Tax fears help prompt slump in sales of ISAs

Mixed messages on savings

Sales of Individual Savings Accounts (ISAs) collapsed during the 2004-05 financial year, the Investment Management Association (IMA) said yesterday.

Sales of Individual Savings Accounts (ISAs) collapsed during the 2004-05 financial year, the Investment Management Association (IMA) said yesterday.

The IMA, which represents all of Britain's leading unit trust managers, said net sales of stock market ISAs slumped to £1.7bn in the last tax year, which ended on 5 April, down 53 per cent on 2003-04, when sales were £3.6bn.

The figures will dash the hopes of fund managers who had predicted investors would slowly return to the stock market as share prices recovered from the bear market that ran from the beginning of 2000 to the end of 2002.

Richard Saunders, the IMA's chief executive, said: "The simple fact is that people have been investing less money in ISAs. While it seemed for a time in 2003 that investors' confidence in the stock market was recovering, sales have flattened out once again."

Mr Saunders also blamed the poor sales on uncertainty over whether the Chancellor, Gordon Brown, was committed to maintaining the tax breaks on offer to ISA investors. "Speculation about the future of ISAs has undoubtedly been a factor," he said.

Tomas Carruthers, chief executive of private investor group Interactive Investor, said many savers had been discouraged by the Chancellor's 2004 Budget announcement that the tax breaks on offer to ISA investors would be reduced, even though this plan was later abandoned.

"Disappointing ISA sales are part of a bigger problem, that the savings ratio has halved under this Government," Mr Carruthers said. "Whichever party assumes control after 5 May, they must take big steps to stop the rot, starting with the restoration of more generous tax incentives for everyone to save."

Leading fund managers said Mr Brown's confirmation in this year's Budget that he would retain ISAs until at least 2010 had helped the market stage a partial recovery in the final weeks of the tax year.

The IMA said sales during March and the first week of April totalled £772m, compared with £743m in the same period last year.

Richard Miles, a spokesman for Fidelity, the biggest retail fund manager in the UK, said: "The Chancellor's decision to extend the life of ISAs is certainly welcome, though we would also like to see Mr Brown restore the dividend tax credit that ISA investors have lost in recent years."

The IMA also pointed out that the fall in gross sales of ISAs was much less dramatic than the net figure, from £5.9bn to £5.4bn. The figures suggest that while investors were marginally less likely to open new ISAs last year, they sold their existing holdings en masse.

Ben Yearsley, of the independent financial adviser Hargreaves Lansdown, said the recovery of the stock market partly explained the anomaly.

"It may be that many investors who made significant losses on ISAs they opened in the late Nineties have finally made some of that money back," Mr Yearsley said. "And [they] have been selling up now their holdings are in more neutral territory."

The development of ISAs also mirrors fund managers' experience with Personal Equity Plans (PEPs), the savings scheme that ISAs replaced in 1999. PEP investors increasingly began selling out of their funds five years after first subscribing, as they began realising cash for the needs that originally prompted them to start their saving schemes.

Yearsley added: "ISA managers have also been hindered by an increase in interest rates over the past year or so, which has made risk-free banks and building society accounts more attractive to investors."

ANALYSIS, PAGE 67

* When Labour came to power in 1997, the savings ratio - the amount of income Britons put aside for their future - was 9.9 per cent. It more than halved to a low of 4.4 per cent last year, recovering to today's 5.6 per cent.

* Labour's critics say the fall in the savings ratio can partly be explained by Government moves to reduce the tax incentives on offer to savers and investors. In 1999, the Chancellor, Gordon Brown, right, abolished PEPs and Tessas, which together enabled investors to save £10,800 a year in tax shelters. The schemes' replacement, the ISA, has an annual allowance of only £7,000.

* Since last April, ISA investors have also been unable to reclaim the 20 per cent tax deducted from dividends on stock market holdings.

* The Chancellor now says ISAs will be available until at least 2010, but doubts persist over his commitment to the scheme. In his 2004 Budget, Mr Brown said that he would reduce the annual allowance to £5,000 from 2006 onwards, though he abandoned this plan in last November's pre-Budget report.