Cicero Policy Briefer

Issue 8, January 2007

The keys to ISA reform

By Tony Vine-Lott, Director-General, PIMA

Christmas came early for the members and staff of the PEP & ISA Managers Association (PIMA) during our annual conference in November. Ed Balls, the Economic Secretary to the Treasury, chose this event to make his primary announcements on the future of PEPs & ISAs.

The announcements were the result of an internal review carried out by the Treasury over previous months. PIMA made a formal submission to this, followed by various meetings and documents setting out how some of our proposals could be implemented and their likely outcomes.

During our meeting with the Minister he asked what we felt was key to the long-term success of ISAs, and to our delight he has accepted our key recommendations. Our focus has always been to define a scheme which has appeal to the general public. Unless there is broad acceptance and understanding of a scheme it will never achieve its objective.

ISAs have been extremely successful across a broad base of the population. Over 17 million people have subscribed over £200bn to ISAs, many from low income families. The simplicity and transparency of the scheme would appear to be what appeals, combined with the ability to access funds at any time without further tax implications.

It has been PIMA’s view that the attraction of the scheme could be further enhanced without major change and with little cost implication to Government. The key recommendations that the Minister accepted are as follows:

Certainty

When ISAs were launched, they came with a guarantee that they would last for 10 years. Unfortunately many interpreted this as “they could end after 10 years”. Many distributors and providers were beginning to believe that it was becoming necessary to inform clients that the scheme may end in 2010, particularly those clients investing for the medium to long term.

ISAs now have an indefinite life—in the same manner as pensions.

Simplicity

Since they were launched, ISAs have been available in two forms—minis and maxis. Maxis allow investments in stocks and shares up to a maximum of £7,000; minis allow investment in stocks and shares, cash and insurance products in fixed ‘components’, which totalled £7,000. This has proved to be confusing for the general public and also restrictive and expensive for providers to administrate.

In future there will be a single ISA scheme which will allow investments in stocks and shares, cash and insurance products (without the rigid components). There will still be a cap on cash subscriptions of £3,000 in a single year and a total of £7,000 overall. This should reduce confusion considerably and reduce cost for providers.

Flexibility

Many people are using ISAs to save for their retirement. However, due to TESSA monies only being allowed to be transferred into the cash component of an ISA, and the public losing confidence in the stock market as a result of the crash a few years ago and consequently putting most of their recent subscriptions into cash—under the current rules their funds are locked in the cash component. This is unlikely to be the most effective for them for longer term investment.

The Government has recognised that ISAs are being used for long-term and retirement savings, and so in the future people will be able to transfer money from their cash into a stocks and shares component, giving them much greater flexibility of asset allocation.

The Minister also announced two other changes which PIMA discussed with him—that PEPs will be merged into the stocks and shares component of ISAs and that on maturity individual Child Trust Funds will be reclassified as ISAs.

The Treasury has now gone out to consultation on these proposals—both on how best to implement them and from when. Responses must be received by the end of January. Do please have your say.

Tony Vine-Lott is the Director-General of PIMA and can be emailed here.

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