Better to transfer to lower rate and use whole tax allowance?

balooney2000

I took out a first direct regular saver isa (interest rate of 7%)in September 2008 which now has £1800 in it. However I have now found that I cannot add £1800 to it to make up this years tax allowance for a cash isa. This means I will lose the remaining allowance for this tax year.

Would I be better to close this isa and transfer the funds with the extra £1800 so that the whole £3600 is used for this tax year, to a lower interest rate isa - say Barclays, and re-start the regular saver isa with First Direct in April to make use of the whole allowance at 7% for the next tax year.
I am worried about losing some of the tax free allowance for this year as I can never get that back.
Please help my maths isn't good enough to work out whether this is worthwhile!

alastair_h

The first direct regular saver isa works out over the year at 3.8% (as you only have full amount of funds in for the last month). It makes sense to me to transfer your existing contribution to another isa provider and pay in the remaining £1,800 - or you loose it. As for restarting the regular saver that's your call, I have attached best buys link so you can see what else is available.

Yes you can transfer to new isa provider.
http://www.firstdirect.com/savings/regular-saver-isa-indetail.shtml
no partial withdrawals in the first 12 months, however the account can be closed in full during this period. In the event of closure/transfer to another ISA manager during the first 12 months, we will pay interest at the standard cash e-ISA variable rate on the whole balance from the date the Regular Saver ISA was opened.

http://forums.moneysavingexpert.com/showpost.html?p=4603369&postcount=1

Milarky

alastair_h wrote: »

http://www.firstdirect.com/savings/regular-saver-isa-indetail.shtml In the event of closure/transfer to another ISA manager during the first 12 months, we will pay interest at the standard cash e-ISA variable rate on the whole balance from the date the Regular Saver ISA was opened.

That's a much lower rate - about Bank Rate -0.5%.

So, assuming this, and that FD adjusts rates at the same time as the BOE the rates would have been:

Sept 4.5% - balance 300 - interest 1.13
Oct 4.0% - balance 600 - interest 2.00
Nov 2.5% - balance 900 - interest 1.88
Dec 1.5% - balance 1200 - interest 1.50
Jan 1.0% - balance 1500 - interest 1.25
Feb 0.5% - balance 1800 - interest 0.75

Total 8.51
(Compare with 7% rate; the amount earned TO DATE is about 36.75)

Does the OP have £150, if not £1800 - because the easiest way to lock in this interest and get the 7% - instead of loosing it would be to trim regular amounts (amend standing order) to just £25 a month...

..doing that would

a) save £28 in interest lost by early closure of the account

b) allow a further £69 interest to be gained over the next six months (at 7%)

but from the OP I don't think it is lack of funds - they have the £300 per month, they've just noticed the account straddles two years of ISA allowances.

IMO the better course is to continue with regular saver ISA - go into next tax year - when the account matures top up by £1800 (rest of next year's allowance) and then transfer the £5400+interest somewhere else (like Barclays) In six month's time the offers should still be there

balooney2000

But would I be better, in the long run, to get interest on £3600 at 3.1% by transferring from the regular saver now, and using the whole of this years allowance?
I can then invest another £3600 next year using the regular saver at 7%, by starting again with the 09/10 allowance.

This would give a total of £7200 invested, and interest of £3.1% on the 3600 fromthis year and 7% on the money from next year.

Sorry I'm not very good at maths and interest rates!

Milarky

balooney2000 wrote: »

But would I be better, in the long run, to get interest on £3600 at 3.1% by transferring from the regular saver now, and using the whole of this years allowance?

'3.1%' - are you thinking of First Direct's new e-ISA, because if you are you have to first tranfer out (e.g. to Halifax ISA Direct) and then back again, since existing FD ISAs are not eligible as things stand.

I can then invest another £3600 next year using the regular saver at 7%, by starting again with the 09/10 allowance.

OK, so next tax year you'll then have gained the orginal amount of interest from the RS ISA - £136.50 Yes?

This would give a total of £7200 invested, and interest of £3.1% on the 3600 from this year and 7% on the money from next year.

But not an average of '£7200' - in fact an average of £3609 (in Halifax, post transfer) plus £1950 (in FD @ 7%) You can't do 'any better' as such.

Sorry I'm not very good at maths and interest rates!

Not to worry, it just requires thinking things through a step at a time.

As I see it, if you sacrifice the fixed rate to the end of the orignal term on the FD ISA then you are giving up the bird in the hand - £28 clawed back, then the interest rate differential [(7%-3.1%)/7%] x £69, or about £38, for the next 6 months. Thus you are £66 'down' initially.

You propose to up your ISA contribution by £1800 (in FD and then transfer this to Halifax) in 2008/9, and that £1800 is 3.1% for 12 months. In addition you can top up the Halifax ISA 6 months sooner than as per my suggestion above. So you gain £3600 for 6 months @ 3.1% as well. These two amounts add up to about £112. But I would assume you could have earned 90% of this as a 'net' rate elsewhere anyway - so the relative gain isn't '£112', it's more like '£11'

So, at the end of the next tax year you should have

[1808 (from FD) + 1800(2008/09 top up) + 3600(2009/10) ] x 1.031 = £7431 in ISAs

compared to

[3737 (from FD to maturity) + 1800(2009/10 top up)] x 1.031x[6mths/12mths] = [strike]£5538[/strike] in ISAs plus (about)[strike] [1800 + 0.90 x 112] = £1900 [/strike]outside the ISAs - a total of £7438.....
first bit should be
[3737 (from FD to maturity) + 1800(2009/10 top up)] x 1.031x[6mths/12mths] = £5623....

And I would amend this

plus (about) [1800 + 0.90 x 112] = £1900... to read

plus (about) [2770 (average balance not in ISAs over 12 months..) + 0.80 x 4%(say)] = £1890...

This is now 5623 + 1890 = 7513 compared to 7431 - a difference of minus £82!!

..which changes the 'advice' to: Don't do this - it would take something like 6 years to pull even


[strike]This difference is so small that (in the name of simplfication etc) you could justify premature closure of the FD ISA, to be just £7 behind in 12 months time, because over subsequent years the ISA should grow differentially from the tax saving and it would probably take about another 6 months thereafter to pull ahead...[/strike]

Milarky

Just realised this was your original intention. If so it it much closer and the struck out comment at the end of the last message would apply.

2008/09 ISA

[ £1808 (from FD) + £1800 (top up) ] x 1.031 = £3720

2009/10 ISA

[£1950 (average FD balance to maturity) x 1.07 + £1650 (average non-FD balance during 12 month period) x 1(.04 x 80%) ] = 3789

£3720 + £3789 = £7509 (compared to £7513 as above)

Judith_W

Don't know if anyone is on the FD e-isa fixed. I called them and they said there was no penalty for removing the funds early. Just that interest is calculated monthly so should try and come out just after a payment.

Does this sound correct? If so it is practically an instant access ISA with guaranteed rate!

Milarky

Judith_W wrote: »

Don't know if anyone is on the FD e-isa fixed. I called them and they said there was no penalty for removing the funds early. Just that interest is calculated monthly so should try and come out just after a payment.

Does this sound correct? If so it is practically an instant access ISA with guaranteed rate!

That is correct but you are mixing the e-ISA with the Regular Saving ISA. The latter - which is the account the OP currently has - does have an interest penalty for early closure - please see their post for more details. The account you mention cannot be transferred to directly from (eg) the Regular Saver ISA for instance.