Raise the cash ISA limits!
More than a quarter of a century has passed since tax-friendly saving and investing were given a big boost in this country with the launch of the personal equity plan (PEP).
Thank you, Nigel Lawson; thank you, Margaret Thatcher.
As a result of Thatcher's quest (Lawson was merely her trusty lieutenant) to turn the country into a nation of shareholders, millions of people have benefited from the opportunity to build nest eggs without fear of the taxman taking his mighty chunk of capital gain or accrued income.
Some, the most assiduous among us, have accumulated seven-figure tax-free portfolios to tide them through retirement and beyond.
So, let's not beat around the bush and for once rejoice. PEPs spawned a savings and investments revolution, of which we should be proud.
The revolution carries on today although PEPs are no more. Like tax-exempt special savings accounts, or TESSAs, they were seamlessly interwoven along the way into the current tax-friendly savings regime that is individual savings accounts (ISAs).
Today, we can all save a maximum of £11,280 into ISAs in the tax year ending 5 April without income generated being taxed further and without having to worry about whether capital gains tax could be an issue in the future.
We can then follow this up with maximum savings of £11,520 in the new tax year starting 6 April. Even children under the age of 16 can get in on the ISA act with a maximum annual contribution of £3,600 into a Junior ISA.
There is no doubt that in the evolution from PEPs and TESSAs to ISAs, this tax-friendly savings regime has become more user friendly. Indeed, its simplification has taken place at the same time as the pensions landscape has become fiendishly more complicated and more prone to government interference.
As an example of this, in December last year, we sat back and listened as Chancellor George Osborne announced in his Autumn Statement yet more restrictions - reductions in both the annual and lifetime allowances – in people's ability to accumulate pension savings.
It won't be long, think experts, before the tax relief available on pension saving comes under closer government scrutiny. Such constant pensions meddling has caused some to question whether ISAs are an altogether better – and more stable – long-term savings alternative.
Thankfully, ISAs have shed many of the silly rules that haunted PEPs in the early days – ridiculous requirements such as unit trusts only qualifying for full PEP inclusion if they had more than 50% of their assets invested in the European Union.
Yet that's not to say that ISAs are the perfect finished product. Far from it.
It's crazy that we still have restrictions on what can be held inside an ISA, in particular as regards cash savings. Currently, only half the annual £11,280 allowance can be saved in a cash ISA. If people want to utilise their full allowance, they must ratchet up the risk to their capital by investing in equities or bonds – typically through unit trusts or investment trusts.
This is madness – as well as unfair on the millions of people (especially the elderly) who have no appetite for risk beyond the trusty cash deposit.
Equally mad is the rule that prevents ISA investors from de-risking their tax-free portfolios by transferring investment-based ISAs into cash ISAs – something many savers would like to do as they approach retirement.
In the run-up to last year's Autumn Statement by George Osborne, I urged him to remove these restrictions. With the backing of Moneywise readers, an e-petition on the issue attracted support from more than 12,000 people.
Despite the backing of various financial institutions and some savvy MPs (notably Alun Cairns, Conservative MP for the Vale of Glamorgan), the Chancellor was not moved. Yet we shouldn't give up hope that he will see sense on this key savings issue.
With the Budget already in the diary for 20 March, George Osborne has one more golden opportunity to make life easier for those who want to build their nest egg with a tax-efficient cash ISA.
He shouldn't miss it. Thatcher, I am sure, would be proud of him if he acted.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.