ISA plans confirmed

As expected, details of the Government's plans for ISA reform were unveiled. Rules will be changed to bring remaining Personal Equity Plans (PEPs) within the ISA wrapper to enable investors to integrate their stocks and shares investments and manage their funds more effectively.

The current differences in the range of investments permitted in ISAs and PEPs will be ironed out. The Government will align thequalifying investments regime by allowing investment trusts with rental income to be held in ISAs and will also allow funds that were held in PEPs to be invested in the full range of ISA qualifying investments.

Whilst PEPs and stocks & shares ISAs are primarily vehicles for equity investment, savers are allowed to hold some uninvested cash in their accounts. The current ISA regime in which all interest earned on cash held in a stocks & shares ISA is subject to a 20% flat rate charge will be extended to PEPs. Ultimately, all PEP accounts will become stocks & shares ISAs. As such, PEPs will cease to exist. However, providers that currently offer both PEPs and stocks & shares ISAs will not be required to amalgamate individual clients' accounts into one account.

At the same time, the Mini / Maxi ISA distinction will be dropped. Savers will instead be able to contribute to two components: cash and stocks & shares. They will be able to hold one of each component per year, with either the same or different providers. The overall annual investment limit will remain at £7,000: savers will be able to invest up to £3,000 in cash and the balance in stocks & shares. For example, an individual will be able to save £1,000 in cash with one provider and £6,000 in stocks & shares with a different provider.

ISA providers will still have to monitor the £3,000 cash limit and the £7,000 stocks & shares limit on their accounts. However, investors who use different providers for each component will themselves be responsible for ensuring that they are within the limits.

The first Child Trust Fund accounts will mature in 2020. The Government will allow funds held in Child Trust Fund accounts to rollover into ISAs on maturity. The aim is to encourage young people to maintain a saving habit into adulthood.

As at 5 April 2006, £111 billion was held in cash ISAs and £70 billion in stocks & shares ISAs. At present, an individual cannot transfer funds invested in previous tax years between the cash and the stocks & shares components of their ISA. The Government proposes to allow individuals to transfer funds from cash subscribed in previous tax years to the stocks & shares component, without affecting their annual investment limit.

The Government intends to implement this package of reforms as soon as possible and all at once, with the exception of the Child Trust Fund measure, for which there is more time.

Jason Hollands, Director, Head of Communications at F&C Investments, commented, "While it was pleasing that the Chancellor confirmed an indefinite extension of Individual Savings Accounts, it was disappointing that he did not take the opportunity to indicate that the Government will consider an increase in the size of the annual allowance.

"The ISA has been stuck at £7,000 since its launch in 1999 and we therefore believe that the next Budget will be the right point in time for the Government to announce a significant upwards revision."

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