We’re often told that if we’re going to put money into savings, we should first invest in an ISA – but it’s not enough to deposit the money and expect great returns.
Instead you should be moving your money around to take advantage of the best rates, but how do you do that and what precautions do you need to take?
Here’s a closer look at whether or not you should transfer your ISA, and what the potential risks and rewards are…
If your existing cash ISA is no longer paying a competitive rate of interest, it’s time to move it to a better paying deal, check on Moneysupermarket.com to help you find the best product. Not all cash ISAs accept transfers in though so this is the first thing to check.
When you’ve decided which ISA you want to open, there will be a section on the application form about transfers. Here you will need to give the details of your existing account that you want to move your money out of. Your new ISA provider will then contact your current provider and arrange for the funds to be transferred.
It is really important to follow this process. What you mustn’t do it close your existing ISA and withdraw the cash with the intention of investing it in another ISA. When you take money out of an ISA it loses its tax-free status. If you follow the transfer process though, you can move your savings to another account without losing the tax benefit.
You may be charged a penalty by your current provider(s) for transferring the money out, though this is becoming less common. The fee may be something as negligible as losing 30 days’ interest, but if it’s anything more significant it may outweigh the benefits of transfer.
It is also important to note that you can transfer a cash ISA into a stocks and shares ISA, but you can’t move money from a stocks and shares ISA to a cash ISA.
The whole point of transferring an ISA is to take advantage of more attractive rates of interest.
Many cash ISA interest rates are inflated by a temporary bonus. For example, the Santander Direct ISA Issue 9 has a headline rate of 3.30%, but includes a 12-month bonus of 2.80%. This means that after 12 months, the rate drops to just 0.5%
In the first 12 months, £1,000 would earn £33 at the higher rate of 3.30%, but after the bonus elapses it would earn just £5.
The other massive benefit is that you can transfer ISAs from previous years into a new ISA and still invest the current year’s allowance on top of that.
So, should you transfer your ISA?
If you’re transferring an ISA to take advantage of a better rate and you do it in the right way (arranging the transfer through your current provider rather than doing it yourself) then it’s a good idea.
The key things to remember are that you need an account which accepts transfers in; you may have to pay a penalty for transferring out of your existing account and that a cash ISA can be transferred into a stock and