ISAs: Frequently Asked Questions (FAQs)

rb10

I thought it might be useful to have a FAQs thread for ISAs, as particularly at this time of year, the same old questions are coming up time and time again on the ISA board, and so many people are having to answer each one individually, when so many are similar.

So here are some FAQs, and their associated answers. Please post below if there are any inaccuracies, or if you have anything to add.

Notes:
1. It is assumed here that if you transfer from one ISA to another, you will transfer the whole balance of the ISA (i.e. all the money that you have paid in, plus any interest that has been paid, or earnt but not yet paid). (It is also possible to only transfer a certain amount of it, but for simplicity, that will be ignored here.)
2. This post only refers to Cash ISAs. A further sum of money can also be placed in Stocks and Shares ISAs, but again, for simplicity, this will not be discussed in this post. Different rules apply if you invest in a S&S ISA.

1. What is my annual allowance?

Your allowance for 2010/11 will be £5100.
But what does this mean? It is the amount of money that you can add into an ISA during the tax year (6th April 2010 - 5th April 2011).
It does not include transfers from one ISA to another (where these are done using the banks' ISA transfer system), but only where you contribute new money into an ISA.

2. What are the best rates?

See a list of the top ISAs here. This post is regularly updated.

3. What are my options if ...

a. ... I do not have any ISAs

You can open one now, with any amount up to your annual allowance.

b. ... I have at least one existing ISA, and the last time I paid any money into it was on or before 5th April 2010

Transferring your ISA elsewhere: You can transfer your ISA(s) to any other account, provided that the new one accepts transfers in (this will be specified in the T&Cs). To transfer, you will need to request an ISA transfer form from the new provider. It is also generally possible (subject to individual providers' T&Cs) to 'merge' multiple ISAs, so that more than one ISA can be combined into just one account.
Adding your 2010/11 allowance: You can either:
(i) Add your allowance into an existing ISA now; or
(ii) Open a new ISA, and add your allowance into this account.
If you choose (ii), then it's up to you whether you transfer your existing ISA into this same account (and so end up with just one ISA, containing the current years' and previous years' funds), or add your 2010/11 allowance to Account A, and transfer your old ISA to account B, ending up with two separate accounts. Both are permitted under the ISA rules. (The advantage of having two separate accounts is that some banks offer higher rates on accounts that do not permit transfers in - so you can put your current allowance in a higher rate account.)
Notes:
(i) If for the whole of the last full tax year (i.e., as of April 2010, the last full tax year was 09/10) you didn't pay any new money into the account, then it will need to be reactivated before you can use it again. This is usually done by filling in a simple form from the bank. After you have done this, then you can use the account as normal.
(ii) Your entire 2010/11 allowance (or as much of it as you wish to use) must all go into the same account (although payments into the ISA can be spread throughout the year). This means that you cannot, for example, put £3000 in Account A and £2100 in Account B. However (just to make it more complex!), it is permitted to pay £3000 into Account A, then transfer this in full to Account B, and add the remaining £2100 then.

c. ... I have at least one existing ISA, and have paid some money into it since 6th April 2010 (but have not used my whole allowance)

Transferring your ISA elsewhere: You can transfer your ISA(s) to any other account, provided that the new one accepts transfers in (this will be specified in the T&Cs). To transfer, you will need to request an ISA transfer form from the new provider. It is also generally possible (subject to individual providers' T&Cs) to 'merge' multiple ISAs, so that more than one ISA can be combined into just one account.
Adding the remainder of your 2010/11 allowance:You can add this either to:
(i) The same account that you have already paid money into this tax year. This can be done at any time up to 5th April 2011; or
(ii) If you transfer the existing ISA elsewhere (the one that you have paid into this tax year), then you can add the remainder of your allowance there, after the transfer has taken place.

d. ... I have used up my whole allowance for 2010/11

Transferring your ISA elsewhere: You can transfer your ISA(s) to any other account, provided that the new one accepts transfers in (this will be specified in the T&Cs). To transfer, you will need to request an ISA transfer form from the new provider. It is also generally possible (subject to individual providers' T&Cs) to 'merge' multiple ISAs, so that more than one ISA can be combined into just one account.
You cannot pay any new money into an ISA now. You will need to wait until 6th April 2011. This means that you cannot now open accounts like the Santander/A&L Flexible ISA (which does not allow transfers in, and is only for new money).

4. I've read that if I withdraw money from an ISA, I lose "tax-free benefits". What are these?

The reason why you should avoid withdrawing cash from an ISA depends on your own circumstances...
I need the money to buy something or to pay off debt. Then you will not lose anything by withdrawing the cash from the ISA. All interest that you have received, and any that is still due to be paid, will be entirely free of tax.
I want to put the money into a normal savings account. Even if in the short term, you can get a higher net rate in the normal savings account than on an ISA, it's worth looking to the longer term as well. If you waste your 2010/11 allowance, then you cannot use this again. Over time, it's possible to build up a substantial amount of money in ISAs, all earning tax-free interest.
I want to put the money in a different ISA. This is the key place where tax-free benefits are lost. By doing this, when you pay the money into the new ISA, it counts as part of this year's allowance; whereas if you transfer it (using the banks' transfer system), then it doesn't impact on your allowance at all. (Note: It is technically possible under HMRC rules to 'self-transfer', where you close the old account and open a new one; however, I would personally stay away from this as bank staff are unlikely to know about it. There is a description in post 11 of this thread.)

5. I am not a taxpayer. Should I open an ISA now?

Again, this depends on your own situation.

If you never expect to pay tax, then it may not be worth it (unless you can get a higher rate in an ISA than the gross rate in a normal savings account).
If you expect to become a taxpayer in the future, then it is often worthwhile to begin moving your savings into ISAs as soon as possible. This means that by the time you start paying tax, you can have a greater proportion of savings in ISAs. Whether or not to do it depends on how much you have in savings, and how soon you expect to become a taxpayer, e.g. if you have £10k in savings and expect to pay tax in two years, then it's worth starting an ISA now (as you'll have just short of £9k in an ISA when you start paying tax, if you start now). But if you have, say, £3k in savings, then there is little point in opening an ISA (unless the rate is better than on a 'normal' account), as when you do become a taxpayer you can immediately move all the money across to an ISA.

6. I want to transfer money into a new ISA. This account has a minimum opening balance of £x, but I don't want to/can't pay this in. What do I do?

Although many accounts state a minimum balance, this is normally just for new money, and so it will (in general) be fine to open it with £0, and then transfer in.

7. I want to transfer to a new ISA, but not add any new money. The application form says something like "I have not subscribed to another ISA and will not subscribe to another ISA", but I have subscribed (i.e. paid money) to another ISA this year. What do I do?

Ignore it. I'm serious here, what you want to do is fine, and follows the HMRC ISA rules to the letter.

8. Any other questions?

Post them below and someone will answer them for you!

Lokolo

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

Sometimes depending on your cookies, when openning the thread it won't take you to the first page.

Other than that, nice one, try and get is stickied.

rb10

Lokolo wrote: »

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

Sometimes depending on your cookies, when openning the thread it won't take you to the first page.

Ok, I haven't had that problem myself, but have changed it over to the one you suggest.

Thanks

dazeruk

rb10 wrote: »

b. ... I have an old ISA, but the last time I paid any money into it was before 6th April 2009

Adding your 2009/10 allowance: You can either:
(i) Add your allowance into the existing ISA now; or

(ii) Open a new ISA, and add your allowance into this account.
If you choose (ii), then it's up to you whether you transfer your existing ISA into this same account (and so end up with just one ISA, containing the current years' and previous years' funds), or add your 2009/10 allowance to Account A, and transfer your old ISA to account B, ending up with two separate accounts. Both are permitted under the ISA rules. (The advantage of having two separate accounts is that some banks offer higher rates on accounts that do not permit transfers in - so you can put your current allowance in a higher rate account.)

Adding your 2010/11 allowance: This can be added to any existing ISA that you hold (provided that the Terms and Conditions of that account allow additional deposits), or you can open a new account in the new tax year, and add your 2010/11 allowance into that account.

If you don't subscribe to an ISA for a full tax year, the account has to be reactivated before any new subscriptions can be made to it.

rb10

dazeruk wrote: »

[/INDENT]If you don't subscribe to an ISA for a full tax year, the account has to be reactivated before any new subscriptions can be made to it.

Thanks, hope the addition below (added to post one) is clear:

rb10 wrote: »

Note: If for the whole of the last full tax year (i.e., as of Feb 2010, the last full tax year was 08/09) you didn't pay any new money into the account, then it will need to be reactivated before you can use it again. This is usually done by filling in a simple form from the bank. After you have done this, then you can use the account as normal.

Paul_Herring

For everyone, your allowance for 2010/11 will be £5100

Any particular reason you've totally ignored the equity half of ISAs?

rb10

Paul_Herring wrote: »

Any particular reason you've totally ignored the equity half of ISAs?

Just to keep things simple ... the majority of the population will only be interested in Cash ISAs, and so do not want to be bogged down with discussion about S&S ISAs.

That discussion has its place, but I think it should be kept separate from this thread.

Thanks for your comment though - I have edited the first post to make it clear that the contents only apply to Cash ISAs.

LauraJayne_2

What if I was to have two old ISAs, say one from 08/09 and the other 09/10. Could I transfer both into a single ISA and then add 10/11 allowance on the 6th April?

Thanks

RayWolfe

Yes you can.

KingL

bump thread.

rb - maybe you add put the string "FAQ" in the title line so that this shows up on a title search for FAQ ?

jamesd

rb10 wrote: »

I want to put the money in a different ISA. This is the key place where tax-free benefits are lost. By doing this, when you pay the money into the new ISA, it counts as part of this year's allowance;

This is a partially inaccurate claim for cash ISAs. You're permitted to withdraw all money from a cash ISA and pay it in to another cash ISA in the same tax year even without using a transfer form. You are permitted to do this only once per tax year. The only non-accidental case where this is useful is to pay into an account that doesn't accept transfers in. It's particularly useful at this time of year when new accounts that don't take transfers in can be introduced.

As I pointed out in our earlier discussion, the ISA rules are perfectly clear about this, complete with examples saying what happens:

12.30 says:

"ISA investors must transfer their ISAs through the ISA manager. Investors cannot
transfer an ISA by closing it and opening a new ISA with the new ISA manager
(commonly known as ‘self transfer’)."

and then 12.32 introduces the exception:

"However, where
• the investor subscribes to two cash ISAs, in the same tax year, and
• subscriptions to the first ISA subscribed to were valid, and
• the first ISA subscribed to was closed (see paragraph 12.33) before
subscriptions to the second ISA were made
the subscriptions to the second ISA may be valid (see paragraph 12.32a)."

which is limited by 12.32a:

"The first cash ISA to be self-transferred in tax year is valid, and need not be
repaired.
The second (and any subsequent) self-transferred cash ISA is not valid and is not
eligible for repair."

and 12.33 clarifies that taking all of the money out is enough to close the ISA and then goes on to give the examples I gave earlier:

"An cash ISA is closed for this purpose when all the funds held in the ISA are withdrawn (including any subscriptions for earlier years) and no further subscriptions are made to the ISA in the same tax year."

Here are the examples that HMRC gives:

"Mrs Cooper subscribes £3,000 to a cash ISA with Anybank plc on 20 April 2008. She closes it on 30 November 2008, then subscribes to a second cash ISA with Betterhomes Building Society on 3 December 2008. The subscriptions to the second cash ISA are valid."

Seems easy enough: close the first and put the money into the second.

"On the same day Mrs Jones subscribes £3,000 to a cash ISA with Anybank plc. She closes it on 30 September 2008, then subscribes to a second cash ISA with Betterhomes Building Society on 3 November 2008. She closes it on 15 February 2009, then subscribes to a third cash ISA with Superiorhomes Building Society on 23 February 2009. The subscriptions to the Betterhomes Building Society cash ISA were valid, but the subscriptions to the Superiorhomes Building Society cash ISA are not valid and are not eligible for repair."

But don't do it more than once.

"Mr Johnson subscribes £3,000 to a cash ISA with Betterhomes Building Society in August 2008. In March 2009 he subscribes £3,000 to a cash ISA with Superiorhomes Building Society. None of the subscriptions are used to purchase insurance products. The subscriptions to the Superiorhomes Building Society are invalid, but repairable. The total subscriptions are £6,000, which exceeds the £3,600 cash ISA subscription limit. The excess subscriptions of £2,400 must be removed from the Superiorhomes Building Society ISA, but the other £600 subscriptions can be repaired."

And don't go over the limit, after adding back what you took out of the first one, or some will be invalid and later HMRC will notice can invalidate the part that's over the limit, so the extra money is returned to you.

You should use the method in the next post in preference to this one if you can. This self-transfer rule is really intended for recovering from mistakes, while the transfer to S&S ISA as cash then withdraw cash is normal working of ISAs, not something intended for error recovery.