Pep Up The ISA, Gordon!

The government needs to take action to encourage us to save more. They could start with ISAs.

In the olden days before the term 'ISA' entered public consciousness, there was a different form of tax-free saving. Remember PEPs and TESSAs?

Before ISAs were introduced we were allowed to save up to £9,000 a year in PEPs (Personal Equity Plans) and any profits from stock market increases were free of tax, as was the dividend income. Similar to Share ISAs, in fact.

We also had TESSAs (Tax Exempt Special Savings Accounts), which were the equivalent of the Cash ISA. You could save up to £9,000 in a TESSA over a five-year period as long as you agreed to lock your savings away for that time.

Anyone with a head for maths can work out that, in those days, we could effectively save an average of £10,800 a year in both PEPs and TESSAs.

As we all know, our dear Chancellor did away with PEPs and TESSAs back in 1999 and introduced the ISA as a replacement tax-efficient savings and investment vehicle. In doing so, he reduced the amount we were allowed to save each year to £7,000, limiting the amount we could save in cash to £3,000 a year. And then a couple of years later, removed the 10% tax credit on dividends thus reducing the benefits of saving in a Share ISA for basic rate taxpayers. At one point he was even going to cut the contribution levels to £5,000 a year but generously decided to leave it at £7,000 for the time being. Huh!

It's not surprising, therefore, that I get annoyed when the Government announces plans to make ISAs more flexible and implies that we should all be grateful that 'ISAs are here to stay' when, frankly, we'd all have been better off sticking with the higher contribution levels of PEPs and TESSAs.

Admittedly, most people don't save as much as £7,000 a year in ISAs, in cash or in shares, but according to the latest savings report from the Association of British Insurers, we are at least beginning to save more these days.

If Gordon Brown is so serious about persuading us to become a nation of savers then he should increase our permitted contribution levels at least in line with inflation each year, restore the 10% tax dividend so basic rate taxpayers can benefit, and do away with the distinction between how much can be saved in cash rather than shares.

The Chancellor will be giving his pre-Budget speech next month. It would be good if he used it as an opportunity to help us save more of our money rather than filching it from us for his own coffers!

Find out more about ISAs.