Sam Dunn: The ISA man cometh and misses a big chance

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The Independent Online

As puzzles go, it was a real poser. It belonged to Chancellor Gordon Brown and, loosely translated, it went like this: 'I want you to put more away for your future but I'm going to chop the amount that you can save and invest tax-free.'

As puzzles go, it was a real poser. It belonged to Chancellor Gordon Brown and, loosely translated, it went like this: 'I want you to put more away for your future but I'm going to chop the amount that you can save and invest tax-free.'

In the end, the answer proved to have eluded even the setter himself. In last week's pre-Budget report Mr Brown announced, subject to consultation, a stay of execution until 2009 for plans to slash the amounts that can be invested in individual savings account (ISAs). So, for each tax year we can carry on putting up to £7,000 into shares, cash or insurance.

These sums grow tax-free and are a vital plank in the UK savings industry. Since the launch of ISAs in 1999, more than 16 million of us have opened one and packed in £150bn.

So the Chancellor's original plan to cut our tax-free annual ISA allowances from £7,000 to £5,000 overall, and £3,000 to £1,000 for cash ISAs, was baffling. Except, perhaps, to a Treasury desperate to claw back revenue.

It should also have seemed a nonsense to the Chancellor himself - a man who is keen to foster a savings culture to wean us off our debt-ridden lifestyles and, in the long term, to cut down the cost of welfare support later in life.

In truth, his change of heart is little more than common sense. Yet rather than simply straightening out his wonky savings message, Mr Brown should have grabbed the ISA by the throat and given it a good shaking.

Simpler rules on mini and maxi ISAs - at the moment, we can't open both types of account in the same tax year - could prevent easily committed administrative mistakes that leave savers trapped in the wrong type of ISA for 12 months.

And, instead of squeezing ISA allowances into prescriptive timeframes, he could have ditched the 2009 deadline altogether and shown a real commitment to long-term saving. Instead, his shelving of the plans smacks of a pre-election political hit.

What Mr Brown could have done was raise the annual allowances and restore the dividend tax credit on ISAs that was abolished earlier this year. Such action would have confounded everyone and put pressure on the Inland Revenue's coffers. But it would also have demonstrated the Chancellor's dedication to filling the savings gap.

All that said, Mr Brown has done us a favour by safeguarding the appeal of ISAs.

Many independent financial advisers and lenders worry that too many savers have placed undue emphasis on property and the equity in it.

The price rises of the recent housing boom may now be sagging as the market cools, but they have created instant, easy wealth for millions of homeowners that could dissuade them from making any other savings plans. That would be a dangerous policy, as they would be badly exposed in the event of a property crash.

What all of us must do instead, says the financial services industry, is strike a balance between short and long-term savings. This "asset allocation" usually includes property, cash, shares and bonds. Arranged wisely, they should provide a sound basis for retirement.

While few of us plan with such precision, the ISA's salvation as a worthwhile part of our savings armoury is a relief.

Meanwhile ...

Mr Brown also attempted to refresh the other parts of our personal finances that an ISA doesn't reach.

The Treasury will direct an extra £250 (or £500 for the poorest families) into the new child trust funds which go live in April. The money will be paid at the age of seven for every child born after 1 September 2002. So, even without contributions from family and friends to the funds, the sum at 18 years old should now be in excess of £1,200 assuming modest growth rates.

The Chancellor also pulled £285m from his pockets for extended paid maternity leave - up from six to nine months - from April 2007.

By the same year, Mr Brown says free nursery education for three- and four-year-olds will be extended to 15 hours each week.

But as the Chancellor sat down last Thursday, you could hear the sound of teeth gnashing across the housing market as hopes of a higher threshold for stamp duty went unfulfilled. For desperate first-time buyers, much hope will have to remain pinned to a falling market.

s.dunn@independent.co.uk

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