Your Money: Check out the supermarket saver

This week is the last chance to contribute to the great debate on the Individual Savings Account - the replacement for PEPs and Tessas. Last week the Paymaster General encouraged speculation that the controversial lifetime limit of pounds 50,000 might be lifted after all. Michael Drewett examines the likely outcome.

The general feeling is that the final version of ISA will be largely unchanged from the original announcement - a tax-free savings vehicle allowing contributions of up to pounds 5,000 per year, of which up to pounds 1,000 is allowed in a "cash" account, plus a further pounds 1,000 into insurance products.

But doubts remain about the prospects for the new accounts and whether they will succeed in their declared aim of persuading people who do not save at all to become savers. The government takes it for granted that supermarkets such as Tesco and Sainsbury will fire up all 12 cylinders of their brand-new banking machines to give an opportunity to the mass market to put something aside for a rainy day, retirement and whatever else, using the cash component of the ISA.

The assertion is that small savers or those who salt away nothing at all need a facility that is simple to get at, easy to understand, with no minimum saving amounts and no commitment to paying regularly, but does not involve investing in shares which can go down as well as up in value. What they want is a small-scale Tessa with the added advantage of easy access to cash. Checking in money at the checkout was, therefore, deemed a particularly obvious solution.

But will that actually be on offer? The problem is that when the government unveiled this masterplan with all its honourable working assumptions, it seems no one remembered to let the supermarkets into the secret. Neither Tesco nor Sainsbury is at all sure where it stands on the issue. Indeed, a spokesman for Sainsbury went so far as to say the company had not even made a submission to the consultation process, and currently had no plans to do so - let alone put the checkout staff on red alert for the flood of investment cash alleged to be heading its way.

The Tesco position is that it is not a public utility, and a business has to run at a profit. And it is hardly likely to win much business if it has to levy a charge on a glorified deposit account. It defeats the whole object of the exercise. But there is no profit in running a cash- only ISA free of charge. As a result, Tesco hopes to expand more into equity-based investment offers by increasing the activity of in-store financial services centres, a venture involving the Royal Bank of Scotland and Scottish Widows. But this is not what first-time savers really want or need.

Critics of the cash-based ISA have been quick to point out that if the big supermarkets do not feel able to offer an easy-access cash deposit account, the idea of it massively expanding the savings base could be dead in the water.

There are further flaws in the theory. The high streets are full of banks and building societies, but non-savers are well practised in the art of avoiding them in droves already. The only difference between a cash ISA and an account with one of the existing high street outlets is the carrot of tax-free status. But how much of an incentive is this in reality?

Even if there are no administration charges, the success or failure of a cash ISA will depend solely on whether or not the saver ends up with a better return tax free than can be achieved, taxed, from elsewhere. If the tax relief merely makes up for an uncompetitive interest rate there is no point. So, to be absolutely fair, let us assume a best-case scenario. The Portman Building Society is one of the most competitive on small balances, paying 5.5 per cent gross with instant access on any balances over pounds 100. Of course, 20 per cent tax is deducted at source, leaving net interest at 4.4 per cent.

Were this money in a tax-free ISA, the missing 1.1 per cent would reappear. But this represents extra income of only 1p a day for every pounds 300 put away - hardly an incentive to get non-savers to sit up and take notice.

On the other hand, today's typical PEP holders are unlikely to find much joy in a cash-based ISA either. On the basis that the individual will only be able to have one ISA per year, there is no point in being locked into one that only offers deposits when equity-based investments have proved time and again to be more able to generate profit over the longer term.

So the ISA may end up appealing only to the sophisticated investor who already has a PEP, and the requirement to offer a cash deposit and insurance policy element could actually add to management costs and reduce the choice of accounts on offer.

Anne Gilbert, managing director of Principal Investment Management in Sevenoaks, Kent, points out that PEP investors will choose money managers that can offer flexibility across the board. Specifically, she says, there are times when a variety of asset classes need to be held alongside one another. But not everyone will be able to offer a full service account. Ms Gilbert said: "This is not just an issue for the supposedly rich. Look how many modest investors had to trade in their windfall shares for one general fund or another because their unit trust-only PEP manager could not include direct shareholdings within the arrangement.