Money Talk: Robin Hood loses his way
Sunday 07 December 1997
That is, after all, the Government's declared intention in suggesting a lifetime limit of pounds 50,000 on holdings in the new tax-free Individual Savings Accounts (ISAs) that will replace PEPs and Tessas in April 1999. The proposed limit is based not on the amount invested but on the current value when the funds are transferred.
Investors who have invested up to the pounds 82,000 maximum permitted since PEPs were introduced could already have assets worth three or four times the proposed limit. The proposal has caused uproar among those likely to be affected and among specialist managers who make their living providing PEPs.
On the Government's own admission, at least 450,000 people will stand to lose some tax privileges. Financial services industry sources think the actual number could be double that. It will catch far more middle-class savers than it will fat cats
Tax relief on Tessas and PEPs will "cost" the Treasury, and therefore the taxpayer, around pounds 1.2bn in the current year, and is expected to reach pounds 1.5bn in 1999-2000.
The new proposals are intended to peg the total at that level by diverting the tax allowances from investors with more than pounds 50,000 in tax shelters to an estimated 6 million people who do not save at all at present, allegedly because they cannot afford the minimum of pounds 20 to pounds 30 a month that PEP and Tessa plans require.
But the whole argument fails if, as seems quite likely, the proposals will reduce the amount of savings that existing PEP investors set aside and fail to attract the necessary numbers of new investors.
Most of these new investors do not save because they cannot afford to. Such people may well not be best advised to invest in shares and unit trusts, which can go down in value as well as up.
But if they are only allowed to put up to pounds 1,000 in a cash deposit, the best they can hope for is about pounds 70 a year interest, on which the tax-free concession is worth just pounds 14. Meanwhile someone has to pay the costs of operating the ISAs.
The rules will not be set in concrete until some time after the consultation period ends on 31 January, 1998. There is certain to be some frantic lobbying to try and get the rules eased and the limits on both annual and lifetime investment increased before then. There is also a good case for allowing separate accounts for cash and share-based investments.
But it is important for investors to know the final shape of the new rules well before 5 April, 1998, so they can make informed decisions on what to do with their money before the end of this tax year. If the Chancellor delays full details until the Budget in mid-March investors would have less than three weeks to finalise their planning.
q Steve Lodge is away.
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