Ed Balls, economic secretary to the Treasury, actually talked some sense for once at the PIMA conference the other week.
He announced that the Government plans to make Isas a permanent feature of the savings landscape and simplify their structure, via 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.
Of course, all this really means is that we’re more or less back to life before Isas were introduced, i.e., Peps, albeit with a lower annual allowance. Nonetheless, the proposed changes are good news as they should give investors the re-assurance they require 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|
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.
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.
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 is expected to be revealed in the chancellor’s Pre-Budget Speech on 6 December and rule changes are expected to take place from April 2007. Let’s just hope that subsequent governments don’t start tinkering with the rules and that Mr Balls has a rapid change of heart regarding ASP.
* 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.
Justin Modray is head of communications at Bestinvest.
The views expressed are those of the author and not those of the company he represents.IFAonline
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