Riddle of Liddell's savings pledge

The savings industry is puzzling over what Philip Warland, director general of the Association of Unit Trusts and Investment Funds, calls "an extraordinary statement" made in the House of Commons last week by Treasury Minister Helen Liddell.

Goaded by a question from Nick Gibb, the new Conservative MP for Bognor Regis and Littlehampton and former tax accountant, Ms Liddell promised that the Government's new individual savings accounts (ISAs) "will certainly be as attractive" as the existing Tessas and PEPs which ISAs will replace in 1999.

The puzzle, says Mr Gibb, is how Ms Liddell, and her boss Gordon Brown, can carry out this promise while simultaneously removing the tax breaks and incentives that underpin existing savings schemes. In the Budget the Chancellor undertook to cut the tax credit on dividends from the current 20 to 10 per cent in 1999. He also removed the ability to reclaim the credit.

Yet it is, as Mr Warland points out, the ability of PEP providers such as unit trusts to reclaim the current 20 per cent credit which has partly fuelled their explosive growth. As a result of this break, and the associated freedom from capital gains tax, PEPs are now costing around pounds 800m annually in lost revenue to the exchequer.

Neither Mr Gibb nor Mr Warland can work out how Ms Liddell can reduce tax credits and make ISAs as attractive as PEPs. "I don't believe the Government can do it without retaining tax credits and at the current level," said Mr Warland.

In principle Mr Warland welcomes Mr Liddell's commitment. But he thinks a U-turn - to match those taking place over foreign income dividends - is likely: "I think she may have to retract her statement or modify it in some way."

Either way Mr Warland is writing to the Revenue seeking clarification. Ms Liddell's spokeswoman at the Treasury said: "There is nothing I can add. We will be issuing a consultation document about ISAs later this year."

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