Keeping an ISA fresh: How transfers work
CASH ISAs - the simplest form of the tax-free individual savings accounts available - 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 ISA account with a new, better interest rate.
We look at why making that move is worthwhile and how to do it in this guide.
Why move an ISA?
Cash ISAs are great nest egg accounts. They keep money in a shell that the taxman can't crack, and account holders can go on adding to their little clutch every tax year.
Someone who used their full cash ISA allowance every year since 1999 (when ISAs were introduced) would have more than £86,000 in tax free savings now, plus interest.
But, just like real eggs, ISA nest eggs can turn rotten.
Even so, any ISA that's more than a couple of years old will see the rates of interest it earns drop 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, comparing the kind of opening rate we might have found in the ISA's younger days, the sort of rate fresh ISAs are offering, and what many offer after a few years:
|3% AER||1% AER||0.1% AER|
This has to be one of the best reasons to transfer from an old ISA to a newer one: when an old ISA goes bad, the account holder loses 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 their ISA money in one place - while some may wish to switch funds from a cash ISA into one or more of the other forms of ISA now available.
How to transfer
Let's move on to the practicalities, keeping those two reasons - increasing interest and combining accounts - in mind.
1. Find a new ISA
A better interest rate on a new ISA is important but for a transfer, it's not the most important thing.
That's because not all ISAs allow transfers in.
So look out for the phrase transfers in allowed, and expect interest rates to be slightly lower than they are for ISAs where transfers in aren't allowed.
When shopping around it's worth noting that banks won't accept transfers from within their organisation.
So, for example, someone with a Natwest ISA generally won't be able to move to another Natwest account or to one at RBS or Ulster Bank, who are part of the same banking group.
2. Open the new account
During the application process, the bank will usually ask applicants to provide details of any old accounts they want to move.
It's not necessary to put any money into the new ISA in order to open it.
New account holders can do that if they want to, but they should remember that anything they put in themselves will come out of the tax-free allowance for that tax year.
3. Transfer carefully
Once the account is opened, it's time to transfer the old ISA into the new account.
If the new bank asked for the details of any older ISAs to be transferred, they may ask for further confirmation that this is what the account holder wants done.
If they're one of the few that don't ask about transfers during the application process, ask for a transfer request form. The bank will ask for the completed form to be posted back to them, or given in at a local branch.
That starts the actual transfer, which should take no more than 15 working days.
However, it's worth noting that should any of the old accounts have notice periods, the providers are entitled to demand that notice be served.
In this case, the transfer period should take no more than 15 working days following this period - unless the account holder specifically states that they don't mind incurring any penalties for accessing their money without notice.
It is incredibly important to abide by this transfer process: the bank must 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 balance has a new, more comfortable, home.
Problems with ISA transfers
Moving an ISA should be fairly simple and straightforward. But sometimes problems do come up. Here are a few - and how to avoid them.
Losing tax-free status
As we noted above, ISA nest eggs need to be treated carefully, and by the banks; handle them too much yourself and they smash, losing 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 net investment is that year's allowance (£15,240 for 2016/17), and that rule applies no matter where that money came from.
This rule is so central to the ISA process, 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.
Moving multiple ISAs or part of a balance
A cash ISA in its first tax year really is like an egg: it has to be kept whole.
It mustn't be chopped up, or spread across different accounts with different providers.
All the money invested in one year must go into one ISA - and should the account holder wish to transfer that money into a different cash ISA, it has to be moved all together.
But with old cash ISAs - money that's been put away before the current tax year - the egg analogy starts to break down.
Older ISAs can be split up. The funds can then be transferred to a number of different accounts.
It's also possible to move several old cash ISAs, in part or in total, 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 ISA funds 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 their allowance for that 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 £75,000. There's more on the protection afforded by the FSCS here.
Another big problem with ISA transfers is that the process can be quite slow.
In 2010, Consumer Focus researchers found the average transfer took about 26 days and a quarter took longer than a month. After a super-complaint to the now-defunct OFT, however, this has improved.
The target is that cash ISAs must be transferred within 15 working days, and stocks and shares ISAs within 30.
In 2011, 93% of cash ISA transfers were completed within that 15 working day target - although bear in mind that as weekends don't count, that can still mean the process takes 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.
Over the next few years transfers should speed up even more. Most banks have been moving ISAs electronically only, rather than posting a cheque, since 2013.
CTFs to Junior ISAs
Another problem has been moving money between Junior ISAs (JISAs) and the accounts that preceded them, Child Trust Funds (CTFs).
In short, it wasn't allowed - and the rules on eligibility for Junior ISAs meant that children born when CTFs were operational weren't allowed one of the newer accounts, even if they'd missed out on a CTF for some reason.
But in March 2013 the Government announced that transfers from CTFs to JISAs would soon be allowed, and since April 2015 transfers have been possible.
While the interest rates available on JISAs aren't spectacular at the moment, the fact that the money is locked away until the child is 18 means it has plenty of time to grow.
There's more on why and how to transfer a CTF to a JISA in our guide here.
Tessa only ISAs
One final, increasingly uncommon problem is that of people who don't have a straightforward cash ISA, but a Tessa-only ISA, or ToISA, to those who know them well.
Anyone wanting a tax-free savings account before ISAs existed got a Tessa, which committed holders to a five-year savings term.
When ISAs were first introduced in 1999, some Tessas still had plenty of years to run - with some of the very last Tessas issued just before the first ISAs opened, and continuing as scheduled until their five year term ended in 2004.
Just as JISAs are automatically converted into adult ISAs when their holders turn 18, those Tessas automatically became ToISAs.
It really is just a name difference now, and anyone who has one can transfer it as if it were any other normal cash ISA.
Moving cash to other forms of ISA
Finally, as we mentioned earlier, money in a cash ISA can keep its tax-exempt status even when transferred into a stocks and shares ISA, or one of the new Innovative Finance ISAs, which allow for tax-free returns on P2P lending.
As we've said above, we're focusing on cash ISAs here. But as both of these other forms of investing can look attractive - because of the potential for a far higher return - we'll talk about them briefly.
We'll start with the new P2P Innovative Finance ISA, or IFISA, because it's the simpler of the two.
Innovative Finance ISA
Very simply, an IFISA works like a cash ISA - except the money we invest in it is then loaned out via peer-to-peer schemes, and can therefore attract the higher rates of interest these tend to offer.
Whereas there's the possibility that we may have to pay tax on the interest earned through a normal P2P loan, the interest earned on the loans made with our IFISA investment is tax-free, no matter how much we earn.
Transferring an existing ISA into an IFISA is entirely possible, using the system outlined above - but people who are already invested in P2P lending should be aware that they can't convert those investments in this way; they'll need to sell up and start again.
Stocks and shares ISAs in brief
Stocks and shares ISAs, like their cash cousins, offer the opportunity to invest without losing money in tax, but the taxes are different.
Stocks and shares ISA holders don't have to pay Capital Gains Tax (CGT) on any profits from their investments. In this instance, bear in mind that people are allowed to make more than £11,100 a year in profit - that is, money earned from selling those investments - before they have to pay CGT.
Holders are also exempted from paying any more than 7.5% tax on any dividend income they receive. This is the basic rate; for higher rate taxpayers it's 32.5%, and 38.1% for additional rate payers.
So for investors who would be affected by higher rate taxes, stocks and shares ISAs are really effective. But most of us won't have to worry about either of these taxes.
Those with a lower income, or who pay a basic rate of tax, won't benefit from the share dividends guarantee; anyone with small investments, or investments unlikely to grow by more than 15-20%, may never have to pay CGT.
The other problem is that, while the rates of return can indeed be better than those in a cash ISA, they can also be far worse - and holders may see their investments decrease in value; there's no guaranteed return. The money is in the hands of the market.
Cash to stocks and shares
That said, for those who want to take the risk, thanks to 2014's overhaul, it's much easier to move money between a cash ISA and a stocks and shares ISA.
Savers can now move their money back and forth between the two as many times as they please - although fees may apply for managing and closing stocks and shares ISAs.
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