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Taking stock of the Isa tax axe

The Government seems steadfast in its determination to abolish the 10 per cent tax credit on dividend distributions in Isas and Pima remains steadfast in its determination to oppose this move. Make no mistake – our campaign goes on.

Of course, we understand the political difficulty. The overall move on tax credits is a part of the package which was set in train right at the start of Gordon Brown&#39s Chancellorship in his first Budget in June 1997.

That package has also raided pension funds to the tune of some £27.5bn in the past five years. I often reflect on the ABI&#39s £27bn savings gap with a wry smile. No wonder there is a crisis in savings.

As the move on tax credits in pensions has had a profoundly disastrous effect on state of UK pensions, we believe the continuing move towards abolition of tax credits within an Isa will have a similarly disastrous result for encouraging wider saving.

Not only does the loss of tax credits per se discourage saving, there is a more fundamental problem which readers of Money Marketing need to consider carefully.

As we approach the demise of the dividend tax credit in April 2004 – just one year away – the regulators are becoming increasingly worried about the prospects for marketing and promotion of the stocks and shares element of the Isa.

The FSA has said it might consider any stock and shares Isa being sold as “tax-free” – in the knowledge that tax credits are to be abolished – as a high crime of misselling.

Interestingly, the Inland Revenue takes a different approach. Who is right? Who knows right now? But it will make the job of advisers and product providers almost impossible in the coming 12 months.

At the end of last year,Pima commissioned some research which demonstrates that consumers are deeply worried about the loss of “taxfree” status.

We found that half of existing Isa customers would not invest further in equity Isas if the tax credit were to be dropped. Only 40 per cent of customers would continue to want to invest in a stocks and shares Isa. So a majority expect to seek alternatives – most likely to be tax-assisted investments, with pensions and cash Isas being the most likely beneficiaries.

Last month, I had a meeting with Treasury Financial Secretary Ruth Kelly. It is always good to get the opportunity to talk face to face with ministers. Quite often, the Sir Humphrey Appleby factor can get in the way.

And it seems it had.

I presented the Financial Secretary – who to my mind is one of the rising stars of this Government – with a detailed breakdown of just where people are investing right now. Apart from the fact that the figures show a massive shift in investment trends right now – they also demonstrate that deposit or fixed-interest saving is clearly in the ascendant – by a ration of at least 2:1 right now.

Of course, much of this is because of the state of markets but the move on tax credits will do nothing to encourage stock and shares saving in the future.

The Financial Secretary said she had never seen these figures presented to her before in this way and was genuinely surprised. A chink of light perhaps.

The recent Treasury consultation document on the Sandler suit of products has recommended a cap of 60 per cent on equity investment on many products. We can deb-ate the rationale for this, but the fact is that market activity is actually creating an even more severe cap on equity saving. At the moment there is no great consumer demand for equity saving – but the abolition of tax credits will make this a permanent fixture rather than a temporary phenomenon within an Isa.

Surely, if the Government is serious about wanting people to have choice, this move will do nothing other than limit that choice.

The one big problem with big political ideas such as the Chancellor&#39s move on the dividend tax credit is that they become, inherently, party political. There becomes too much face to lose by making a U-turn on an issue.

But let us look at things differently. The Isa has been this Government&#39s biggest savings success. It is reaching lower-income groups who previously have not saved and, by doing so, achieving a key Government aim – tackling social exclusion by widening the savings base. It has been taken up by those who liked the Pep and Tessa and it has broadened the scope of investing for many.

So why now sacrifice, this big political success story because of policy intransigence for a minor fiscal prize?

I think the bigger prize of encouraging more people to save is well worth fighting for – and I believe the Government and Treasury ministers think that too.

The campaign goes on.

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