ISAs to be retained indefinitely, but £7,000 limit is not extended

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More than 16 million savers with £190bn worth of investments in individual savings accounts (ISAs) will be allowed to go on using the tax-free plans indefinitely, the Government announced yesterday.

Ed Balls, the Economic Secretary to the Treasury, pledged the Government would retain ISAs permanently, ending widespread concern that the plans could be abolished in 2010, the date ministers had previously committed to keeping ISAs until.

The announcement means that money held in existing ISAs will go on building up tax-free and that savers will be able to open new accounts in every future tax year.

The Treasury will spell out full details of its plans for ISAs in the pre-Budget report, expected in four to five weeks. But yesterday Mr Balls said: "These announcements, the largest ever reform to the ISA regime, will simplify personal savings and help more families to save for the future."

Mr Balls also said the Government would simplify the tax-free savings system with several measures that will almost certainly take effect from the start of the 2007-8 financial year next April.

While the overall investment limit of £7,000 a year for ISAs will continue to apply, the distinction between "mini" and "maxi" ISAs will be abolished.

These rules currently allow ISA savers to invest in more than one asset class using the tax shelters each year, but have caused confusion among investors. In future, investors will still be restricted to investing £3,000 in a cash ISA each year - and limited to £4,000 in stock market investments if they use the cash option - but the mini and maxi regime will be abolished.

In addition, personal equity plans (PEPs), the tax-free savings plans which closed to new investments when ISAs were introduced in 1999, will in effect be abolished. Investors will continue to receive tax relief on their existing PEP holdings, but the assets will be reclassified as ISA money.

The move will mean the end of the PEP name 20 years after the launch of the shelters by the then chancellor of the exchequer Nigel Lawson.

Under the final reform, young savers with child trust funds (CTFs) will be allowed to roll over their cash into ISAs when they reach 18. The funds, launched by the Government 18 months ago, offer a state savings contribution of at least £250 to all children born since October 2002. Parents can then top up the funds, but the money cannot be accessed until age 18.

The announcement waswelcomed by savings providers, though there were calls for more generous investment limits.