Is it time to transfer your ISA?
It comes as little surprise these days to hear of drastic interest rate cuts and a stockmarket in the doldrums, but the gloomy financial climate makes it more important than ever to make your money work as hard as possible.
So, if you want to be a canny saver, it’s vital to regularly review your savings and investments, including your ISA pots. You can save up to £3,600 in a cash ISA each tax year (or £5,100 for people aged over 50 from 6 October 2009).
But rather than keeping all your ISA savings from each tax year in seperate pots, you could take advantage of transfer rules and move the money into one account without losing your current tax year ISA allowance.
At the same time, since April 2008 savers have been able to transfer their cash ISA savings into a stocks and shares ISA.
The ins and outs of transfering ISAs can leave some people confused - to help you on your way, we answer some of the most commonly asked questions about transferring ISAs.
Q: With rates on cash ISAs dropping, is it worth considering a transfer?
A: As interest rates plummet towards zero it’s a struggle to make any money on savings accounts such as cash ISAs. However, if you find your ISA rate is lower than those in the best buy tables, it’s probably worthwhile switching to a new deal.
Although spending a Sunday afternoon filling in forms may sound tedious, this task will be particularly beneficial if you’ve built up a substantial sum in ISAs over the years.
“A lot will depend on how much you have accumulated,” says Andrew Hagger, spokesman for comparison site moneynet.co.uk. “If you had started saving when these accounts were introduced [in 1999], you might well have around £40,000 in ISAs now.”
According to figures from moneynet.co.uk, an extra 0.2% on savings of £20,000 held in a cash ISA would give you an extra £40 in interest over a year.
While rates are generally pretty dismal at present, there are a few decent deals that are worth switching to. “It’s particularly worthwhile switching if you have an old ISA and the rate you’re getting is variable, which means it’s sinking along with interest rates,” says Rachel Thrussell, analyst at moneyfacts.co.uk.
Q: How do I transfer my account?
A: Transferring your ISA is a simple task, but be careful how you do it. Whatever you do, don’t close your existing ISA and then move the money or you will lose the tax break.
“The scary thing is quite a few people try and simply withdraw the money and take it somewhere else, which defeats the whole purpose,” says Hagger.
This is because you can only save up to £3,600 in cash in an ISA each tax year (or £5,100 for people aged over 50 from 6 October 2009). Withdrawing the money from an old ISA and depositing it in a new one means the money will count as part of your current tax year allowance.
Instead, once you’ve chosen an attractive account, ask the new provider for a cash ISA transfer form. Around 84% of all cash ISAs accept transfers of funds from other accounts.
You will need to give your new provider the details of your current ISA, but your existing and new providers should do the actual legwork when it comes to making the transfer.
Bear in mind that while the majority of ISA providers do accept transfers, often the best paying accounts don't - so it's vital you look to see if ISA transfers are accepted before you apply for a new deal.
Q: How can I find a provider that lets me do a transfer?
A: Use comparison sites such as Moneywise's Compare & Buy tool, or on websites such as moneyfacts.co.uk and moneysupermarket.com. Just make sure you either click on ‘more information’ or tick the box for ISAs that accept transfers when comparing rates. If you’re in any doubt, call the provider directly and ask before making an application.
Q: I’ve already chosen an ISA for this year - can I still transfer to another one?
A: "You can still transfer to another account, as long as you don’t put more than your annual allowance of £3,600 into a cash ISA for the current tax year,” says Thrussell.
So, if you opened an account last April, for example, you can shift your money as often as you like to take advantage of the best rates, just as with ordinary savings accounts. The difference is that moving your ISA fund may involve some time and effort, so you’re unlikely to want to make a habit of it.
Q: What about ISA funds from previous years?
A: If you have several ISAs in place from previous years, you can choose to move them all to another provider, and your new provider will deal with the process of gathering the various funds into one account for you.
“Just tell them that you need to transfer several ISAs, and fill in the relevant forms,” advises Thrussell. “However, bear in mind that moving several accounts may slow down the process.”
How speedy this process will be depends on the organisational skills of the new provider.
Q: Is it true that none of the best-rate cash ISAs offer transfers?
A: It is often the case that some of the best-buy cash ISAs don’t accept transfers; if you’re shopping around for a new home for last year’s cash ISA you need to make sure you read the small print before comparing rates.
Q: Will I be charged a penalty for transferring?
A: You shouldn't be charged for transfering your ISA savings. The only penalty is that it takes some time to complete the form and process the transfer.
However, Hagger says that there have been accounts in the past that have required you to give a certain amount of notice before shifting your cash.
Q: Will I earn any interest while the funds are being transferred?
A: Yes, says Thrussell: “The money remains with your existing provider rather than in limbo until it appears in the new account, and it will earn interest, albeit at your old rate, until the new provider receives the money.”
Even if there’s a technical glitch and the money takes months to transfer, you will still be earning interest, though the rate may be pitiful.
Liz Neild, a spokeswoman for M&S Money, says: “As soon as the transfer cheque is received by us, it’s date-stamped and interest is paid from this date.”
Q: How long will the whole process take?
A: It usually takes about a week for transfers to complete. But bear in mind that switching accounts can take longer – up to 30 days – towards the end of the tax year, particularly if you are switching to a popular provider.
Last year saw many ISA providers fumbling in the dark to process ISA transfers, resulting in a nightmare for thousands of investors keen to make the most of their cash. Many waited months to transfer their ISAs to top-paying accounts on offer from high street names such as Barclays. This led to a number of problems, including exclusion from newly expired rates thanks to administrative chaos – and even the threat that the tax-free status on accounts might be lost.
In response, the British Bankers' Association introduced a new 23-day target for transfers to complete - it also developed a new electronic system for transfering ISA savings via BACS rather than the 'cheque in the post' method currently used.
So far only a small number of banks have signed up to the electronic scheme, and experts say it will take some time before ISA transfers are speedier for all.
If you do experience problems with your transfers, you can refer your case to the Financial Ombudsman Service, which has pressed providers in the past to compensate customers for severe delays.
Q: With rates being so low on cash ISAs, can I transfer my money into a stocks and shares ISA?
A: When ISAs were first introduced, you couldn’t move money from cash ISAs into stocks and shares ISAs. However, in April 2008 the rules changed and these days you are able to transfer money from a cash ISA into a stocks and shares one.
This means you can start your savings off in a cash ISA and then to roll them over into a stocks and shares ISA when you feel confident that the time is right. Otherwise, if you’re fed up with paltry rates and happy to take some risk for long-term investment purposes, you can move them immediately into the stockmarket.
Unfortunately, this won’t work the other way round, so you can’t move your money back into cash. This means that you should take time to consider your decision – see our checklist below to help make the right choice for you.
Q: Do the same rules apply to stocks and shares ISA transfers and cash ISA transfers?
A: The process of switching between cash and stocks and shares ISAs is similar – just contact the new provider and ask them for the relevant forms.
“You can transfer previous years’ subscriptions to cash ISAs, or stocks and shares ISAs in whole or in part,” says Gavin Haynes, investment director at Whitechurch Securities.
However, he adds: “It’s very important to be aware that once you’ve converted to a stocks and shares ISA you can’t move your money back into a cash ISA in the future.”
If you have built up a nest egg by using your ISA allowance, you may want to move all your holdings under one roof by transferring your money to a fund supermarket. This would make it easier for you to manage your money while still allowing you access to a wide range of investment options.
Q: What are the charges for transferring your stocks and shares ISA?
A: “It’s important to check with your current ISA manager if there are any exit charges when transferring to another provider,” explains Haynes. This will depend upon the fund and provider that you have used.
When selecting a new ISA provider to transfer to, it’s likely that the initial charge will be the same as for new subscriptions. However, in most cases, it’s cheaper to go through an IFA or a discount broker than to go direct to the ISA provider. Many discount brokers can reduce the charge to 1% or less for transfers and new ISAs.
Q: Is my money safe when being transferred, and who is responsible for it?
A: Your money should be safe as long as the provider is covered by the Financial Services Compensation Scheme. Thrussell adds: “Your money is the responsibility of the old provider until it arrives in the new provider’s account.”
Questions to ask yourself before transferring your cash ISA into a stocks and shares one:
1. Are you saving for the long term?
2. Can you tie up your money for at least five years?
3. Are you prepared to take some risk with your money?
4. Have you already got cash savings in place for a rainy day?
5. Do you understand that markets go down as well as up, so you may lose money?
If you have answered yes to more than three out of the five questions, you should probably consider transferring into a stocks and shares ISA.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
The ISA rules allow investors to transfer money from an uncompetitive savings account with one provider into one from another provider that pays a better rate of interest. The bank to which you are transferring the money must do the transfer process, as withdrawing the money from the ISA wrapper means you lose the tax-free status. You can transfer a cash ISA into a stocks and shares ISA, but not the other way around and the current tax year’s cash ISAs must be moved whole to a single provider, but previous years’ ISAs can be split between new providers.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Exclusion is a potential loss or specific risk that an insurance policy does not cover and they occur in all types of insurance policies. Common exclusions include: natural hazards (exploding volcanoes, earthquakes) war, nuclear fallout, wear and tear (anticipated through the use of a product, especially motor insurance), UFO damage to vehicles, vehicles “stolen” by vengeful spouses, travelling any pre-existing health problems and travelling to countries the Foreign & Commonwealth Office deems too dangerous.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Created in 1968, BACS is a not-for-profit industry body, owned by 16 of the leading banks and building societies in the UK and Europe. All direct debits, standing orders, credit card payments, personal loans and the vast majority of salary cheques are processed through BACS. In 2010, 5.7 billion UK payments with a total value of £4.06 trillion were processed through the system.