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Chancellor to back down over plan to curb Peps

The Chancellor is prepared to make concessions in his plans to introduce new Individual Savings Accounts following a storm of controversy over the proposals. Diane Coyle, Economics Editor, reports on a partial victory for critics of the planned accounts.

Gordon Brown has indicated to officials that he is prepared to concede ground on some of the criticisms of the proposed Individual Savings Account during the consultation period.

The most likely change would be an increase in the amount that people can transfer into a new account from existing Peps and Tessas without breaching the pounds 50,000 lifetime cap on contributions to the new accounts, according to senior sources.

The change of heart is thought to reflect ministerial unhappiness with the perception that the ISAs are part of a covert attack on the middle classes as much as an admission that the proposals are genuinely flawed.

Certainly, many experts have argued that the switch from Peps and Tessas to ISAs will discourage middle-class savers without increasing saving by the less well-off by very much. Most recently the National Institute for Economic and Social Research, a respected independent think-tank, said the Government's proposals would reduce the amount saved in Britain.

The main criticisms of ISAs by the financial services industry, however, have focused on the difficulty of administering the pounds 50,000 lifetime limit. Potential providers of the accounts have said it will be difficult to keep track of separate accounts and to monitor withdrawals.

However, Treasury sources have already indicated that there is no intention to raise or abandon the pounds 50,000 ceiling.

However, there has also been much unhappiness with the fact that the cap imposes a de facto limit on the amount that can be transferred from existing Peps and Tessas. This will affect between 10 and 15 per cent of current holders of Peps, according to the Inland Revenue.

A concession increasing the amount that can be transferred from existing accounts is likely to be announced in the Budget on 17 March.

Prudential, the UK's biggest life insurer, yesterday proposed that the Government should link the new Individual Savings Account with its other major reform of personal finance, stakeholder pensions.

The Pru said it shares concerns that ISAs will be made attractive to low-income savers at the expense of pension saving. In its Budget submission to the Government it said it wants ISA savers to be able to shift money into pensions with no tax penalty.

The Pru also suggested cash bonuses for long-term saving instead of the proposed tax credit of 10 per cent on the growth of the fund.

Its submission repeats a criticism made by the Institute for Fiscal Studies. In its "Green Budget" report last month, it argued that reform of tax concessions for saving should have been explicitly linked to pension reform.

Budget for work, page 20