ISA confusion

jibbyboo

I've currently got a Principality ISA which I opened a year ago and the interest rate is something like 3% (I can't remember exactly). So to benefit from the tax-free savings, I'm assuming that I need to put everything I can into there before 4th April, and then when the rates are lowered, transfer everything into a new ISA on a higher interest rate?

Or is the idea to open a brand new ISA before Friday and transfer my current ISA into it?

Also, I don't understand really how my money is 'safer' from tax by being in an ISA - does it just mean that it receives higher interest? And what if I withdraw it from a cash ISA bit by bit?

I have read Martin's article about ISAs but it didn't seem to answer the above questions. Thanks in advance!

jem16

jibbyboo wrote: »

I've currently got a Principality ISA which I opened a year ago and the interest rate is something like 3% (I can't remember exactly). So to benefit from the tax-free savings, I'm assuming that I need to put everything I can into there before 4th April, and then when the rates are lowered, transfer everything into a new ISA on a higher interest rate?

That's the general idea yes.

Or is the idea to open a brand new ISA before Friday and transfer my current ISA into it?

There wouldn't be much point in that unless the new ISA was paying a higher rate.

Also, I don't understand really how my money is 'safer' from tax by being in an ISA - does it just mean that it receives higher interest? And what if I withdraw it from a cash ISA bit by bit?

Interest earned is taxable at your normal rate, so 20%, 40% or 50% of the interest would be lost to tax except for savings in an ISA.

If you withdraw, whether bit by bit or as a lump sum, then you lose the tax free interest from then on if placed in a non-ISA account. You don't lose any already built up.

System

Assuming the ISA is an instant one with a variable rate, not one with a fixed term?

Fixed-term ISAs are tricky to transfer smoothly. If you move the money out before the due date, you lose interest. But you can't open a new ISA in the same tax year, so you may have a gap when the old ISA has reverted to a minimal rate.
Some providers have an easy way of doing this - Derbyshire Building Society simply have a button saying "Open a new ISA and transfer this money into it at the end of the fixed-rate period".
Lloyds however make a real meal of it - make an appointment to see a manager, open a new ISA, wait until the due date, transfer the old one.

But don't whatever you do ever close or withdraw money from the ISA - make sure it is transferred by the special ISA transfer system, not just an ordinary cash-transfer.