How to transfer a cash ISA

It means we can shop around for ISAs to get the best interest rates and transfer our money into a better-performing ISA.

Many ISA providers will allow savers to transfer money into them, although we should check this is an option under their rules.

However, it's crucial the process is followed accurately and the money must never come out of the ISA system.

Credit: Vitalii Vodolazskyi/Shutterstock.com

Why move an ISA?

Cash ISAs are one of the most tax efficient ways to save, with up to £20,000 able to be deposited in an ISA account during each financial year.

However, many customers will find that the interest rate on their ISA becomes less valuable over time and just like with other forms of savings, it's worth shopping around to find a better deal.

In the early days of ISAs new accounts offered extremely attractive introductory rates of around 4% AER - although that's come down considerably in the last decade and rates now struggle to break the 1% mark.

Even so, any ISA that's more than a couple of years old will see the rates of interest it earns drop to just 0.1% or even lower.

Let's look at the effect that could have on savings in terms of real cash over a year, comparing the kind of opening rate we might have found in the ISA's younger days, the sort of rate fresh ISAs are offering, and what many offer after a few years.

For clarity's sake, we're looking at whole figures that would be applicable if we put the maximum allowable into the ISA on the first day of the financial year:

This has to be one of the best reasons to transfer from an old ISA to a newer one: when the interest rate on an old ISA goes bad, the account holder loses out, sometimes to an almost insulting degree.

However, that's not the only reason people choose to transfer their savings. Some move just for simplicity - it's a lot easier to have all their ISA money in one place - while some may wish to switch funds from a cash ISA into one or more of the other forms of ISA now available.

There are no limits on the number of times we can transfer an ISA. However, it's important to remember we can only make payments into one cash ISA each year.

How to transfer an ISA

The process for transferring an ISA from one provider to another must be followed carefully or savers may find they have lost their tax-free status.

Follow these steps to transfer an ISA safely:

1. Find a new ISA

The most important thing to check when searching for a new ISA is whether the provider allows transfers into their ISAs.

Some providers will keep their highest interest rate ISAs for customers who open a fresh ISA with them and do not allow any lump sum transfers into that ISA (as the interest payments on a bigger amount would be much higher).

So, check whether transfers in are allowed before even checking the interest rates offered by a new ISA.

When shopping around it's also worth noting that banks won't accept transfers from within their organisation or banking group.

So, for example, someone with a NatWest ISA generally won't be able to move to another NatWest account or to one at RBS or Ulster Bank, who are part of the same banking group.

2. Open the new account

During the application process, the bank will usually ask applicants to provide details of any old accounts they want to move.

It's not necessary to put huge sums of money into the new ISA in order to open it.

New account holders can do that if they want to, but they should remember that anything they put in themselves will come out of the tax-free allowance for that tax year.

Many ISAs will just request a token amount of a few pounds to get the ISA open, so don't feel compelled to go above that token payment immediately.

3. Transfer carefully

This is the most important part of the transfer process - making sure we transfer money from our old ISA into the new one without any difficulties.

Once the account is open, we can transfer the old ISA into it.

This must be undertaken by the providers themselves. While we can tell them what we want to happen, the ISA providers are the ones that deal with the money itself.

If the new bank asked for the details of any older ISAs to be transferred, they may ask for further confirmation that this is what the account holder wants to do.

If they're one of the few that don't ask about transfers during the application process, ask for a transfer request form. The bank will often ask for the completed form to be posted back to them or given in at a local branch. Some may allow online or phone transfer forms.

That starts the actual transfer, which should take no more than 15 working days.

However, it's worth noting that should any of the old accounts have notice periods, the providers are entitled to demand that notice be served.

In this case, the transfer period should take no more than 15 working days following this period - unless the account holder specifically states that they don't mind incurring any penalties for accessing their money without notice.

It is incredibly important to abide by this transfer process: the bank must move the money otherwise it loses its tax-free status.

There's more information about that problem in the next section but, barring all disasters, that's it: an old ISA balance has a new, more comfortable, home.

Problems with ISA transfers

Moving an ISA should be fairly simple and straightforward. But sometimes problems do come up. Here are a few - and how to avoid them.

Losing tax-free status

If an ISA transfer is not handled by banks and ISA providers, the ISA will lose its protected status.

On a practical level this means that people with money in an ISA should not consider moving it to a current account or taking it out in cash, thinking that they can just put the money into a "transfers allowed" ISA.

Once the money is out of the ISA system it's out for good. In any one tax year the maximum net investment is that year's allowance (£20,000 as the limit currently stands), and that rule applies no matter where that money came from.

This rule is so central to the ISA process, there's very little chance of redress if it happens.

Moving multiple ISAs or part of a balance

A cash ISA must be kept whole during the first financial year it is invested. So, if we want to move a cash ISA in the same year we opened it, the whole thing must be transferred.

As an example, if we open a cash ISA with one provider in May but decide we want to transfer it to another provider in December, everything that we have saved into the ISA must be moved at the same time.

After the first year, we have more flexibility.

Older ISAs can be split up. The funds can then be transferred to a number of different accounts.

It's also possible to move several old cash ISAs, in part or in total, into one new account, as long as the account terms allow it (and many do).

When people decide to consolidate several accounts, for example, they often transfer several old ISAs into one new "transfer in" account and then also invest some new cash, part of their allowance for that tax year, into that same account.

The major problem with putting all that money in one place is that savings are only protected in one institution up to £85,000 under the Financial Services Compensation Scheme (FSCS).

As we mentioned earlier, with many banks part of the same groups as others, it's worth keeping an eye on how much money we have across various accounts - ISAs, savings, current accounts - to ensure we haven't breached the limit.

Delays

Another problem with ISA transfers is that the process can be quite slow sometimes.

The target is that cash ISAs must be transferred within 15 working days, and stocks and shares ISAs within 30.

Yet we do see providers struggling to hit that deadline, especially at peak periods where people are looking at their savings and moving things around or when banks open ISAs with attractive rates. These can cause delays in the system.

However, it's worth noting that banks must now compensate consumers when delays occur.

No matter how long the transfer takes, interest must be paid from working day 16 onwards.

If customers are unhappy with the way the transfer has been handled or believe their bank has not applied the interest rule appropriately, complain in writing and then consider escalating the complaint to the Financial Ombudsman Service (FOS) if the response is unsatisfactory.

CTFs to Junior ISAs

Another problem has been moving money between Junior ISAs (JISAs) and the accounts that preceded them, Child Trust Funds (CTFs).

This is becoming less of a problem as fewer children have CTFs now, with the last tranche due to come to maturity in 2029.

However, in the past, transfers from CTFs to JISAs were not possible - and the rules on eligibility for Junior ISAs meant that children born when CTFs were operational weren't allowed one of the newer accounts, even if they'd missed out on a CTF for some reason.

The Government eventually changed this, and transfers have been available since April 2015.

While the interest rates available on JISAs aren't spectacular at the moment, the fact that the money is locked away until the child is 18 means it has plenty of time to grow.

Read more on how and why to transfer a CTF to a JISA.

Moving cash to other forms of ISA

Finally, as we mentioned earlier, money in a cash ISA can keep its tax-exempt status even when transferred into a stocks and shares ISA, or one of the new Innovative Finance ISAs, which allow for tax-free returns on P2P lending.

As we've said above, we're focusing on cash ISAs here. But as other forms of investing with ISAs can look attractive - because of the potential for a far higher return - we'll talk about them briefly.

We'll start with the Innovative Finance ISA, or IFISA, because it's the simpler of the two.

Innovative Finance ISA

Very simply, an IFISA works like a cash ISA - except the money we invest in it is then loaned out via peer-to-peer schemes, and can therefore attract the higher rates of interest these tend to offer.

Whereas there's the possibility that we may have to pay tax on the interest earned through a normal P2P loan, the interest earned on the loans made with our IFISA investment is tax-free, no matter how much we earn.

Transferring an existing ISA into an IFISA is entirely possible, using the system outlined above - but people who are already invested in P2P lending should be aware that they can't convert those investments in this way; they'll need to sell up and start again.

Stocks and shares ISAs

Stocks and shares ISAs, like their cash cousins, offer the opportunity to invest without losing money in tax, but the taxes are different.

Stocks and shares ISA holders don't have to pay Capital Gains Tax (CGT) on any profits from their investments. Outside of a stocks and shares ISA, bear in mind that people are allowed to make more than £12,300 a year in profit - that is, money earned from selling those investments - before they have to pay CGT.

Holders are also exempted from paying any more than 8.75% tax on any dividend income they receive. This is the basic rate; for higher rate taxpayers it's 33.75%, and 39.35% for additional rate payers.

So, for investors who would be affected by higher rate taxes, stocks and shares ISAs are really effective. But most of us won't have to worry about either of these taxes.

Those with a lower income, or who pay a basic rate of tax, won't benefit from the share dividends guarantee; anyone with small investments, or investments unlikely to grow by more than 15-20%, may never have to pay CGT.

The other problem is that, while the rates of return can indeed be better than those in a cash ISA, they can also be far worse - and holders may see their investments decrease in value; there's no guaranteed return. The money is in the hands of the market.

That said, for those who want to take the risk, thanks to 2014's overhaul, it's much easier to move money between a cash ISA and a stocks and shares ISA.

Savers can now move their money back and forth between the two as many times as they please - although fees may apply for managing and closing stocks and shares ISAs.

Summary: Be careful when transferring

Cash ISAs are vital tools for people who want to save and maximise their tax efficiency each year.

Transferring from one cash ISA to another can be a great way of getting the best interest rates and keeping ISAs fresh. However, if the process is not carried out properly, we can lose the tax-free benefits of our ISAs and so we need to act carefully.

When transferring an ISA, remember the following:

• Money from the ISA must never come out of the ISA system. It must go directly from one ISA provider to another, meaning we should never see it in our current accounts or other savings accounts, even for a short period.
• Some ISAs will not allow transfers into them, so be sure to check.
• We can't transfer money from an ISA during its first year, but we can split and combine ISAs from multiple accounts after that first year.
• Providers should transfer ISAs within 15 working days and interest must be paid from the 16th day, whether the transfer has completed or not.

Ultimately, transferring a cash ISA from one provider to another is a valuable process, yet savers must be cautious and ensure they're going about it in the right way.