8 November 2000
ENCOURAGING BRITAIN TO SAVE
Measures to build on the success of Individual Savings Accounts (ISAs) were announced today by the Chancellor of the Exchequer.
Welcoming these announcements, the Economic Secretary Melanie Johnson said:
ISAs are a continuing major savings success story. Last year, more than £28 billion was paid into over 9 million accounts a third more than was invested in TESSAs and PEPs during their last, and most successful, year. In the first three months of this year, more than £9 billion has already been paid into over 5 million accounts.
CAT-standard ISAs have achieved value for money by setting an interest rate floor for cash ISAs and a cap on charges for equity ISAs. In the first year, a typical saver investing £3,000 a year in an equity ISA would have paid £35 less in charges than someone investing in a non-CAT ISA.
We want to build on this success. Keeping the higher contribution limit for five more years will enable ISA-holders to continue to save more tax-free.
Allowing 16 and 17 year olds to open a cash ISA extends the opportunity for tax-free saving to 100,000 under-18s who work and pay tax. This will build on our proposals to encourage financial literacy in the classroom by letting young people begin to save tax-free if they leave school and start work.
The Inland Revenue and Treasury today announced a number of findings that illustrate the success of ISAs. These include:
Further details of these and the changes to ISA rules are set out below.
separate Treasury paper, Helping People to Save, published alongside
the Pre-Budget Report describes the Governments strategy for encouraging
personal saving, the steps taken so far and the way ahead to encourage
saving among low and middle-earners.
ISA savings limits
1. For the tax year 2000-01 savers can subscribe up to £7,000 overall, of which no more than £3,000 may go into cash and £1,000 into life insurance. This limit was to reduce for 2001-02 to an overall £5,000, of which no more than £1,000 could go into cash and £1,000 into life insurance. This planned decrease in the limits will not now take place. Instead the overall £7,000 limit, and £3,000 limit for cash, will be retained until April 2006.ISA take-up figures
2. In the first year of ISAs (1999-00) over £28.4 billion was paid into nearly 9.3 million accounts.
3. During the first quarter of ISAs second year (6 April 2000 to 5 July 2000) over £9.1 billion was paid into over 5.2 million accounts. This exceeds the £7.3 billion paid into 3.5 million accounts in the comparable quarter (6 April 1999 to 5 July 1999) last year.
4. The ISA take-up figures for the first quarter of 2000-01 show that:
· over £4.9 billion was paid into mini ISAs including
- over £4.5 billion into cash
- nearly £360 million into stocks and shares
- £30 million into life insurance;
· over £4.2 billion paid into maxi ISAs including
- nearly £4 billion into stocks and shares
- over £220 million into cash
- £5 million into life insurance.
5. Investors who want to take out an ISA have the choice each year of one maxi ISA with a single manager for all ISA savings or up to three mini ISAs with different managers for different kinds of savings (cash, stocks and shares and life insurance).
6. The Inland Revenues initial analysis of annual returns from ISA managers for ISAs first year (1999-00) shows that around 99 per cent of investors did not take out more ISAs than they were entitled to. The Inland Revenue have identified around 85,000 investors who may have taken out incompatible ISAs. Where it is established that such an ISA has been taken out and the investor is not entitled to the tax relief, the usual compliance rules for tax-relieved savings schemes will apply.
7. All ISA application forms are required clearly to set out the rules which apply and should draw applicants attention to them. All forms ask the investor to make a declaration that no other incompatible accounts have already been opened, for example that they cannot have a maxi and mini account in the same tax year.
8. In addition each investor is sent a notice by their ISA manager near the end of the tax year telling them what type of ISA they have, and reminding them of the ISA rules. This should help prevent ISA investors who made a mistake in the first year of ISAs from making the same mistake in the second year.
Research on ISAs
9. An analysis of NOP Financial Research Survey for 1999-00 shows that ISAs have succeeded in attracting relatively more low-income and younger savers than TESSAs or PEPs. More than a quarter of mini cash ISAs have been taken out by people with household incomes less than £11,500 per year, compared to around one in five TESSAs and one in six PEPs. More than one in five mini cash ISAs have been taken out by people under 35, compared to one in six PEPs and TESSAs. Also, more of the benefit of tax-free saving in ISAs goes to low-income and younger savers than was the case with TESSAs and PEPs, as they hold a higher proportion of ISA savings.
10. McKinsey & Co were commissioned by the Treasury to research the ISA market. Their study, which covered over half the market, found that half of all ISA funds under management are in CAT-standard funds, including over £1 billion in CAT-standard equity ISAs.
11. Just over a third of CAT-standard equity funds in the study were actively managed rather than being run as tracker funds, showing that the fear that active management would be impossible within the 1 per cent charge cap was unfounded. And just over two thirds of that investment was made directly by savers showing that Investors have bought CAT-standard with confidence. CAT standards have also driven down costs - charges for CAT ISAs invested in Unit Trusts are roughly half the cost of non-CAT equivalents.
12. The study confirms that ISAs are saver-friendly in other ways. ISAs are accessible to savers because CAT standards for minimum investments have been equalled and exceeded. The CAT standard for cash ISAs allows a minimum contribution of £10, but in practice the lowest regular saving limit is £1. When savers want to get at their money there are no long lock-ins for CAT cash ISAs and the overwhelming majority of cash ISAs are on instant or seven day access.
Changes being made following the review of the operation of ISAsISAs for 16 and 17 year olds
13. Young people aged 16 and 17 will be able to take out a cash ISA from 6 April 2001. They will be able to subscribe to either a cash mini ISA or the cash component of a maxi ISA. The contribution limits will the same as for cash ISAs held by those aged 18 and over (i.e. £3,000 a year until April 2006). It is envisaged that a 16 or 17 year old will be able to continue to subscribe to his or her ISA, once he or she reaches 18, without having to make a new application for an ISA.Crown Servants spouses
14. The rule which, exceptionally, allows Crown Servants such as diplomats and members of the armed forces serving overseas to subscribe to an ISA, will be extended to their spouses with effect from 6 April 2001. This brings the rule into line with the equivalent rule for stakeholder pensions. Qualifying investments.
15. Respondents to the review were generally pleased with the range of investments that qualify for the stocks and shares component of an ISA, especially the facility to invest in listed shares worldwide. As stated in the Inland Revenue Press Release dated 19 October entitled Individual Savings Accounts and Crest Depository Interests, regulations will be laid shortly that will allow Crest Depository Interests (CDIs) to be a qualifying investment for ISAs, provided that the investment represented by the CDI is itself is a qualifying investment. ISA administration.
16. Generally the view of respondents to the review was that the administration of ISAs was working well, but that there was scope to change the ISA rules to increase the use of electronic business. ISA savers and the industry will therefore benefit from a change to the requirement for ISA declarations. At present if an ISA application is made electronically - by telephone, fax or e-mail - the ISA manager must complete a declaration on behalf of the investor and send him or her a written copy. From 6 April 2001 the ISA manager will be able to return the declaration to the investor electronically. Some further minor administrative changes will be made to help streamline the operation of ISAs.
Alignment of PEP rules for those with ISAs
17. Contributors to the review of the operation of ISAs almost unanimously favoured aligning the PEP rules with the ISA rules and considered that doing so would be helpful to both individual investors and ISA providers. The main changes to be made, which will take effect from 6 April 2001, are as follows: ·
NOTES FOR EDITORS
Incompatible ISAs18. As part of the compliance procedures the Inland Revenue will contact the ISA manager with whom the investors second ISA account is opened. If this ISA account does turn out to be an incompatible ISA, the manager will close it down, returning investments to the investor. The manager must also repay to the Inland Revenue any tax relief given in error. Income and capital gains from the investment are taxable, and the manager will advise the investor what he or she needs to do about informing his or her tax office.
19. Investors who suspect that they may have an incompatible ISA should contact their ISA manager for guidance or can telephone the Inland Revenues ISA helpline number 0845 604 1701.
Review of the operation of ISAs
20. The review of the operation of ISAs was announced in the Budget this year, and began work in April 2000 after ISAs first full year. Responses have been received from a wide variety of respondents - 12 savings industry representative bodies and consumer groups, 23 individual ISA providers and independent financial advisers, and six other respondents. The review also involved discussions between the Revenue and some of the representative bodies and providers.
21. The cost of retaining the existing £7,000 ISA contribution limit of £7,000 (£3,000 limit for cash and £1,000 for life insurance) until 5 April 2006 will be £20 million in the first year rising to £275 million a year after six years. Extending ISAs to 16 and 17 year olds will have negligible costs. The costs of aligning the PEP and ISA rules are also expected to be negligible.
Consultation on draft regulations
22. The Inland Revenue will publish draft regulations to implement the proposed changes to the ISA and PEP rules for consultation shortly, and is also considering any regulatory impact that the changes may have. (The regulations referred to in para 13 above, on Crest Depository Interest, will not be included in the consultation.)
ISAs for 16 and 17 year olds
23. Section 660B of the settlements legislation in Part XV of Income and Corporation Taxes Act 1988 will apply to ISAs for 16 and 17 year olds, as it currently applies to other savings accounts for minors. As a result, if a parent gives their child funds to invest in an ISA, and the investment income arising on all gifts from that parent to their child in the year exceeds £100, then all the investment income will be treated as the parents for tax purposes. Even though the income arises in an ISA, it will be taxable and the parent should report the income to their tax office.
24. ISAs were introduced from 6 April 1999. Individuals who are both resident and ordinarily resident in the UK for tax purposes and are aged 18 or over (or from April 2001, 16 or over) can subscribe to an ISA. Returns from ISA investments are free of income tax and capital gains tax and in addition a 10 per cent tax credit is paid on dividends from UK equities until 5 April 2004. There is no lock-in and no minimum contribution.
25. An ISA can include three components: cash (including National Savings), stocks and shares and life insurance. Husbands and wives have their own contribution limits. Savers can subscribe each year to either one maxi ISA (which must offer a stocks and shares component and can have either or both of the other two components), or up to three mini ISAs, one for each component. Investors with matured TESSAs can also take out a TESSA-only ISA.
26. PEPs currently comprise general PEPs, which can include a range of authorised unit and investment trusts, UK and EU listed shares and UK corporate bonds, and single company PEPs which invest in the shares of one company. No further contributions could be made to PEPs after 5 April 1999, but existing PEPs at that date can continue under their existing rules, and receive the same tax reliefs as ISAs.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 020 7438 6692/6706/7327
(Out of hours: 07860 359544)
Non-media enquiries to: 020 7438 6420/6425
(Office hours only)
Individual savings accounts
(a) Totals may not equal the sum of the individual components due to rounding.
(b) Average contributions are rounded to the nearest £10.