Money Talk: Gordon grants our wishes

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The Independent Online
THE CHANCELLOR deftly cast himself in the role of Good Fairy and the Paymaster-General, Geoffrey Robinson, as the Wicked Witch last Tuesday. With a wave of his wand Gordon Brown protected all existing PEPs from tax for ever, and banished the Witch's threat of retrospective taxation on holdings in excess of pounds 50,000.

Savers will now be able cheerfully to put their full entitlements of up to pounds 9,000 into PEPs for the current financial year and next, safe in the knowledge that it will not affect their ability to invest in an Individual Savings Account. According to some estimates three-quarters of a million people who have been waiting to see whether the Witch would win will now push up to pounds 1bn into PEPs in the next two weeks, keeping PEP providers burning the midnight oil to get applications processed in time. Whether this is a wise moment to invest only time will tell.

Gordon Brown has also sweetened the start of the Individual Savings Accounts by allowing investors to put up to pounds 7,000 into an ISA in year one, from April 1999 to April 2000, including up to pounds 3,000 in a tax-free deposit account. After April 2000 the annual limit for investing in an ISA will still be pounds 5,000, including pounds 1,000 in a cash account, and the whole ISA programme will run for 10 years.

Meanwhile, what should Tessa investors be doing? Tessas were born in 1991, four years later than PEPs. But Tessas were immediate stars and raked in pounds 25bn in little more than a year, while PEPs had to wait for a stock market boom to become really glamorous.

In recent years, however, Tessas have been neglected and unloved as rates of interest dwindled and investors found themselves locked in by the Treasury rules which force holders to keep their Tessas for five years or forfeit their tax-free status. Even fixed-rate Tessas, which turned out to be more attractive than their variable rate versions, have lost their charms.

After April 1999 no new Tessas will be allowed, although any Tessa started before then can continue to attract up to pounds 1,800 a year and a maximum of pounds 9,000 over a full five-year term. By contrast, investors will be able to put pounds 3,000 into a new ISA deposit account in 1999-2000, and a further pounds 1,000 a year for the next nine years, to make a total of pounds 12,000.

Crucially, investors will also be able to take their money out of a cash ISA account whenever they need it, without forfeiting the tax-free advantages. Capital from a maturing Tessa can be switched into an ISA, but money put into a new Tessa now will be tied in for the full five years.

This should mean ISA cash accounts will offer slightly lower interest rates than a Tessa to compensate for the greater flexibility. Providers might also offer a choice of fixed-rate and variable-rate cash ISAs. That remains to be seen, however. Meanwhile, there seems no advantage in rushing to start a new Tessa now.