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The ins and out of Isas

Sam Shaw assesses the pre-Budget report’s measure on Isas

The pre-Budget report confirmed that Isas are here to stay to 2010 and beyond but disappointed the industry by only offering a faint glimmer of hope that the maximum investment limit might be raised.

The industry was largely more welcoming to the news that the Isa regime was to be simplified.

However, the lack of a firm commitment to raising the 7,000 limit proved the main talking point. The Chancellor only said the rate will be “at least 7,000,” which can be left open to interpretation.

Baronworth director Colin Jackson says he would have liked to see the limit increase to around 9,000 or 10,000. Many have called for rises to be in line with inflation but this would mean the limit would an odd figure like 8,300 whereas 10,000 would be more meaningful for people.

He says: “I think the actual Budget could bring further reform but it will depend on what the political situation is. If Brown is trying to woo the public, he may well go a little bit further.”

Threadneedle communications director Richard Eats says he would like to see the limit raised to 12,000 but is not hopeful.

He says: “It is far easier to plan your monthly savings if the amount you are striving to save is divisible by 12, a simple point which the Government does not seem to have capitalised on.

The announced reforms will bring Peps within the Isa regime and remove the distinction between maxi and mini Isas.

Eats says this will serve to simplify investment valuation statements and the management of assets.

Money can also held in cash Isas to be transferred into the stocks and share component.

Eats says: “This is a big tick in the box. The Chancellor clearly wants to encourage people to invest longer term in equities and bonds rather than the short term, like cash. If the market is at first reluctant, it could present a real opportunity for IFAs.”

Association of Investment Companies director general Daniel Godfrey said: “The proposed Isa reforms will give investors much more flexibility to manage their investments and tax planning. The proposal to allow investors to transfer from cash into stocks and shares, without affecting their annual investment limit, is a vote of confidence in equity investment and sends out a strong message about the importance of long-term investment.”

But on a less positive note, there was no move to allow money held in equities to be transferred into equities.

Alan Steel Asset Management managing director Alan Steel warns that the changes might mean that some investors may move from cash to equities without realising they cannot switch back at a later date.

The Building Societies Association has issued a similar warning, noting this make it more awkward for people to manage their portfolios in some circumstances, the most obvious case being the problems for older people looking at decreasing their equity exposure for cash as they near retirement.

Director general Adrian Coles says: “Anyone shifting their cash Isa into equities must be made aware that they cannot reverse the decision. Making transfers one-way-only means that errors of judgment or bad advice could never be rectified while still retaining the Isa tax exemptions.

“Increasingly, people are seeking, sensibly, to diversify their retirement savings and Isas are being held for the longer term. As they near retirement, it makes sense for people to increase the balance of cash in their portfolios so to match their assets and liabilities. Allowing transfers from stocks and shares Isas to cash would help with this.”

Conspiracy theories are also starting to build that encouraging investors to shift from cash to equities but not allowing the same flexibility to move the other way is a calculated move by the Government to increase its tax take on equity dividends. After all, it was Gordon Brown who removed tax relief on equity dividends in Isas.

JS&P certified financial planner Patrick Connolly says: “I can understand why they have done this. They are trying to encourage more activity into the stockmarket. The tax on dividends is an important revenue stream for the Government.”

Coles also knocks the move as not being beneficial to lower-earners because higher-rate taxpayers fare better from Isas.

He says: “There is no tax benefit to those on lower incomes holding equities inside as opposed to outside an Isa.”

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