The government has recently announced the final form of the
Individual Savings Account ("ISA"), which will bring major changes
to the savings industry. The ISA will begin on 6 April 1999 and the
government has guaranteed the continued existence of the ISA as a
savings vehicle for at least 10 years. The scheme will be subject
to review after 7 years to decide on any changes to be made after
the 10 year period.
What do we know about the ISA?
The account is a tax-advantageous "umbrella" under which can be
placed four different sorts of investment:
- Cash (including National Savings) (up to £1000
- Life insurance (up to £1000 per annum); and
- Stocks, shares, unit trusts (up to the £5,000
annual maximum and with no minimum UK equities holding).
Individual investors, along with the account
managers, decide the exact makeup of each account within an overall
limit of £5,000 per annum, although in the first year of the scheme
(1999/2000) the annual limit will be £7,000, of which no more than
£3,000 can go into cash and £1,000 into life assurance. The
government has dropped the controversial £50,000 lifetime upper
limit under great pressure form the financial services
Any investments within these limits are exempt from
tax. In addition a 10% tax credit will be paid for the first 5
years of the scheme on dividends from UK equities. This will apply
to equities in the stocks and shares component of the ISA, and to
equities which back policies in the life assurance component.
There will be no statutory "lock-in" period for an ISA. However,
individual account managers may agree with their customers to
restrict access, and we therefore expect this to be one area where
the level of competition in the market place will determine the
eventual form which the ISAs will take. Withdrawals from an ISA
will be without tax penalty.
Investors who already have a PEP will be able to transfer their
entire balance into an ISA. In relation to TESSA's the capital (but
not the accumulated interest) may be transferred into the cash
component of the ISA when the TESSA matures.
Subscriptions to PEPs can be made up until 5th April 1999, and any
PEPs held at that date can continue as PEPs with the same tax
advantages as before or be transferred into an ISA.
TESSAs can continue to be opened until 5th April 1999 and run for a
further 5 years from that date. Annual subscriptions to a TESSA
will not affect the annual ISA subscription limit.
What don't we know about the ISA?
It is not yet clear who will be allowed to provide ISAs. As part of
its intention to ensure that ISAs are available to the vast
majority of savers, the Government has suggested that the product
could be organised by mass retailers such as supermarkets in order
to make it more accessible, and that they might be encouraged to
apply for a "kitemark" to show that they have reached certain
It is not yet clear whether or not product providers will be able
to charge customers for the £1 billion (estimated) cost of the
transition from TESSAs and PEPs to ISAs.
It is also not clear how the ISA will be regulated. If regulation
is tight, for example as tight as the regulation currently in place
for sales of life assurance (one of the ISA's four possible
elements) this will raise costs and discourage mass retailers from
joining in, disenfranchising the low income savers which the
product is aimed at. It would also mean that investors in the
low-risk elements of an ISA's would be subsidising the costs
incurred by those purchasing the more risky, and therefore more
highly regulated, elements. However, if regulation is more relaxed,
for example as relaxed as that which governs the sale of national
savings products (another of the ISA's four possible elements) then
this may lead to fears that the life assurance element will be
missold to those who cannot afford to save.
The Government has not made it clear which life insurance policies
will be covered by the ISA. The Inland Revenue have said that only
"true life assurance policies" will be allowed under the ISA
umbrella, but the extent to which this includes combined products
such as savings/health insurance is unclear.
When shares are received from the demutualisation of a building
society the shares will not be able to be transferred into an ISA.
Shares issued in connection with an approved profit-sharing scheme
or savings related share option scheme will be allowed to be
transferred straight into an ISA at market value. The value
transferred will count towards the annual subscription but no
Capital Gains Tax liability will arise on the transfer.
What should you be doing to prepare for the
introduction of the ISA?
PEP and TESSA providers should consider writing to investors to
explain that, following the budget, that they do not think that the
new ISA will unduly affect the majority of savers, who do not need
to do anything at this stage with regard to the possible transfer
of funds between PEPs/TESSAs and ISAs. This should inform and
reassure them, and also allow those companies planning to offer
ISAs to begin to market them to their existing savings
Those intending to offer ISAs should begin to plan the way in which
they will be marketed. For example, the government is keen to
introduce mass-retailing techniques to ensure that the number of
people saving doubles, from 6 million to 12 million. This is likely
to make the ISA a low-margin product, and providers might consider
linking up with a company with a large marketing base, such as a
supermarket or garage chain.
Providers of PEPs and TESSAs should begin to consider how their
systems might need to be adapted to cope with transfers to the ISA,
as the implementation date is only a year away.