Boosting the role of ISAs

The drive to encourage greater private savings among Brits has been bolstered by changes to Individual Savings Accounts (ISAs) which take effect in April next year.

The Economic secretary to the Treasury, Kitty Ussher, has laid out regulations to make ISAs available indefinitely, increase the amount people can save through the vehicles and allow savers to transfer money saved in cash ISAs to stocks and shares ISAs.

From April 2008, the annual ISA limit rises to £7200, of which £3600 can be saved as cash.

With the introduction of personal accounts set for 2012 and the wider thrust to boost saving through pensions, the new rules could see ISAs used as building blocks for retirement savings.

“It’s really important that people don’t think about their retirement money as just their pension,” says Anna Bowes, investments manager at AWD Chase De Vere.

“Under current rules the pension lump sum is your only access to the capital; the rest has to provide you with an income. ISAs play an important role in the whole retirement package and will hopefully help people to save for retirement without the fear of not having access to their money.”

Under the new regulations, the mini/maxi distinction has been removed, and all Personal Equity Plans (PEPs) will automatically become stocks and shares ISAs.

Andrew Tully, marketing technical manager at Standard Life, says the changes, coupled with A-Day last year, have heightened the flexibility of pensions.

“People can use an ISA as a feeder account for a pension, and we might see more of that in the future,” he says.

“If someone is a basic rate taxpayer, they can save up in an ISA and if at some stage in the future they become a higher rate taxpayer, they can put that money into their pension. That way, rather than getting 22% tax relief on the pension contribution you could get 40% tax relief on the pension contribution because it’s growing in a tax efficient way.”

While allowing people to transfer from cash to shares ISAs increases flexibility, the risk is that many people will do so when the stock market if flying high.

Had they done this in the first half of the year, when equity markets were booming, they would have been hit hard by the recent share market volatility triggered by the sub-prime mortgage crisis in the US.

Ultimately though, any move that increases the options for retirement savings should be welcomed.

The Conservative party has entered the UK savings policy debate with a proposal for a ‘lifetime savings account’, a cross between ISAs and personal pension schemes.

Based on 401(k) plans in the US, the accounts would provide full income tax relief on contributions paid into the account, and tax-free withdrawals on retirement to buy a pension annuity.

Tony Vine-Lott, director general of the Tax Incentivised Savings Association (TISA) says: “While we have made great strides on simplifying the ISA and making it more customer-friendly, savers could still benefit from the structure and simplicity of a lifetime savings account for longer-term savings.”

1 September 2007