By GRAHAM FROST 03/11/2006
Ed Balls MP, Economic Secretary to the Treasury, this week announced that the Government plans to make Individual Savings Accounts (ISAs) a permanent feature of the savings landscape and simplify their structure. His speech suggested four key proposals:
- ISAs will continue to be available well beyond the original commitment of 2010 with an annual allowance of at least £7,000.
- The mini/maxi distinction within ISAs will be removed.
- PEP schemes will become part of the ISA wrapper.
- Child Trust Funds (CTFs) will roll-over into an ISA when a child reaches 18.
| "Overall, this is good news..." |
Overall, this is good news. The changes should give investors the re-assurance they require if they’re to use ISAs as an effective long term savings vehicle. It might also repair some of the damage caused by Chancellor Gordon Brown when he reduced the income tax advantages of receiving dividends within an ISA in both April 1999 and April 2004.
Despite Brown’s stealth tax, ISA Tax Benefits are still very attractive for long term investors, especially higher rate taxpayers. The figures below show how much tax might be saved over a 30 year period:
Estimated Overall Tax Saving* |
| |
Basic Rate Taxpayer |
Higher Rate Taxpayer |
| Equities |
£5,000 |
£66,000 |
| Bonds/Cash |
£55,500 |
£111,000 |
The larger the fund the greater the tax advantage and the annual ISA allowance becoming a permanent fixture gives investors a realistic opportunity of building a worthwhile ISA pot. Of course, there is a risk that future Governments might change ISA legislation yet again, but hopefully they will have the sense to ensure continuity with the current proposals.
| "Simplicity is good, but the Government needs to allow investors to switch from stocks & shares to cash..." |
By removing the mini/maxi distinction, it seems ISAs will simply comprise cash and stocks & shares components. Simplicity is good, but the Government needs to allow investors to switch from the stocks & shares component into cash at a later date else it could prohibit them reducing risk in their twilight years.
Parents will welcome the rolling of CTFs into ISAs when a child reaches 18. While it doesn’t stop the child subsequently selling the ISA and wasting the proceeds, it should generally result in the money remaining invested for longer. If the child leaves the money invested long term it could result in a handsome windfall at retirement; the basic £250 vouchers could grow to £32,971 by age 65 (assuming 7% annual return) and with £1,200 annual top ups until age 18 this swells to £1,083,567.
While some ISA managers are calling for a hike in the annual allowance to £10,000 it’s probably unlikely as the majority of voters can’t even afford to fully utilise the current £7,000 allowance. All should be revealed in the Chancellor’s imminent Pre-Budget Speech and rule changes are expected to take place from April 2007.
* Figures assume an individual uses their £7,000 annual ISA allowance each year for 30 years. Annual equity returns 7% of which 3% dividends. Annual bond/cash returns 5% of which all is interest. Annual capital gains tax allowance rises by 2.5% each year.