Is it goodbye to the equity Isa, and hello to hated means tests?

It was the last thing a beleaguered individual savings account (Isa) industry needed to hear: a call from a respected and government-friendly ideas factory to abolish the most popular form of Isas, those invested in shares. But that is what the Institute for Public Policy Research (IPPR) said this week. Such heresy, in a year when sales of Isas are likely to be their record low, produced predictably outraged protest from investment trade bodies. But, though the IPPR's conclusion may be drastic, its argument bears examination.

Its starting point is the position of both the Conservative and Labour governments, that personal equity plans (Peps) and Isas were explicitly designed to extend the shareholder population. The Thatcher government had been stung by the charge that it raised billions from floating privatised industries without giving people the wherewithal to trade them. And when Labour took power six years ago the Chancellor, Gordon Brown, said: "There is broad agreement that we must do more to encourage savings by everyone." Yet statistics show conclusively that Isas have done little to expand the shareholder base beyond the level achieved by Peps. Isas are taken out by a fifth of households, with a bias towards older people on middle incomes or better. These are precisely the sorts of households that would have the spare cash to invest.

The investment industry lobbies are correct to say Peps and Isas have been roaring successes, though much of this has been built on the back of the most rampant bull markets of the past century. They have encouraged saving that probably would not have happened. Although their tax incentives are rivalled by those available for investment in a pension fund, people do not like having their money tied up for 30 or 40 years, and Peps and Isas are transparent. You can see how well you are doing.

But Annabel Brodie-Smith, communications director of the Association of Investment Trust Companies (AITC), put her finger on the IPPR's main point when she said: "Isas haven't really encouraged those on low incomes to save in the way the Government intended, but it's hard to save when you haven't got any money."

And that is the problem with any savings vehicle based on tax incentives. There is no incentive to use them if you do not pay tax. That is why non-taxpayers are always encouraged to invest in gross funds, those paying interest without tax deducted. The IPPR says the only way to get the poor to save is to set up a matching scheme, with the Government crediting them with a sum related to how much they save, £1 for £1 or £2 for £1 or whatever is deemed appropriate. But it would inevitably involve the hated means testing.

This could be paid for by abolishing the equity Isa, which costs the Exchequer £650m a year. But this is hardly the year to be removing savings incentives. So why not simply add the IPPR plan to the existing system? The only alternative is compulsion, which would effectively mean taking money from those on middling incomes and transferring part of it to the poor.

The IPPR also wants to see better delivery mechanisms to ensure poorer savers have better access to investment products. It has a touching faith in the ability of intermediaries such as credit unions and "community-based organisations" to do this. I doubt whether such well-meaning bodies, who spend most of their time sorting out debts rather than savings, will place a sufficiently high priority on making sure their customers have taken advantage of all the latest investment incentives.

It is a time-worn motto of the investment industry that its products are not bought but sold, alluding to the need to persuade people put their hands into their wallets. In a rare departure from the polite fiction that independent financial advisers (IFAs) only ever have their clients' interests at heart, Peter Hargreaves of the West Country adviser Hargreaves Lansdown says: "The problem is that IFAs aren't paid to give advice, they are paid to sell products." This is in stark contrast to survey findings that consumers expect IFAs to offer a balanced view that puts equal emphasis on the good and bad aspects of a product.

But IFAs have to make a living and consumers, in this country at any rate, hate paying fees for financial advice. The only alternative is income tied to product sales, usually in the form of commission. Mr Hargreaves says that the one in eight of us who visit an IFA often ask the wrong questions. In effect, we tell the adviser to take our financial position as read and usually want to know what products we should invest in. A conversation follows on the lines of how much spare cash we have and how much risk we are happy with. The IFA then selects fitting products.

But Mr Hargreaves says we should march in and ask for what amounts to something like the Wealth Check that Your Money runs on its back page each week: an overall assessment of someone's financial position that is not product-related. The trouble is that if the IFA believes we are fine as we are, or ought to keep more money in a deposit account, most are loath to hand over a fee of £250 or so for such advice. We want the mumbo-jumbo and we expect to be stuck in a juicy commission-laden product. And, IFAs being amenable folk, that is exactly what we tend to get.

w.kay@independent.co.uk

The writer is personal finance editor of 'The Independent'