Tax Saving Survey: Despite fears, ISAs are worth investing in

Information may still be patchy, but it seems the tax-free package could be beneficial, says Rachel Fixsen
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The Independent Online
IT WAS trumpeted as a savings account for the many, not just the few. But since its upbeat announcement last year, the Government's new tax-free savings vehicle, the Individual Savings Account, has attracted little but howls of protest from the financial services industry.

Savers are confused. "Certainly the basic saver, who is the target market for the ISA according to the Government, doesn't know what it is," says Mark Maguire of Abbey National, citing Abbey research.

But savers should not ignore the tax breaks ISAs will offer when they are launched on 6 April. They may be worth having, but many say they are mean compared with those offered through Personal Equity Plans (PEPs), the scheme ISAs are to replace. But although ISAs have a lower limit on equities investment, they do have the advantage of allowing a broader range of investment. There is no geographical restriction on ISA share investment so if investors want to, they can put it all into a North America fund, for example.

Cash savers could gain under the new system

The cash element of ISAs will replace Tessas, which allow investment of up to pounds 9,000 over five years, tax-free. With an ISA, the annual cash limit is pounds 1,000 (though it is pounds 3,000 during 1999/2000), but over time, savers could potentially build up a larger sum. Each individual can only have one Tessa, so pounds 9,000 is the maximum.

People on low incomes could benefit from having an ISA. "They can't take the risk that equities involve anyway, but they don't want to tie their money up for too long either," says Janice Thomson of Chelsea Financial Services.

So how will the public respond to the launch of ISAs next April? "I think it'll be a success," says Adam Fairhead, of Save & Prosper. "There has been a lot of negative press and I don't think it has been very helpful."

Apart from the fact that ISAs offer a lower annual investment limit than PEPs, the financial services industry has also been up in arms because the framework surrounding the new scheme has still not been finalised, leaving little time for planning.

A major bugbear is the proposed CAT (cost, accessibility and terms) benchmarking for ISAs. As plans stand, the only equities ISAs to make the CAT standard would be those investing in UK tracker funds. Ambrose McGinn, of Abbey National, says tracker funds are more volatile and risky than managed funds, and unsuitable for first-time investors.

"Research very clearly tells us consumers will be misled with CAT-mark ISAs into thinking this is some government endorsement," he says.

Research done for IT company Unisys shows that all leading retail finance organisations in the study will have an ISA facility ready by April. But only a few are making obvious attempts to promote ISA products. Unisys blames this on the high cost of implementation, low revenue prospects and the fact the institutions prefer the tax-free savings options which already exist.

Some people have complained the product looks complicated and confusing. "If anyone is making it complicated it's the Government... we're going to make it as simple for the public to use as possible," says Mr Fairhead.

ISA RULES

Individual Savings Account (ISA) will be sold from 6 April 1999. They are guaranteed to run for at least 10 years.

ISAs will be free of income tax and capital gains tax. In the first five years, dividends from UK equities held in an ISA will attract a 10 per cent tax credit.

You can invest up to pounds 5,000 a year in an ISA, but up to pounds 7,000 in the first year that the accounts are available.

Up to pounds 1,000 of this a year can be in cash (pounds up to pounds 3,000 in the first year) and up to pounds 1,000 annually can be invested in life assurance. The rest can be invested in equities. It will be possible to choose separate providers for the cash, insurance and investment components of ISAs.

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