By Jennifer Hill
LONDON (Reuters) - Industry experts have welcomed government plans to extend tax-free savings indefinitely but called for a rise in investment limits on ISAs.
The 7,000-pound annual limit has been unchanged for seven years.
Ed Balls, Economic Secretary to the Treasury, said on Wednesday the government would simplify the ISA regime and guarantee its future beyond 2010.
The tax-free accounts were introduced in 1999 for an initial 10-year period. Of the 7,000 pounds per year that individuals can pay into an ISA, 3,000 pounds can be held in cash.
Peter Vipond, director of financial regulation and taxation at the Association of British Insurers, said the news acted as a "signal to consumers that the government will provide an environment that encourages a savings culture".
Advertisement starts
Advertisement ends
The government also said it would bring personal equity plans (PEPs), which ISAs replaced, under the same umbrella.
It will allow child trust funds to roll over into ISAs on maturity and remove the "maxi" and "mini" ISA distinction.
Maxi ISAs must have a stocks and shares element and be held with a single provider, while mini ISA holdings can be split between different providers.
Adrian Coles, director-general of the Building Societies Association, said scrapping the distinction would make ISAs "more flexible and simpler to operate".
The ability to place PEPs within ISA wrappers will yield cost savings, while the commitment to retaining ISAs could also save investors tens of thousands of pounds more in tax.
Rod Homer, chief executive of financial services consultancy Etheios, said bringing PEPs in line with ISAs would simplify administration and cut the cost of statements and tax reports.
"Some of these savings will be passed on to clients in the form of reduced costs charged to the funds and consumers will also benefit from the greater clarity of a single statement and tax certificate," he said.
Meanwhile, independent broker Bestinvest said a higher-rate taxpayer who invests 7,000 pounds per year for 30 years would save around 66,000 pounds in tax, assuming annual returns of 7 percent including dividends of 3 percent.
Director of client services Dominic Cummings said: "The nature of ISA tax advantages means that investors really start to benefit once they accumulate a large pot of savings, as this is when the income and capital gains tax savings can really become worthwhile.
"Naturally, making the annual ISA allowance a permanent fixture gives savers the opportunity to achieve this."
However, the vast majority of potential tax savings comes from avoiding higher-rate tax on dividends, and a basic-rate taxpayer would save just 5,000 pounds of tax, after the government scrapped dividend tax credits in April 2004.
Bestinvest called for greater flexibility for ISA investors to switch into long-term cash holdings as they become more cautious, and said the allowance should rise to 10,000 pounds.
Other industry figures also called for an increase.
Stuart Bernau, an executive director of Nationwide, said: "We would like to see the Chancellor announce in his pre-Budget report a rise in ISA investment limits, as they have remained unchanged since they were launched seven years ago."
The pre-budget report is expected later this month or early in December.
ISAs are one of the government’s success stories. More than one in three adults hold one and almost 215 billion pounds has been invested -- making them far more popular than other savings initiatives, such as stakeholder products and child trust funds.
The ISA changes are expected to take place from April 2007.
