The present plan is for these to be introduced in April 1999, replacing Peps and Tessas, and to be used to encourage all of us to become tax efficient savers. Under the main proposals, a saver can shelter up to pounds 5,000 a year in the new vehicle, free of all income and capital gains tax. Included in the limit can be up to pounds 1,000 in cash and pounds 1,000 in life assurance, plus equity-linked and other savings. As well as existing financial service providers, new outlets such as post offices and supermarkets are likely to offer ISAs.
The proposal that has caused most controversy is the planned pounds 50,000 limit on an individual's lifetime savings that could be sheltered in the new ISA. Those concerned with Peps have lobbied hard against this. To start with, no one knows how many investors already have more than pounds 50,000 worth of savings in their Pep accounts. Geoffrey Robinson, the Paymaster General, who introduced the proposals, first claimed that the total was around 750,000 people. Within days this estimate was reduced to 400,000. But as Pep holdings do not have to be declared on tax returns, no central organisation knows who has more than pounds 50,000 in their Pep accounts.
The Budget on 17 March should let us know whether the Government will change this pounds 50,000 limit. The omens seem good, and, depending on which rumour you listen to, it is thought that Gordon Brown, Chancellor of the Exchequer, could either raise the cap to pounds 80,000, or possibly pounds 100,000, or alternatively ring-fence existing Peps. This tactic, known as "grandfathering", would mean that all current Peps would be left as they are, but that from 6 April 1999, or maybe earlier, no new money could be invested in them.
So what should investors do now? First of all, until the fine details are produced, which could be well after the Budget, we do not know how ISAs will operate or what the charges will be. Many leading Pep managers, such as Fidelity and M&G, have stated that they will transfer their Pep customers into the new scheme free of charge.
So those who have not yet invested their full entitlement into a general Pep this year should do so before 6 April if they want to invest in equities. Investing via a Pep is still often a cheaper way to buy into a unit trust than going direct. And you get the tax benefits.
To encourage you even more, some management groups, including Mercury, Halifax and Templeton, have cut their initial charges, often by 2 or 3 percentage points. Save & Prosper has gone farther than most, dropping all initial charges on its Growth & Income fund Pep.
Do remember that you are allowed only one Pep manager in this financial year. So if you sheltered with a Pep manager any windfall shares from a building society or insurance company that demutualised after last April, you must put your Pep money with that manager.
If you are new to Peps, don't rush into buying just because of the tax advantages. You should do so only if you are reasonably happy that over the long term, five years or more, equities will continue to outstrip other forms of savings, as they have done in the past.
The rules are simple. You can put up to pounds 3,000 into a single company Pep and pounds 6,000 in a general Pep where more than half the money is invested in UK equities on a stock-exchange within the European Community. Of this, up to pounds 1,500 can be put into shares that are traded outside the EU.
Unless you are an experienced investor, you will be best served by investing in unit or investment trusts, with their professional management and ready- made portfolios. There is an extremely wide choice of funds available - everything from low to high risk.
At the low-risk end of the market are tracker funds. These mirror the performance of a general stock market index such as the FTSE 100. Many groups offer them, including Virgin, M&G, and Legal & General.
For those nervous about a stock-market collapse, there are now a number of protected funds available that guarantee a return of capital, usually after five years, even if share prices fall. The latest comes from Legal & General and invests in the top companies in Europe. Because of its structure and listing on the Dublin stock exchange, it qualifies both as a single company and as a general Pep. So up to pounds 9,000 per tax year may be invested. Transfers into an ISA will be free and it will pay out, at the end of six years, 140 per cent of any market growth up to a maximum of double your original investment. Should markets fall, it guarantees a full return of your original stake.
Contacts: Templeton (0800 272728); Mercury (0800 882884); Virgin Direct (0345 900900); Legal & General (0500 116622); M&G (0345 321037); Save & Prosper (0800 829100); Fidelity (0800 414171); Halifax (0845 6000845) 10 SIMPLE PEP RULES
Peps are really suitable only for taxpayers.
A Pep is a tax wrapper for investing in shares
Invest in a Pep only if you believe that equities will grow faster over the long term than other forms of saving
Don't invest just because of the tax advantages
You are allowed only one Pep manager this financial year
If you have sheltered any building society or insurance company shares in a Pep, you must use that manager
Up to pounds 6,000 can be invested in a general Pep in this financial year, ending at midnight on 5 April
Unless you are an experienced investor, use a Pep that invests in unit or investment trusts
Choosing a Pep is often cheaper than investing direct in a unit trust, and you get all the income and growth tax free
In this and the 1998/99 tax year, you can invest up to pounds 18,000 in general and single company Peps. Husbands and wives each have their own individual Pep allowance for investmentReuse content