Goodbye PEP, hello ISA

After months of hype, the first ISAs are on sale at last. But should you invest? By Nic Cicutti
Everyone dreams of making history. For many of us, this might involve saving the world, scoring the winning goal in a cup final, or making 10 million-selling hit record.

This week, in his own slightly less dramatic way, Ash Rawal, a 38-year- old corporate consultant from Derby, also made history. At one minute after midnight on 6 April, Mr Rawal became the first person in the UK to buy an Individual Savings Account, Labour's new tax-free savings vehicle.

Whether his decision to stay up late turns out to be the epoch-making step Labour hopes crucially depends on whether millions of other savers follow his lead, and also invest in an ISA. And more important still will be the question of just who is investing: the acid test will be whether the ISA succeeds in attracting into it lower-paid people, who traditionally have been ignored by the savings market.

ISAs, which offer shelter from capital gains tax to investments, are the Treasury's answer to this perceived disenfranchisement. Unlike PEPs, which were primarily about investing in shares or bonds, ISAs will also allow savings to go into instant-access accounts or even insurance-linked products, both seen as more likely vehicles for working-class people's cash.

Despite the Treasury's best intentions, experts are mostly cynical about whether ISAs will improve savings habits among the working population. Research by the Association of Unit Trusts and Investment Funds (Autif) suggested in March that consumers were unwilling to "commit" to the new savings product. Some 59 per cent of those surveyed were commitment phobics where ISAs were concerned, up from 52 per cent six months earlier.

These worrying findings led Anne McMeehan, director of communications at Autif, to say: "It is worrying that ISAs have still not succeeded in attracting wider public support. It seems the investment industry is already experiencing an uphill struggle in converting its existing customers."

Autif's findings are matched by Marks & Spencer Financial Services, whose own survey shows that of the 67 per cent of adults who have heard of ISAs, more than half still know nothing about them.

Similar research emanates from Yorkshire bank, whose savings manager, Andrew Hindle, adds, "Given the Government's aim for the ISA - to end confusion and to make tax-free savings more accessible - our study shows much work to be done. Rather than end confusion, the level of understanding has not risen at all in the past year."

The fears of experts have been compounded by the seeming complexity of ISAs and the way in which some potential ISA providers, among them Save & Prosper, have been unable to launch products because their computer systems are not yet up to scratch. These worries led Sainsbury's Bank to say that it is not at present considering launching its own ISA.

So, less than one week into "ISAland", is all the doom and gloom justified? The evidence is patchy, but things don't appear to be as bad as they might be. On Thursday, Standard Life, a leading life insurer, announced that within 48 hours of the ISA's formal launch, it had already switched 18,000 of its existing PEP customers' monthly contributions into the new savings vehicle. In addition, it has fielded 3,000 enquiries from prospective customers on its ISA product range.

Alan Burton, managing director of mutual funds at Standard Life, says: "The initial response clearly doesn't compare with the level of activity seen during the last few weeks of the PEP season, but it is still very encouraging. There are clear signs that ISAs are of encouraging new savers."

National Savings, which also offered a competitive ISA savings account, reported 7,000 account openings, worth pounds 10m, on Wednesday alone. Further evidence of the potential for ISAs also came from NatWest, whose survey shows that 43 per cent of people are considering investing in one.

This may sound like music to the Government's ears, but it is worth noting that the bulk of ISA investments for the foreseeable future are likely to be straight switches from existing cash-based savings accounts into ISA-linked accounts, where no tax need be paid on the interest.

Equity-linked ISAs are likely to remain a minority interest for some months to come, while providers struggle to get their systems up and running and to turn their PEP investors into ISA groupies. Under such circumstances, it is likely that choice, a key condition of any equity-linked investment, is likely to be more limited, in terms of available fund management groups, for some time to come.

Roddy Kohn, an independent financial adviser at Bristol-based Kohn Cougar, says: "My advice to clients is that, where they can, they should break from the cycle of last-minute investment seen at the end of every tax year. That means starting to make regular premium payments now.

"The problem is that not all funds-management groups have said exactly what they are launching. While there are plenty of good ISA-linked funds available now, it is probably wiser to wait for a few weeks while we find out what all the providers are likely to do."

Until then, the experts advise taking advantage of some excellent rates available from cash- linked ISAs. One important caveat is where an investor wants to maximise his or her holding in equities: setting up a cash-based "mini-ISA" will prevent them from placing all of their pounds 7,000 entitlement for 1999/2000 into shares.

Either way, ISAs are here to stay - and the evidence is that Mr Rawal may have made a little history after all.