Cash ISAs can be a great way to shelter your savings from tax. But it’s important to keep an eye on the rate of interest you are earning – and make sure your money is always working hard on your behalf.
Many ISAs pay variable interest, meaning the rate can go up or down and the top account you picked a few years ago could now be at the bottom of the league tables.
Banks and building societies often attract new ISA customers with introductory bonus rates that run for a stated period of time – perhaps a year, or 15 months. But when the bonus expires, the rate you earn plummets.
Even fixed-rate ISA rates sometimes only last for a set term before reverting to a lower level.
So use MoneySuperMarket’s cash ISA comparison tables to check what’s available – and switch if you find a better deal.
"You can switch your ISA at any time, but you should never close down the account as you will lose the tax benefits..."
You can switch your ISA at any time. You can also consolidate several old ISAs into one account to make it easier to manage your money.
Just remember never to close your account, and to avoid transferring too much cash over to any one provider.
If you close an ISA, you lose the tax-efficient allowance from that particular year AND the tax breaks built up in previous years – even if you open another ISA with the money.
And while the Financial Services Compensation Scheme protects your money if the ISA manager goes bust, the limit is £75,000 in a cash ISA and £50,000 in a stocks and shares ISA.
This year’s ISAs
If you want to switch an ISA you have opened in the current tax year, you must transfer the full amount into your chosen new account.
So, if you put the maximum cash ISA allowance of £15,240 for this tax year (which ends on April 5, 2017) into an ISA opened since April 6, 2016, you must transfer the whole £15,240 into the new account.
If, on the other hand, you only put in £3,000, that is the amount you must transfer across.
You can then top it up to the maximum £15,240 in the new account before the end of the tax year, if you wish.
Previous years’ ISAs
The rules are less rigid on ISAs from previous tax years. So if you opened a cash ISA last year with £10,000, you can transfer any amount to a new account – even if it takes you above the current year’s limit.
Money transferred from an old ISA taken out in a previous year does not count towards this year’s allowance.
Savers can also switch from a cash ISA to a stocks and shares ISA, and vice versa. Again, you must transfer the full amount from the current year’s ISA, but savings from previous years can be split.
If you switch money from the current year’s cash ISA into a stocks and shares ISA, you can also open another cash ISA later in the year – as long as the total amount sheltered from tax does not breach the annual allowance.
Let’s say you put £5,000 into a cash ISA in May 2016 and then switched to a stocks and shares ISA in December. You could, in theory, open another cash ISA in January 2017 with £10,240 and still be within the overall £15,240 limit.
Banks and building societies must allow you to transfer out of a cash ISA, but they are under no obligation to accept transfers in.
So watch out for restrictions and penalties, particularly if you are thinking of switching from a fixed-rate ISA before the end of the fixed term.
It’s also worth repeating that you should never close a cash ISA as you could lose the tax benefits. Instead you should contact your new ISA provider to arrange a transfer.
The process should not take more than about 15 days. And if it does, you should be compensated for any lost interest.
Some firms even start to pay the new interest rate from the day you make the transfer request. But don’t be afraid to contact the account providers if the transfer drags on.
Similar rules apply if you want to switch from one stocks and shares ISA to another, though the process usually takes longer.
But the charges incurred can make frequent switching an expensive option.
New ISA flexibility
ISAs have become much more flexible since April 6 2016. If you hold cash in an either an investment, cash, or Innovative Finance ISA, you can take this cash out of your account and put it back in within the same tax year without this affecting your annual allowance. Not all ISA providers may offer this flexibility, so check with yours before withdrawing any money.