Money: The dangers of being just a bit too clever

City+: The coming `fire sale' offers one-off opportunities for savers. But, warns John Andrew, they should not get carried away

The run-up to the end of the tax year is a good time for financial advisers, and 1998 will be no exception. This year, the Government has handed them a large carrot with which to encourage us to invest in tax- efficient schemes "while stocks last".

The opportunity for what is known in the industry as a "fire sale" stems from proposals for the instant-access, tax-free Individual Savings Account (ISA), to be introduced in April next year.

Personal equity plans (Peps) will then lose their tax-free status and tax-exempt special savings accounts (Tessas) will be withdrawn, though existing ones will be allowed to run their course.

When the ISA comes in, there will be new limits on the amount invested tax-free.Up to pounds 5,000 each year, of which no more than pounds 1,000 may be in cash and pounds 1,000 in life insurance, subject to an overall limit of pounds 50,000, can go into an ISA.

The fire sale exists because, for some, saving now, rather than after April 1999, will mean more tax breaks overall. In April, existing Peps and maturing Tessas can be immediately transferred to the new ISA, subject to the proposed pounds 50,000 limit.Taking advantage of the tax-efficient opportunities now will help maximise the opportunities to be offered by ISAs.

But this does not apply to everyone. It is good to have a tax haven, out of the clutches of the Inland Revenue, but there are dangers in concentrating on the tax breaks. Both Peps and Tessas are medium- to long-term commitments. Ideally, the money should be put away for at least five years. And Peps are stock-market investments that carry varying degrees of risk.

For savers who are normally risk-averse, or do not have funds to tie up for a long period, Peps are rarely suitable. The fact that they are tax free does not alter either of those factors.

Even savers who do not fall into this category should check that Pep charges, levied by the Pep provider, do not outweigh the tax advantages.

A Tessa is, in one sense, no riskier than a normal savings account. But there is a risk to the tax breaks that build up within it. The Tessa is tax free only if runs for its full term. Take any of the capital from the account, and the tax-free status is lost.

When a Tessa is closed early, the total interest, built up tax-free, is treated as taxable income in the year it is closed. The danger here is that the boost in income could move the saver into a higher tax bracket. Savers with income near the upper limit of their bracket should consider this, if they are not sure whether they will be able to stay the course.

Since last July, the Inland Revenue has been carrying out a wide-ranging review of tax avoidance. This will include another method of avoiding tax. The Government is known to dislike the current regime under which investors can plan for inheritance tax. Currently, no tax is payable on most lifetime gifts if the donor survives for seven years. Possible changes may involve complete abolition, so that tax is paid as soon as the gift is made, or an extension of the seven-year period.

Is this another reason for a fire sale, of inheritance tax planning vehicles? Not necessarily. Though it is unlikely that any future changes would be retrospective, we cannot be sure until the details are announced. While anyone contemplating reducing an estate's liability to IHT should act sooner rather than later, tax advantages must not outweigh more fundamental considerations.Be tax efficient, by all means. But do not let the saving of tax distort your judgement.