Cash ISAs (Individual Savings Accounts) are used as a tax-free way to maximize the interest earned on the savings. So, it seems unfair when best-buy ISAs drastically cut their rates. By moving your savings into a new top-performing account, up to five or six times more interest can be earned. Whilst it is not difficult to make the change these days, it is important to follow the correct steps, to avoid incurring large penalties.
The key rule when transferring an ISA is to never take the cash directly out of the account – this would result in an instant loss of the tax-free protection.
The first step is to find a new top-paying cash ISA account and check that the provider will accept ISAs transferred in. Also, it is important to check that there will be no penalties when transferring funds out of an existing account.
With some fixed rate deals you may face losses of anything up to 365 days worth of interest should you withdraw your savings early. Easy access accounts with variable rates of interest allow for transfer at any time. Therefore, consider the implications of a fixed versus variable rate cash ISA, based on ease of access as well as interest rates.
The new provider will supply the necessary forms to ensure that the capital sum retains its tax-free protection after transfer to the new account. As a guideline, the banks have agreed to make the transfers within a 15 working day timeframe, that is, three working weeks. If there are any delays it is worth checking with the original account provider that they received the transfer instruction in the first place. Interest on the new cash ISA must be paid from the date that the old account is closed and, for some providers, interest may even start to accrue from the date of application.
Transfers to a new ISA account can be made at any time of year, providing it is within the rules. For cash ISAs opened between 6th April 2012 and 5th April 2013, you are required to transfer the entire account balance to your new provider. For accounts opened before 6th April 2012, the balance can be transferred either in its entirety or split across different providers.
It is also possible to switch the cash ISA in to an ISA for stocks and shares, but the reverse is not permitted. You must be aged 18 years or over for stocks and shares ISAs whereas cash ISAs can be started at 16 years of age.
Payments can be made into only one cash ISA in any one tax-year, but a transfer is not counted as making a payment. It is possible to transfer money from one old account into a better performing cash ISA and still open another account, providing contributions are only made to one of these accounts.
Remember that anything transferred from the old tax-year is not counted towards the savings allowance for the current tax-year. This means that a further maximum of £5,760 cash can be contributed tax-free, plus shares up to the remaining value, which cannot exceed a total investment allowance of £11,520.
To make the most of your ISA, you need to keep abreast of changes in interest rates and be ready to switch. It is easy to transfer your cash ISA as long as you note three key points: (1) never take out the actual cash yourself for transfer, (2) remember that cash ISAs can be transferred to share ISAs but not the other way around, and (3) only cash ISAs from pre April 6th 2012 can be split up.