William Kay: Will structured products with greater protection but less profits replace ISAs?

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In the bars of the City's Square Mile, it's the classic buy signal.

In the bars of the City's Square Mile, it's the classic buy signal. The public are getting out of shares, or at least the tax-lightened individual savings accounts (ISA). Latest figures from the Investment Management Association (IMA) show that, for the first time, there was a net outflow from ISAs as thousands of investors cashed in last month.

But closer examination of the numbers suggests that while this may be a historic moment in the eventual phasing out of ISAs, it does not tell the whole picture about savers' attitudes to the stock market.

The fact is that ISA sales have been tailing off since the spring, thanks to the ailing stock market and the growing attractions of property and fixed-interest investments. At £349m, ISAs accounted for only one pound in seven of total gross retail sales in September. The more significant point is that after taking account of investors cashing in, net total retail sales have more than halved in the past year from £559m to £266m.

Richard Saunders, the IMA's chief executive, cites continuing uncertainty about investment prospects, higher interest rates and the reduced tax benefits associated with ISAs to explain the collapse of that part of the market. But he has to admit that the net outflow of funds from ISAs took place when stock markets were stronger, although this week's turbulence will have done nothing at all for investor confidence.

In fact, it looks as if financial advisers have been diverting their clients away from ISAs since the start of the new tax year in April, when dividends within ISAs started to be taxed. A favourite alternative has been so-called structured products, which are rapidly taking centre stage as the new with-profits.

Structured products put savers' money into an often complicated format with promises of protection, in return for the customer giving up some of the potential profits. They are often linked to stock market indices such as the FTSE 100.

The early versions tried to offer too much profit, which meant the promised protection was too flimsy. These were the now-derided precipice bonds, where the saver's money dropped off a precipice unless certain conditions were met. Loud and long were the complaints from risk-averse investors who were talked into these products.

Now 100 per cent money back is a minimum promise, and some of the more recent versions lock in gains to lift the floor. To that extent they mirror with-profits bonds, which have been discredited since the endowment selling scandal, although for different reasons.

But the basic desire for a way of benefiting from the stock market with a safety net remains.

That safety net is far more important right now than the tax privileges attached to ISAs, which in any case the Chancellor, Gordon Brown, seems determined to kill. Mr Brown says he wants to encourage savings, so it will be interesting to see how to intends replacing ISAs.

The present cautious climate makes all the more bizarre the decision of the City investment bank Dresdner Kleinwort Wasserstein to introduce a UK covered warrants Tracker Certificate linked to hedge funds. It may be a first in the UK covered warrants market, as Dresdner claims, but it's about as much use as trying to sell a unicycle to people who can't ride tricycles.

* Congratulations to Abbey National on relaunching their consumer website. It looks much clearer and is written in very helpful language. It cannot be a coincidence that it is appearing after Abbey and Banco Santander shareholders have approved Santander's takeover. But, even though Abbey is to be run by Francisco Gomez Roldan, Santander's chief financial officer, not a word of Spanish has crept in.

The website is a little economical with the truth, however. All products carry advice to consider or not consider them in certain circumstances.

But the 7 per cent Monthly Saver somehow doesn't mention that you shouldn't consider it if you have a lump sum, because then your interest rate will be approximately halved.

A 'rare' fault with the chip and pin system

An unexpected blow has been dealt to the chip and pin brainwashing campaign, which is trying to get us used to the idea of putting in a four-digit Personal Identification Number (PIN) instead of signing when we use a credit card.

It turns out that it is unwise to venture out with one of the new cards without cash or another card. This follows the experience of one Independent reader, who used her card to pay for a haircut, then took it to Boots, identifying herself by PIN rather than signature each time.

Same card, same pin: the Boots machine rejected it three times, rendering the card useless. Then the retailer cannot accept a signature, and cannot bluff because the card issuer knows it has been rejected. The only answer is to pay with another card or cash. And not all of us trust ourselves with more than one card.

The industry spokeswoman, Sandra Quinn, says this sort of error occurs only about twice in every hundred transactions, apparently less than with the old-style magnetic stripe cards. But, given the hundreds of millions of credit card purchases every year, it still adds up to a lot of hassle.

Combined with the irritating need to remember different PIN numbers, the whole exercise is beginning to look like a plot to make us use credit cards less. Strange, really, when bank chiefs have been berated by MPs for playing tricks with customers.


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