ISA rates may have suffered in recent years, but that doesn't mean you should turn your back on these nifty little accounts. If anything, it's the ideal time to take a look at your current situation, particularly if you're stuck in an account paying meagre rates of interest. Why not look to the alternatives?
Decent rates can be found, particularly if you're willing to lock your money away – check out the best ISAs currently on the market – and if you transfer funds, you could make the most of your tax-free allowance with a much better rate.
A quick word on the personal savings allowance (PSA) – the rules mean that you can receive up to £1,000 in interest tax-free each year, which means many could wonder whether having an ISA is still worth it. Well, there's no telling how long the PSA will last for, so at some point, your savings could become taxable again; this isn't the case with ISAs, so it's well worth continuing to build up your pot. Then there's the fact that the tax-free benefits of ISAs are cumulative, so no matter how big a pot you amass over the years, you won't pay tax on it.
So, with that in mind, we thought we'd put together a quick overview of six things you need to know about ISA transfers…
- The rule is that you're only allowed to pay into one cash ISA per tax year. However, you can transfer ISAs as often as you like – transfers don't technically count as paying in, so if you notice a better rate elsewhere you can make a transfer whenever you wish (provided you only pay into one active ISA per year and you're not locked into a fixed account). It's also worth noting that you can transfer previous years' ISA savings to a better account AND open a new one for the current tax year at the same time – previous savings aren't governed by the "one cash ISA per person per year" rule, and as long as you don't contribute to both it's perfectly acceptable to have another one.
- You can transfer funds held in an ISA from one provider to another as long as they accept transfers – not all of them do, so make sure to check. Variable rate accounts tend to be the most willing to accept transfers, and it's also worth remembering that some providers will charge interest penalties for transferring the money out (usually fixed rate ISAs or notice accounts) which could negate any benefits of getting a better rate elsewhere, so make sure to check the small print before lining up a new deal.
- You can transfer the current year's ISA subscriptions and/or all or part of the previous year's subscriptions to the new account – transfers aren't governed by the usual paying-in limit (currently £20,000) so you can transfer as much as you like. However, if the ISA only contains savings paid in during the current tax year, you must transfer the full account to the new provider, and bear in mind that not all providers allow partial transfers of previous years' savings.
- Money held in a cash ISA can be transferred into another cash account or into a stocks & shares ISA, and likewise, assets held in a stocks & shares ISA can be switched back into cash should you wish (this may take more preparation than transferring cash ISAs, however, so make sure to speak to your provider). The same pretty much applies with the innovative finance ISA but bear in mind that there are additional factors to consider, and things may also be a little trickier when it comes to Help to Buy ISAs and Lifetime ISAs, so again, make sure to speak to your provider about the specifics.
- Don't just withdraw the money, close the account and reinvest in another ISA – transferring is key. Withdrawing rather than transferring will mean you lose the tax-free advantages of that savings pot, and if you have several years' worth of ISA savings in cash (i.e. more than £20,000), you can't automatically put it all into a new ISA because of the annual limit. You MUST transfer the account itself or the funds held within it, otherwise you're effectively starting over.
- It's simple to make the transfer – once you've done your research to find the best rate, and have made sure all applicable ISAs allow transfers, all you have to do is open the new account and complete a short transfer form with the new bank or building society. After that, it's all in the hands of the providers – they'll complete the transfer process and will do so within 15 working days, and you'll be compensated for any lost interest if the process takes longer.