Regular saving: Prepare for new accounts

Once upon a time, tax-free investments meant PEPs and Tessas, two savings vehicles introduced by the previous Conservative administration. But from April 1999 Labour's brave new plan, the Individual Savings Account, comes into force. Simon Read guides us through its implications.

To anyone planning to make regular savings, the proposed Individual Savings Accounts (ISAs) look like offering valuable tax benefits. After they are introduced in April 1999, they will allow you to save up to pounds 5,000 a year in a variety of different ways, including up to pounds 1,000 in a deposit account and up to pounds 1,000 though an insurance company policy - including old-style with-profits endowments which have a element of life cover.

The attraction of ISAs will be that all gains will be free of personal tax liabilities. As such, they will be replacing the existing personal equity plans (PEPs) and tax-exempt special savings accounts (Tessas). Indeed, cash in PEPs and Tessas must be transferred to the new account. PEP holders will have until 5 October 1999 to transfer their savings into an ISA. Those with a Tessa will have to wait until it reaches maturity before they have to transfer the proceeds.

Both PEPs and Tessas have been responsible for encouraging many people to get the regular savings habit. Some financial experts, however, claim that the new ISAs will not be such an attractive proposition. This is largely because of the planned introduction of a new lifetime limit of pounds 50,000 on the accounts.

"The savings habit will not flourish as the Government would have wished, even as we enter the 1998 PEP season, unless they realise that a lifetime limit is a disincentive for people to save now," says Marc Sylvain, managing director of Fidelity Investments. "We are urging the Government to reconsider this element of the ISA package. It serves neither the investors' nor the Government's interests."

Don Clark, managing director of Wolverhampton-based IFA Torquil Clark, agrees. "I think the imposition of such an arbitrary limit will have a detrimental effect on savings," he says. "The buy it or lose it mentality which has helped made PEPs a success will disappear. I would like to see the limit abolished altogether or increased to pounds 100,000."

This could happen. The ISA proposals are precisely that - proposals. Interested parties have until the end of January to persuade the Government to change its mind on any aspect of the ISA. This includes the proposed pounds 50,000 lifetime limit. Don Clark, for one, thinks a rethink on this is highly possible. "I feel that the pounds 50,000 limit is far from final at the moment," he says.

You can help change the Government's mind. If you wish to lobby for a higher limit, write to your MP or to Keith Brown at the Inland Revenue, Room 234, Southwest Wing, Bush House, London WC2B 4RD.

Until the exact details of the ISA are finally announced, it will be a little difficult to know how to prepare for the new savings accounts. Do nothing yet, suggests Andrew Barker, operations director of Skipton Financial Services, the independent financial advice arm of the Skipton Building Society. He cautions investors: "The best approach is to wait and see. ISA providers will not be able to publish details of their new accounts for a considerable time, not while the rules that will govern them can still be subject to change."

All PEP holders will get statements of their accounts in April 1999. They will then have until October to switch to a new ISA that their plan manager is likely to be offering them. To make the transfer at the time, they will simply need to return a tear-off slip. Most PEP managers have already committed themselves to making no additional charges for the transfer.

Tessa holders will have until their accounts mature before they have to transfer the cash into an ISA. Wise savers will therefore start a new Tessa between now and April 1999 to get the additional tax allowance. You are allowed to save up to pounds 9,000 over five years in a Tessa. Anyone starting a Tessa before April 1999 will, therefore, have five years of the tax benefits. They will also be able to save up to pounds 5,000 in an ISA for the additional tax-free gains.

"The ISA heralds some improvements over its tax-free predecessors. As well as allowing instant access to your fund, something that you cannot do with Tessas and some of the other tax-free savings schemes without losing the tax advantages, they will also widen the range of qualifying investments to National Savings and life assurance," points out Mr Barker.

"However, these improvements pale into insignificance when compared with the eventual removal of tax credits for dividends and the introduction of a lifetime savings limit of pounds 50,000 for investors."

Despite these shortcomings, ISAs will still offer a savings haven, free from income and capital gains tax, and you might even win one of the 50 monthly prizes of pounds 1,000 to compensate for the disadvantages.

Independent financial adviser Towry Law has produced a free consumer guide to Individual Savings Accounts which is available from Towry Law, Baylis House, Stoke Poges Lane, Slough, Berkshire SL1 3PB, or phone 0345 868244.

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