Cash ISAs can be a great way to shelter your savings from the taxman. But it’s important to keep an eye on the rate of interest you are earning – and to move your money if necessary so it is always working hard on your behalf.
Many ISAs pay variable interest, where the rate can go up or down. That means the best buy a few years ago could now be at the bottom of the league tables.
You should pay particular attention to introductory bonus rates. Banks and building societies often attract new ISA customers with a bonus rate that runs for a stated period of time – perhaps a year, or 15 months. But when the bonus expires, the rate you’ll earn often plummets.
Watch out, too, if you have taken out a fixed-rate ISA as the fix may only last for a set term before the rate reverts to a lower figure.
It’s easy to compare rates on cash ISAs using MoneySuperMarket’s comparison service - and if you discover that you have a dud account, you should consider switching.
You can switch your ISA at any time, but it’s worth repeating that you should never close down the account as you could lose the tax benefits
You can switch your ISA at any time, but it’s worth repeating that you should never close down the account as you could lose the tax benefits.
You might also think about switching if you want to consolidate several old ISAs into one account to make it easier to manage your money. Just be careful not to transfer too much cash over to one account: the Financial Services Compensation Scheme protects your money if the ISA manager goes bust, but the limit is £85,000 in a cash ISA and £50,000 in a stocks and shares ISA.
Be careful to transfer the money – don’t close an ISA and hope to open another one with the proceeds. If you close the ISA, you lose the tax-efficient allowance from that particular year.
If you want to switch this year’s ISA (one you’ve opened since April 6, 2014, the start of the current tax year), you must transfer the full amount into your chosen new account. So, if you put in the maximum cash ISA allowance, which rose from £11,880 to £15,000 from July 1, you must transfer the whole £15,000 into the new cash ISA.
Or, you might have put in only £3,000, in which case you must transfer £3,000. You could then top up the account to the maximum £15,000 before the end of the tax year (April 5, 2015 – although it would be wise not to leave any transactions until the last minute).
Previous years’ ISAs
The rules are less rigid on ISAs from previous years. For example, if you opened a cash ISA last year with £5,000, you could transfer any amount to the new account. You might therefore decide to move only £2,500 into the new ISA. It’s entirely up to you.
Don’t worry if money you transfer from an old ISA takes you over the current year’s limit. If the ISA is from a previous year, it doesn’t 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, though savings from previous years can be split.
If you switch money from the current year’s cash ISA into a stocks and shares ISA, the taxman presumes that you did not put any money into a cash ISA this year. You could therefore open another cash ISA later in the year, as long as you did not breach the annual allowance of £15,000.
Let’s say you put £5,000 into a cash ISA in April and then switched to a stocks and shares ISA in December. You could, in theory, open another cash ISA in January with £10,000 and still be within the overall £15,000 limit.
Banks and building societies must allow you to transfer out of an ISA, but they are under no obligation to accept transfers into an ISA. You should also watch out for penalties, particularly if you are thinking of switching from a fixed-rate ISA before the end of the fixed term.
You can switch your ISA at any time, but it’s worth repeating that you should never close down the account as you could lose the tax benefits. Instead you should contact your new ISA provider to arrange the transfer process.
It doesn’t usually take long to switch cash ISAs – the industry guidelines suggest 15 days, and if it takes longer than this you should be compensated for any lost interest. Some firms also start to pay the new interest rate from the day you make the transfer request, so you don’t lose out. But if the process drags on, you should contact the bank or building society to chivvy them along.
Similar rules apply if you want to switch from one stocks and shares ISA to another, though the process usually takes longer.
Be wary of making frequent switches because of the charges for stocks and shares ISAs. You should also bear in mind that you cannot switch from a stocks and shares ISA into a cash ISA.