On the fourth day of demystifying ISAs, we take a look at the rules surrounding transferring assets between types of ISAs and ISA providers. Catch up on previous articles from this series if you are not clear on the basics of ISAs, the tax benefits of ISAs, or who is eligible to invest through an ISA.
1. I can transfer funds between a cash ISA and a stocks and shares ISA.
It depends. Money held in a cash ISA can be transferred to a cash ISA from a different ISA provider or to a stocks and shares ISA, but you may incur fees to do so. If you already have assets in a stocks and shares ISA these can only be transferred to another stocks and shares ISA, so if it’s cash that you’re after you’ll have to sell some of your holdings.
If you do transfer funds from your cash ISA to a stocks and shares ISA, you can then put new money into a cash ISA in the same tax year, as long as you do not exceed the annual limit of investing £10,200 in total of which only £5,100 can be held in cash (rising to £10,680 and £5,340, respectively, from April 5, 2011).
Importantly, in both the case of a cash ISA and a stocks and shares ISA you must ask your current provider to arrange the transfer and be sure to check whether you will incur costs associated with this transfer.
When thinking of switching providers, “the last thing you want to do is withdraw from a cash ISA,” said financial adviser Yvonne Goodwin. Withdrawing funds from your ISA and trying to reinvest these will be counted as adding to your annual allowance.
For example, let’s say you have put £4,500 into a cash ISA this year and you then discover you need money to fix a leaking roof. If you tap into your ISA and withdraw £2,000 but then discover that the repair only cost £1,000, you can return the ‘spare’ £1,000 to your cash ISA, but this would be considered an additional ISA investment and would then push you £400 over your annual cash ISA limit (£5,100).
If for some reason you exceed your annual allowance of £10,200 (£10,680 next tax year), gains on any sum above this threshold will be taxed.
2. Transferring ISAs between providers is free and easy
We certainly believe that it should be, but this is not always the case. Firstly, many providers will impose fees if you want to switch to another provider. Secondly, the process may take some time and require some following up with your current provider to make sure all the necessary paperwork has been sent and received. Thirdly, some providers require advance warning if you wish to make withdrawals, usually 30 days.
Some ISA providers are kind to indecisive investors and offer a “cooling off” period (usually a week or two). If this is indeed the policy of your ISA provider, reclaiming money from your ISA during the “trial” period will not be counted as using up your annual allowance in any way.
“If you are confident you will get more benefits from a different provider, you should not hesitate,” said Goodwin. Cash ISA providers can offer very different terms, she explained. But before you commit to a switch, make sure your new provider is definitely offering a better deal and that the old one is not prepared to match the offer in order to keep you as a client.
3. I need to keep my investments in an ISA for a year in order to reap the tax benefits.
In principle, you don’t. You can take your money out at any time and enjoy your gains or interest tax free. That said, some providers will penalise you or not reward you fully if you withdraw your funds before a certain deadline.
If you’re using ISAs to invest, rather than save cash, then your investment horizon should really be a lot further out than just one year. At Morningstar we’re strong advocates of investing for the long term and if you’re buying into the stock market we’d suggest a time horizon of at least five years—you don’t need to look far back in history to see the potential for short-term losses.
4. I cannot invest in fund vehicles from one provider if my ISA wrapper is provided by another provider.
Not always. Many ISA providers recognise that investor choice is important and offer a selection of funds from various companies, so you can manage your ISA investment through that one provider but have the benefit of several companies’ investment products to choose from. However, buying a stocks and shares ISA from a fund management company sometimes restricts you to investing in only the funds this company provides.
Should your risk preferences change through the years, you may want to change providers or consolidate your holdings via a fund supermarket. Investing in ISAs via a fund supermarket will allow you to select funds from a wide range of companies, receive dividends from all your investments in one instalment and manage your assets from a single platform, usually online.
If you do wish to switch ISA provider, whether from one company to another or from one supermarket to another, be aware that you must move the entire sum invested in the current tax year. Money that you have put into ISAs in previous tax years can often be transferred in part or as a whole, though not all companies will allow you to transfer just part of your ISA. As always, make sure you are aware of your ISA provider’s policy and withdrawal/transfer fees.
Remember that in any given tax year you can only create one cash ISA and one stocks and shares ISA. If in doubt about whether you have exceeded your ISA allowance or paid into too many ISAs, you can contact the HMRC’s ISA helpline or get in touch with an independent financial adviser.
