Astute consumers do not to put all their eggs in one equity-based basket.
The submission recognises that there are many Government initiatives in the savings area, welcoming the development of Child Trust Funds, the Savings Gateway and calling on the Government to stick it its guns in its plans for a simplified selling process for so-called “Sandler” products. However, the submission also points out that the Government is sending out mixed messages on the need to save by pushing ahead with cuts in the investment limits for cash ISAs, while maintaining more generous tax breaks for products offered by National Savings and Investments.
The BSA does not accept the commonly held view that any long-term savings plan must be rooted in equity investment. The poor performance of equity based products in recent years, and in Japan in particular, shows the dangers of such a narrow approach. Instead, the Association believes there is an important role for cash based savings accounts to play in many people’s long-term savings planning. For people who do not want accounts which are exposed to high risk, especially those on low incomes who cannot afford to lose all their initial investment, this is especially important. In addition, the proposed Government policy to encourage parents to invest in an equity-based Child Trust Fund is in our view misguided, as the stock market may not be the right choice for all parents.
The cash ISA has been a resounding success and has been embraced by customers. Total cash ISA balances currently amount to £83 billion, of which almost £30 billion is held with building societies. It is therefore very disappointing that the Chancellor proposes to reduce the annual subscription for the cash ISA from £3,000 to £1,000 from April 2006.
There is also an uneven playing field when it comes to offering tax incentivised savings accounts. The Government clearly recognises that tax breaks attract people into savings as National Savings and Investments, backed by the Treasury, offers a range of tax-free savings accounts. However the rest of the industry is restricted to offering cash ISAs and the limits on these are to be cut in April 2006.
Brian Morris, Head of Savings Policy at the BSA said;
“The Select Committee’s inquiry is timely. There is a need for a debate about long-term savings. But we are concerned this should not focus solely on investments in stocks and shares. The Government’s plans for the Child Trust Fund – where it is insisting that all firms offer the stakeholder, equity based account - is but one example. The bear market of the past few years has exposed the dangers of such a narrow approach. A balanced view needs to be taken which recognises the importance of cash-based savings in any long-term savings portfolio.
“The market for cash-based savings needs to be a fair one. But the Government’s plans to cut the investment limits for cash ISAs, whilst retaining all the various tax breaks for products offered by National Savings & Investment risk skewing the market.”
