Individual Savings Accounts - now and forever?

Individual savings accounts (ISAs) have been reprieved, and are set to remain a part of the savings landscape for the foreseeable future. The tax-free savings schemes had previously been guaranteed only until 2010. However, the Treasury minister, Ed Balls, announced last week that these handy ways of beating the taxman would be extended indefinitely.

Speaking at an investment conference, Mr Balls said, "Our task is to entrench a culture of savings for people of all ages. Today's announcements - the largest-ever reform to the ISA regime - will simplify personal savings and help more families to save for their future, to deliver our objectives of ensuring everyone can share in rising prosperity."

"The government is committed to ISAs, and we are keen to build on their success," he added.

This is indeed welcome news for savers, as the Government stands accused until now of doing nothing to help people save and, on account of its economic policies, encouraging vast swaths of the nation sink under a welter of debt.

Among the proposed changes to the Individual Savings Account rules are: the abolition of the distinction between "mini" and "maxi" ISAs, which many members of the public never understood anyway; the inclusion of personal equity plans, the investment predecessor of ISAs, within the ISA wrapper; and the possibility of rolling over the Child Trust Fund (CTF) savings scheme for children into an ISA once the fund matures as the child turns 18.

ISAs were introduced in 1999 by Chancellor Gordon Brown as a replacement for the existing Personal Equity Plan (PEP) and Tax Exempt Special Savings Account (TESSA) regimes which had been introduced by the Conservatives. The new scheme was immediately dubbed unnecessarily complicated and confusing for savers, and a typical example of Labour meddling, compared with its popular predecessor.

However, the complexities did not stopped upwards of 16 million people - more than one in three adults - subscribing to an ISA since they were invented, with nearly £190 billion saved in all schemes. This compares with a total of seven million TESSAs and PEPs in 1997, when Labour took office.

Simplification will be most welcome, and the ability to switch between cash savings and stock market investment is an innovative move. It also makes sense to dovetail the Child Trust Fund, another of Labour's saving schemes, into the ISA framework, so that a flood of cash from young people's savings does not suddenly explode from its tax-free protection, with no obvious place to go, offering account holders the temptation to fritter it away.

08 November 2006 © Moneyextra.com

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