When transferring an ISA to another provider or another type of ISA product, you should not withdraw the money from the existing account and reinvest in the new one. You must follow the transfer process of the new provider to keep your pot tax free.
What is an ISA transfer?
An ISA transfer allows you to move your money from one ISA to another, without ever losing the protection of the ISA tax wrapper. This is to avoid forfeiting the tax benefits that keep any growth or interest tax free.
There's a variety of reasons why people choose to transfer their ISAs, such as:
- Looking for a potentially better growth performance on a stocks and shares ISA
- The convenience of having your investments or savings all in one place
There are certain rules that apply to ISA transfers, which are discussed further in this guide.
Can I transfer part of an ISA?
If you’re transferring an ISA you've opened and paid into this tax year, you have to transfer the full amount, as it counts towards your current ISA tax allowance. So, if you've placed £10,000 in an ISA and you decide to transfer it in the same tax year, you will only be able to contribute a further £10,000 thereafter (to make up your full £20,000 ISA tax allowance).
If the amount you're transferring was built up in previous tax years, you're free to transfer all or just some of it, without impacting your annual ISA allowance.
An example of why it's important to transfer, not withdraw from an ISA
Let’s say you close your current ISA, containing £15,000, all of which you contributed to in previous tax years. You then pay this into a brand-new ISA. You will now only be able to contribute a further £5,000 for the present tax year, as the £15,000 has swallowed up three quarters of your tax allowance.
Had you transferred this sum into your new ISA, you would still be able to contribute a further £20,000, because the £15,000 was paid in in the previous tax year and doesn't count towards the current allowance.
What types of ISA can I transfer?
You can transfer the following types of ISA:
- Cash ISAs
- Stocks and shares ISAs
- Junior ISAs
- Innovative Finance ISAs (IFISAs)
- Lifetime ISAs
ISA transfer rules
You can transfer a cash ISA to a stocks and shares ISA or any other type of ISA. You can also transfer to another cash ISA with a different provider. Be aware that if your cash ISA is a fixed-term one, there may be a penalty for transferring.
Stocks and shares ISA
You can transfer a stocks and shares ISA to another provider or another type of ISA at any time.
A junior cash ISA can be transferred to a junior stocks and shares ISA (and vice versa) with the same ease as the standard versions. You can't, however, transfer either junior product into an adult ISA – or any other type of ISA.
Innovative Finance ISA (IFISA)
When it comes to an Innovative Finance ISA it can be more complicated. If transferring your IFISA to another kind of ISA, the cash part shouldn't pose a problem. The investment part though, due to the financing nature of the product, will have certain restrictions.
Lifetime ISAs can be transferred to another type of ISA, but if you're under the age of 60 there will be a 25% transferral fee. This is due to the 25% bonus paid by the government on condition you remain invested for later life or use the funds to buy your first home.
Variations in the rules aside, you cannot transfer any type of ISA to another person. This is because the tax benefits apply only to the person whose name the account is in.
Does transferring an ISA count as opening a new one?
Transferring an ISA doesn’t count as opening a new one.
You can’t open more than one ISA of the same type in a single tax year. You could, however, transfer an existing ISA to a new provider and then open a new one of the same type in the same year.
What are the benefits of transferring an ISA?
There are a number of reasons why people may choose to transfer an ISA:
1. Potential for a better return
While there are of course risks to investing, transferring a cash ISA to a stocks and shares ISA could potentially result in a better return. This is due to the potential growth from investing, which has historically often outperformed interest rates.
Market performance and the resulting compound growth dictate the level of returns and could, in the long term, shield your investment from the effects of inflation. Sadly, variable cash ISAs rarely offer an interest rate that'll keep your savings in step with price rises, meaning over time the spending power of your money is reduced.
Bear in mind all investments can go down as well as up, and you may get back less than you put in.
2. Potentially lower fees
There's no standard set of charges in the world of stocks and shares ISAs and different providers have different fee structures. Transferring may help you save money on management fees or other charges.
3. Convenience of combining your ISAs into a single pot
With the ability to open both a new cash ISA and a new stocks and shares ISA each tax year, many people end up with multiple ISAs.
The old account, or accounts, are then left stagnant, as they cannot be paid into while contributing to another of the same type. By transferring into a single ISA, all the money is in one place, working in step with new contributions and making it easier to keep track of your returns.
4. A simple way to start investing
Transferring a cash ISA into a stocks and shares ISA with a dedicated fund manager offers an easy way to begin investing. There's no need for detailed market knowledge, familiarity with different asset classes, or to analyse impenetrable data before making the choice of where to invest. If you've an interest in the potential returns that could be gained from investing, and are prepared to remain invested for the medium to long term (five years or more), it might be worth considering.
How to transfer your ISA
Transferring an ISA from one provider to another is usually quite straightforward. By following the correct procedure and sticking to the ISA transfer rules, you should find it a relatively smooth and hassle-free process.
If you're thinking of transferring to Wesleyan's With Profits Stocks and Shares ISA, you'll be able to start the transfer process online. Wesleyan then takes care of the actual mechanics involved with the transfer.
With any ISA transfer, the complex side will be taken care of by your new and existing providers. Just remember some providers may charge an exit fee to transfer out, so check the terms before you make your move.