Raise the cash ISA limits!

Published by Jeff Prestridge on 05 February 2013.
Last updated on 05 February 2013

nest with coins

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.

User friendly

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.

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