These include:

• extending the current ISA £7,000 contribution limit (including up to £3,000 in cash) for a further five years until April  2006;
  
  
• allowing 16 and 17 year olds to open a cash ISA;

• extending ISA rules on investments, transfers and administrative procedures to PEPs, benefiting around 5½ million investors.     

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:

• survey results showing that ISAs attract relatively more low-income and younger savers than TESSAs or PEPs; and

• a summary of independent research by McKinsey and Co on the effect of introducing benchmark standards for ISAs’ Charges, Access and Terms (CAT standards). 

Further details of these and the changes to ISA rules are set out below.

A separate Treasury paper, Helping People to Save, published alongside the Pre-Budget Report describes the Government’s strategy for encouraging personal saving, the steps taken so far and the way ahead to encourage saving among low and middle-earners.


DETAILS

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.                                                  

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.

Incompatible ISAs 

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 Revenue’s 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 ISAs

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.