While ISAs earn tax-free interest for as long as they’re open, old ISAs won’t always offer you the best deal out there. Banks and other savings account providers typically offer the best interest rates on new accounts. Meanwhile, the rates on older ones can dwindle considerably, even after the first year.
Luckily, transferring your old ISAs into one or more new ones with a better rate is quite easy. But you’ll need to follow a specific procedure otherwise you risk losing the tax-free status.
Before you start the process of transferring an ISA, there are two key things you need to think about.
1. Does a transfer penalty apply?
You can transfer your ISA from one provider to another at any time. But your current ISA provider may charge a penalty for doing so. This is usually a reduction in interest. Penalties most often apply when you transfer a fixed-term ISA before the fixed term expires.
The penalty for transferring can be fairly steep. Lifetime ISAs, for instance, have a 25% withdrawal fee if you transfer them before you’re 60. It’s a good idea to weigh any financial benefit you stand to gain from a transfer, against the penalty you’ll have to pay. Sometimes, the penalty may be so high it makes the transfer not worthwhile.
2. Should you transfer all your ISAs into one account?
Transferring all your ISAs into one account can make it easier to manage your money, because it’s all in one place.
But you should be wary of these pitfalls:
The Financial Services Compensation Scheme only covers deposits up to £85,000 per person per bank. So, if the total amount you hold in ISAs exceeds this amount, you may want to split it between different banks or savings providers so that all of it stays covered.
ISAs that accept transfers tend to offer lower interest rates than those that don’t. For this reason, it may be a good idea to keep your active and inactive ISAs separate.
If you're ready to transfer your ISA, there are five key steps to the process:
Step 1 - Decide the kind of ISA you want to transfer to
This largely depends on your savings goals and personal preference. As a rule of thumb, the easier it is to access your money, the less you can expect to earn in interest.
You can transfer any type of ISA into any other type of ISA, whether that’s a stocks and shares ISA to a cash ISA, or vice versa.
Cash ISAs are typically safer than stocks and shares ISAs. Your money is also easier to access, because it’s held in cash. The trade-off is that cash ISAs usually attract lower rates of interest.
Stocks and shares ISAs typically offer the best returns. However, because your money is being invested there is more risk attached.
Step 2 - Shop around
Compare ISAs from different providers. Some ISAs do not accept transfers at all, so check this out beforehand. It’s also a good idea to check what penalties apply to the new ISAs, in case you decide to transfer again in the future.
Money Saving Expert lets you compare both cash ISAs and stocks and shares ISAs online. It may also be a good idea to speak to an, especially if you decide to transfer your money into a stocks and shares ISA. Ideally, speak to an adviser that looks at the whole market. That way, you’ll get the most comprehensive and unbiased advice possible.
Step 3 - Open your new ISA
You can open most ISAs online, by phone or in branch. You’ll need your National Insurance number at hand in order to complete the application.
Step 4 - Fill in an ISA transfer form
Do not close your old ISA account or attempt to move the money yourself. If you do, your money may lose its tax-free status.
Instead you need to fill out an ISA transfer form. You can get this form from your new ISA provider, either when you apply or once your new ISA is open. Simply provide the details of the ISA you want to transfer in and the amount. Your new ISA provider will handle the transfer on your behalf.
Step 5 – Your bit is done
Your new ISA provider must complete the transfer within 15 days of receiving your transfer request. However, stocks and shares ISA transfers can take up to 30 days to complete.
You have a right to complain if your transfer isn’t complete within these time-frames. Your provider must also start paying you interest within this period, irrespective of whether the transfer has completed or not.