Relax - Peps and Tessas are not dead yet

The Government has been urged to adopt a face-saving formula to allow its Individual Savings Account (ISA) to replace Tessas and Peps without leaving savers "drowning in paper".

The savings industry is increasingly optimistic that the Treasury will compromise on proposals to limit savings to pounds 50,000. Under one proposal, Peps will be frozen as they are, without further contributions, and allowed to continue to grow.

Geoffrey Robinson, the Treasury minister in charge of the ISA, has said he accepts concerns that current proposals, which would limit contributions to pounds 50,000 for the lifetime of the Pep holder, could cause serious administrative problems for savers and providers alike.

According to M&G, one of the leading providers of Peps, under the current proposals savers will be flooded with forms. A person who saved for 12 years would have to be sent 12 records, twice a year, to ensure that he or she stayed within the lifetime limit. "By the end of 12 years, trees would have to come down," said Jeffrey Mushens, a director at M&G.

The Inland Revenue's computer systems, already creaking under the weight of the self-assessment tax system, would struggle with the task of policing the limit if it were introduced as planned, in April 1999. With 11 million savers, about 33 million records would have to be monitored every year.

Both the Association of British Insurers and Autif, two trade bodies that represent the majority of the savings market, want a compromise formula to change proposals they call "costly, complex and possibly unworkable".

Under the formula, Peps will be frozen as they are, and will keep tax benefits. This will stop providers rushing to bring out complex systems to allow Pep savers to transfer to ISAs. Many providers fear they cannot develop the systems in time for April next year. But the Government could keep the pounds 50,000 limit, intended to slash the pounds 1.2bn annual cost of tax relief for Peps and Tessas. Last year, this cost rose by pounds 400m.

Financial regulators have joined the savings industry in saying consumers will be robbed of choice, and may be exposed to mis-selling if Government plans for ISAs are not drastically changed. The Personal Investment Authority, which has spent three years trying to clear up the pension mis-selling scandal, has said that plans to restrict consumers to one savings company a year could block them from picking a suitable vehicle.

Kelvin Baynton, representing the consumer panel of the financial watchdog, reported: "The panel is much exercised about competition and value for money for consumers. The best life insurance may be with one company, the best unit trust with another. But under the new rules, people will be locked into one provider."

Geoffrey Robinson, the Paymaster General, defended Government plans to cap the amount saved at pounds 50,000. "This Government has to balance the choice between total amount saved and what we can spend on tax relief," he said.

Both providers and savers now have little time to find out which route the Government has chosen. It is expected that final proposals, forming the basis of the scheme to be introduced next year, will be mooted when Gordon Brown unveils his Budget in two weeks' time.