Cash ISAs are meant to keep earning interest tax-free, year after year.
But older accounts don't always keep up the 'earning interest' side of that deal.
Luckily, there's a way to make them good as new again: moving them to a new account with a new, better interest rate.
We look at why making that move is worthwhile and how to do it in this guide.
ISAs are great nest egg accounts, they keep your money in a shell that the taxman can't crack and you can go on adding to your little clutch in every tax year.
Someone who used their full cash ISA allowance every year since 1999 (when ISAs were introduced) would have about £40,000 in tax free savings now.
But, just like real eggs, ISA nest eggs can turn rotten. Rates of 3% or even 4% AER often drop, after a year or two, to just 0.1% or even lower.
Let's look at the effect that could have on savings in terms of real cash over a year:
|3% AER||0.1% AER|
So one of the best reasons to do a transfer is because when an old ISA has gone bad it means you're losing out, sometimes to an almost insulting degree.
However, that's not the only reason people choose to transfer their savings. Some move just for simplicity: it's a lot easier to have all of the money in one place.
For more on cash ISAs in general see our guide here.
Let's move on to the practicalities keeping those two reasons for starting the transfer - increasing interest and combining accounts - in mind.
A better interest rate on a new ISA is important but, for a transfer, it's not the most important thing.
Not all accounts allow transfers so look out for the phrase transfers in allowed or transfers accepted and expect interest rates to be slightly lower than 'non transfer' accounts.
When shopping around it's worth noting that banks won't accept transfers from within their organisation.
So if, for example, you have an account with NatWest you generally won't be able to move to another NatWest account or to one at RBS, part of the same banking group.
It's also worth noting at this point that old cash ISAs can also be transferred into stocks and shares ISAs, see the end of this article for more on that option.
During the application process, the bank will usually ask applicants to provide details of the old account they want to move.
It's not necessary to put any money into a transfer ISA in order to open it. You can do that, if you want to, but remember that anything you put in will come out of your tax-free allowance for that tax year.
Once the account is opened, it's time to transfer the old ISA into the new account.
Generally, the new bank will ask for a transfer request form, which they'll provide, and ask that it's posted or given in at a local branch.
That starts the actual transfer, which should take no more than 15 working days in all.
What's very important, the part where you have to be careful, is abiding by this transfer process: the bank needs to move the money otherwise it loses its tax-free status.
There's more information about that problem in the next section but, barring all disasters, that's it: an old ISA has got a new face lift.
Moving an ISA should be fairly simple and straightforward but sometimes problems do come up. Here are a few - and how to avoid them.
As we noted above, ISA nest eggs need to be treated carefully, by the banks; handle them too much yourself and they smash, they lose their protected status.
On a practical level this means that people with money in an ISA should not consider moving it to a current account or taking it out in cash thinking that they can just put the money into a 'transfers allowed' ISA.
Once the money is out of the ISA system it's out for good. In any one tax year the maximum investment is that year's allowance (£5,640 for 2012/13) and that rule applies no matter where that money came from.
This rule is so central to the ISA process that there's very little chance of redress if it happens.
|Case study from the Financial Ombudsman Service (FOS)|
|A woman can't get help from her bank so she moves her ISA cash into a current account.
She complains to the FOS that if the bank had helped her she wouldn't have done it. But the FOS is unsympathetic; there was information available, they say. Tough.
A cash ISA in its first tax year really is like an egg, it has to be kept whole.
You can't go chopping it up, putting the amount for the tax year into different accounts with different providers. That's just going to smash that handy tax-free shell.
But with old cash ISAs, that's money you put away before the current tax year, the egg analogy starts to break down.
Older ISAs can be split up. The amounts can then be transferred to a number of different accounts.
It's also possible to move several old cash ISAs, in part or as a whole, into one new account, as long as the account terms allow it (and many do).
Mixing old and new ISAs
Despite these differences, old and new ISAs can mix in one account.
When people decide to consolidate several accounts, for example, they often transfer several old ISAs into one new 'transfer in' account and then also invest some new cash, part of the limit for the tax year, into that same account.
The problem with putting all that money in one place is that savings are only protected in one institution up to £85,000. More on FSCS protection here.
Another big problem with ISA transfers is that the process is slow.
In 2010, Consumer Focus researchers found the average transfer took about 26 days and a quarter took longer than a month. After a supercomplaint to the OFT, however, this has improved.
In 2011, 93% of transfers were completed within 15 working days, the new guideline, although remember that could be up to 21 days in total.
More impressive than the increase in transfer speed is that banks must now compensate consumers when delays occur.
No matter how long the transfer takes interest must be paid from working day 16 onwards.
In the next few years transfers should speed up even more. From 2013, for example, banks will be forced to move ISAs electronically rather than by posting a cheque.
It's kind of mind mangling that they still post the cheques, isn't it?
Another, increasingly uncommon problem is people who don't have a straightforward cash ISA but a Tessa only ISA or ToISAs, to those that know them well.
Tessas were the tax free accounts before ISAs existed and so there's some overlap. ISAs were launched in 1999 but Tessas continued to come to the end of their fixed period up to 2004.
Those accounts then turned into ToISAs. It really is just a name difference now, though, those with one can transfer it as if it were any normal cash ISA.
Finally, as we mentioned earlier, money in a cash ISA can be kept in its tax-free eggshell but moved to a stocks and shares ISA as well.
As we've said above, we're focusing on cash ISAs here but because stocks and shares can look attractive, because they have the potential for a far higher return, we'll mention them briefly here.
Stocks and shares ISAs, like their cash cousins, offer the opportunity to invest without losing money in tax but the taxes are different.
With stocks and shares you're not paying Capital Gains Tax (CGT), tax is on interest where applicable and higher rate taxpayers won't pay more than the basic rate on dividends.
The simple problem with that is that not every investor will even pay these taxes. Those with lower incomes, paying a basic rate of tax, won't benefit from the share dividends guarantee; those with small investments or investments unlikely to grow by over 15-20% may never have to pay CGT.
The other problem is that, unlike cash ISAs, there's no guaranteed return. The money is in the hands of the market.
More practically, it's worth knowing that once an ISA has moved from cash to stocks and shares it can't move back.
Cash can become shares or cash at another rate but shares can only be exchanged for other shares.
It's also interesting to note that a cash ISA for the current tax year can be moved to shares and that move will have no effect on the individual's year allowance.
In other words, this tax year a cash ISA holder could have £5,640, the whole limit, then move it to shares and just open a new ISA with that same amount.
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