Savers are often advised to periodically switch their savings accounts to secure better interest rates. Recently, experts have suggested that this strategy should also be applied to Individual Savings Accounts (ISAs). For those unfamiliar, ISAs allow you to save up to £20,000 each year without incurring taxes on any gains you make. They serve as an excellent means of growing your savings in a tax-efficient manner. However, many individuals may still find themselves contributing to accounts that offer low interest rates. Transferring an ISA is somewhat different from transferring a standard savings account, so here’s what you need to know.
Is Your Money Working Hard Enough?
Clare Francis, the director of savings and investments at Barclays, emphasizes the importance of evaluating whether your money is truly working to its potential. Start by checking the interest rate you are currently receiving and compare it to what is available in the market. As the Bank of England has recently lowered the base rate, it is anticipated that savings providers will respond by reducing their rates. Nevertheless, some available rates are still able to outpace inflation, particularly those associated with ISAs. Therefore, if you discover a better rate, it may be worthwhile to consider transferring your account.
“In addition to assessing the interest rate on your cash ISA, think about how long your money has been parked in that account and when you anticipate needing it,” advises Ms. Francis. “If you have contributed to a cash ISA for several years without needing to access those funds, and if you don’t foresee needing them in the near future, consider transferring to a stocks and shares ISA. Investing can provide the potential for higher long-term returns. The added advantage of investing within an ISA is that any gains you realize are tax-free.”
The Golden Rule of Transferring
Once you’ve decided on where to transfer your funds, remember the most critical rule: never withdraw money from a cash ISA. Doing so will result in the immediate loss of your valuable tax benefits. Instead, reach out to the new provider and complete an ISA transfer form. The new provider will handle the transfer process for you. Banks have committed to a timeline of 15 working days for the transfer to be completed, so you should expect to start accruing interest shortly after this period. If the transfer takes longer than expected, you can file a complaint with your ISA provider; this may expedite the process or even result in compensation if you are losing a significant amount of interest due to delays.
Ms. Francis also recommends checking if there are any restrictions on accessing funds from your existing cash ISA. “If your account is fixed-rate, you might not be able to transfer your money until the fixed term ends, or you could incur a penalty in the form of lost interest for doing so,” she notes. “Some accounts may also require advance notice before you can withdraw funds.”
Consolidating ISAs
Rather than simply transferring one ISA, you may want to consider consolidating multiple accounts into a single ISA. This can simplify your financial management, but it’s essential to weigh your access needs carefully. Fixed-rate cash ISAs often offer higher interest rates compared to easy-access ISAs, but they may come with restrictions on when you can access your money. Consequently, if you’re willing to lock away some savings for a year or two, having more than one cash ISA might be beneficial while keeping a portion of your savings readily accessible.
If you choose to consolidate, inform the new provider that you wish to transfer funds from various old ISAs. If you are fortunate enough to possess a substantial amount in savings, it’s wise to ensure that you do not exceed £85,000 in a single consolidated ISA. This limit is crucial because the Financial Services Compensation Scheme (FSCS) protects savings up to £85,000 per financial institution.
Is it Possible to Do a Partial Transfer?
Yes, partial transfers are indeed possible, but it is important to confirm whether the new provider offers this option. Changes made in April 2024 allow for partial transfers, yet some providers may still limit these to funds from previous tax years. Always verify the specific terms with your new provider to ensure you understand your options.
