Answering Your Questions: Transferring Your ISA
An ISA or ‘individual savings account’ is a way of investing or saving your money tax-free. They are usually offered by banks or building societies for people over the age of 16 for a cash account or 18 for other types.
Any interest or returns you make will be free from tax and you can earn benefits on your finances up to the £20k annual limit.
You can choose to pay in a lump sum during the financial year or pay instalments as you wish. Just bear in mind that exceeding this annual allowance usually results in being contacted by HMRC.
You will be asked to remove extra funds if your provider fails to reject the payment or pay it back into your current account.
Also, this allowance takes into account every type of ISA you have. Meaning that you could save £10k in a cash account and another £10k in a separate stocks and shares account, but this would bring you to the annual allowance amount.
Because you are able to have multiple accounts open at once, it can be hard to control and keep track of your finances. There is a common misconception that transferring your ISA from one provider to another can’t be done. However, many people do it and find having everything in one place much better for them.
In this article, we will be addressing some common questions and concerns - hoping to shed a little light on the pros and cons of transferring your ISA.
Types To Choose From
There are four main accounts you can choose from, each with its own functions and advantages. You may also need to consider the risks associated and what you are willing to invest.
Cash ISAs
This is usually seen as the least risky option that many people use as a savings account with more benefits. While your finances will be subject to inflationary risks, it is an alternative to investment that can see more discrepancy each year.
With a standard savings account, you could pay tax on any interest that exceeds your personal savings allowance. However, this option means you will not pay tax on anything.
People who pay a basic rate of tax at 20% could earn up to £1,000 a year of interest that is completely protected. Because of this, it could work as your only savings account - allowing you to earn higher interest rates and receive better benefits from it in the long run.
Similarly, there are a few different cash options to choose from and transferring your ISA could take place between any of these as well as between the main types.
Easy access - Take money out whenever you need it without the worry of fees or penalties.
Notice Accounts - You will need to give your provider a certain number of days notice before withdrawing cash.
Fixed Rate - While you may receive higher rates with providers that offer this type of account, you’ll often pay an interest penalty if you wish to withdraw early or transfer between other ISA accounts.
Stocks and Shares/Investment ISA
Here you can invest funds into different assets, shares and bonds of varying risks. While it will be up to you initially to decide how much risk you are willing to take, it is important to remember that the value of your investments could go up or down significantly.
As a result of this, it is beneficial to go into an investment with the intention of saving long-term. The general advice is that finances should remain in place for at least 5 years to give you the potential for greater returns.
You may also need to pay more fees associated with this type of ISA, including a transfer charge. Not every provider will require this, but it is well worth looking into as you start to think about setting up an account or transferring your ISA.
Innovative Finance
The difference between this type of ISA and others we have mentioned is that it involves peer-to-peer lending. This links investors to borrowers, offering higher interest rates.
However, keep in mind that if the borrower won’t or can’t afford to repay the money lent to them, you may lose out on finances. This is why it is considered such a high-risk option. It can also take much longer to withdraw funds as you will have to wait for other investors to buy you out of your loan.
Lifetime ISAs
These have two primary uses. It can help first-time buyers get onto the property ladder. And, it can be used as a way to contribute to your retirement savings.
An annual limit of £4000 applies to your lifetime account, but you can receive a bonus of up to £1000 on top of this if you were to save the entire amount. This 25% bonus equates to £1 for every £4 saved!
You may only use the account to buy your first home. After this, you can continue to save into it and receive the government bonuses but your next withdrawal will need to be for retirement purposes.
Transferring Your ISA - Why Bother?
From year to year, you may notice a fluctuation in interest rates and the performance of different providers. Similarly, you may have a change of situation and decide that one type will now be more beneficial than another.
It is a very competitive market, especially where investment is involved - so shopping around could benefit you significantly in the future.
Furthermore, if you have a few ISAs open, you may find it easier and more reassuring to have all of your savings in one place. This way you can keep a close eye on it and know that each penny falls under the same level of risk.
Are There Any Disadvantages To Transferring Your ISA?
One thing to consider that could vary between providers is having to pay a penalty charge when moving your funds out of their account. This is often required with fixed-rate accounts but may also be the case for others.
You should be made aware of this when you sign up and can contact your provider to find out what the charges would be. One thing we would suggest is weighing up the benefits of paying the fee and transferring against the perks and interest rates of your new provider.
You may incur additional charges when setting up a different account that could make it more beneficial to leave savings where they are.
Do All Providers Accept Transfers?
No. When setting up an ISA, you’ll need to do a bit of research to find out how easy this process is. For those that don’t offer such a service, you may be tempted to make a withdrawal, close the account and open a new one to pay into.
However, doing this will mean losing all of the tax benefits. This is why we tell clients never to withdraw their savings in order to pay into a new account.
If you want to open a new account, it will usually benefit you to leave the current savings where they are and start from scratch, or find a provider that does accept transfers. While they may not offer quite as high interest rates or benefits - you don’t want to lose out on tax benefits.
How Does A Transfer Work?
You’ll need to do some window shopping to determine which new provider suits you the most and will offer the risk levels, interest rates and opportunities you require. Once you’ve opened a new account with these people, it will be time to request a transfer from your current provider.
This often results in having to fill out a few forms, ensuring that your details and the value of the transfer are correct. But from then, your new provider should take care of the rest. Bear in mind that a stocks and shares ISA may take longer to process but once the paperwork has been received - it should be a breeze!
Will An ISA Affect Benefits?
Because money held within an ISA is defined as your savings, it could affect your eligibility for certain benefits should you exceed limits.
The more money you have saved, the fewer benefits you will receive. So, if you recently paid in a lump sum or regularly invest in stocks and shares, it could affect your benefit entitlement.
Furthermore, Universal Credit payments won’t be affected by any savings under £6,000. However, if you have more than £16,000 in your ISAs or other savings accounts (combined) you won’t be entitled to Universal Credit at all.
Want More Advice?
Transferring your ISA doesn’t have to be a huge problem. It can actually be really beneficial for a lot of people. Especially if you’ve held the same type of account for a few years.
Circumstances change and better options arise from year to year, so it’s always worth keeping an eye out for changes that may affect you. Although, be aware that some providers may ask for different fees and charges during a transfer or even when opening a new account.
We are happy to give you more advice and information regarding this process and point you in a direction that will help you to make the most out of your savings for the future.
If you’re looking for information about Lifetime ISAs or further retirement fund options, it might be worth taking our free scorecard first! It will show you how prepared you are and how aligned your saving strategy is. As a result, we’ll provide you with a free report, offering actionable steps to improve your situation.
Contact us today - we’re always here to help.
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