trees. It may seem surprising then that these two could have anything in common.However, from July 2000, new […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment