losing tax benefit when tranferring ISA?

macelee

People always say "never withdraw money from your ISA" or you lose the tax benefit immediately. Not sure what that exactly means in the following situation:

I am thinking of transferring money from a cash ISA account into a stock/share ISA. The transfer procedure appears to be very complex and may take a long time to complete.

Assuming that the amount in my cash ISA is less than the ISA allowance £15000 for this tax year, and I do not plan to add any more money into the stock/share ISA later this tax year, do I actually lose anything by simply withdrawing the cash from the cash ISA and then pay that into the stock/share ISA?

I understand I simply lose some of the allowance which I will never use anyway. Is that correct?

Thanks for your answer!

Archi_Bald

Your understanding is absolutely correct. The "never withdraw" mantra stems from the times when the annual allowance was a lot lower than it is now, and for many people it now makes sense to withdraw and then put the funds into a new ISA.

westy22

Both you and Archi Bald are correct but I cannot see why the transfer should be long and complex - I have done a number of Cash ISA to S&S ISA transfers in the last 2 years and the cash has moved successfully within about 10 days in all instances.

TrustyOven

westy22 wrote: »

Both you and Archi Bald are correct but I cannot see why the transfer should be long and complex - I have done a number of Cash ISA to S&S ISA transfers in the last 2 years and the cash has moved successfully within about 10 days in all instances.

But why 10 days?
Why not 1 day?
Why not 2 hours?

We now live in a world of electronic financial transactions, can watch HD video in real-time (no need for buffering like in the 90s), can chat with people half-way round the world in realtime, and yet doing cash ISA transfers take 10 days?

Makes no sense.

bowlhead99

TrustyOven wrote: »

But why 10 days?
Why not 1 day?
Why not 2 hours?

We now live in a world of electronic financial transactions, can watch HD video in real-time (no need for buffering like in the 90s), can chat with people half-way round the world in realtime, and yet doing cash ISA transfers take 10 days?

Makes no sense.

Because the cost to the industry of having every stockbroker and fund platform and bank using 100% compatible systems just so they could interface better with each other during the rare occasion when someone moves a cash ISA into a S&S ISA or vice versa, would be millions and millions. This would first be paid by the individual providers and ultimately be paid by consumers and in practice the consumers do not want interest rates to fall or annual fees to go up, just so they can get a faster transfer.

Four years ago when the OFT instigated a drop in cash ISA transfer time limits from 30 days to 15, the thinking went like this:

- The new manager has 5 days to contact the old manager,
- The old manager has 5 days to transfer the funds and associated paperwork to the new manager
- Then the new manager has 3 days to credit the funds to the new account.
- And 2 days was allowed for time in the postal system

When this came in, some banks were not really affected because they already had systems and processes to handle the transfers in those timescales. For others, they had to change their systems or staffing to accommodate. What you're looking at with a cash ISA to S&S ISA transfer is all the banks and building societies and credit unions working with all the various stockbrokers and platforms to handle the movement of cash, crediting to nominee accounts and keeping all the HMRC paperwork and reporting in order.

They all use entirely different systems and methods and are not set up for 'straight through' processing. And remember if there's a maximum or average time expected, it will have to include the slowest organisation in the industry to be transferring to or from the second worst organisation in the industry. Some of the transfers will be quite a lot quicker.

There's a bunch of manual stuff that happens behind the scenes, to do a transfer. Due to the need for HMRC compliance, the customer can't just go online to his existing ISA and fire out a payment to wherever he likes. In any case, many ISAs are not even available to access online.

Instead, you give an instruction to your new provider, generally with a physically signed form. The new provider prepares for the transfer and has to get the paperwork over to the old provider. The old provider has to wait for it to come through the queue of documentation, consider whether it is genuine or not by reviewing your original signature, whether it relates to current or prior year ISA holdings, perhaps how much your account might be worth if you closed it now (penalties for early closure etc) and what action to take.

Someone will then set up a payment with a whole bunch of appropriate references so that the receiver can identify that particular £1000 among the millions arriving in its account that day. And someone more senior in the organisation presumably has to review this to confirm that yes indeed those are the correct details, the money is going to the right place etc, before approving it to get paid as part of the next batch going out with other payments.

Presumably if the paperwork is approved at 9am they don't just set up a unique outgoing payment at 9.01am, it will go as part of a big batch later. And that batch of payments won't necessarily arrive in a couple of hours like a consumer 'faster payment', it might go on a slow BACS transfer on a multiday cycle. Then whenever the receiver gets cash coming in, they have to allocate it to the customer's new account (or existing account) by tying up any references for the transfer. And then they have to flag that incoming cash as available for trading.

You could improve all of this stuff by having everyone set up specialist automated systems and incurring greater expense to get money to move absolutely as fast as possible rather than as cheaply as possible. For the bank losing the customer's deposit, there is very little incentivisation to do that. For anyone receiving the customer's deposit, there is little incentivisation to do that, other than what their competitors do and what their perception is of how much the customers will really care. If a broker has a £2000pa platform fee and another is £200pa, I am going to have made my choice without worrying about whether my cash takes 3 days to arrive instead of 4.

You are right, you or I can move money from one account to another using faster payments, sometimes within minutes (although faster payments is officially 'end of next working day'). So money can move quickly. In the UK, there are about 7 billion payment transactions (BACS, CHAPS, Faster Payments) a year with a total value of £75 trillion. So physically moving money is something that can be done quite easily once someone hits the button.

If you are doing something 7 billion times a year it's quite easy to get it right. But an ISA transfer is not just about physically moving money it is about the stuff that happens before and after someone hits the button. And there are not 7 billion of those things a year.

So, you mention the internet is quite fast these days and you can fit a video conversation and an HD movie into the pipe at the same time. I'm not saying there isn't enough space in the pipe to communicate your £1000 transfer request. But the hundreds of different firms that sit either side of the transfer request have other things to do around your transaction.

Transfer ins and transfer outs are a small part of their business. Also, "Transfer Out From Us Really Quickly" is not a marketing man's dream slogan. And on the Transfer In side, once you've filled out all the account opening paperwork there's very little reason for the firm to rush you through, because he's already got you committed to send him money.

This is a rather longwinded way of saying , I don't expect 2-hour ISA transfers any time soon.

Lansdowne

TrustyOven wrote: »

We now live in a world of electronic financial transactions, can watch HD video in real-time (no need for buffering like in the 90s), can chat with people half-way round the world in realtime, and yet doing cash ISA transfers take 10 days?

Buffering is a digital phenomenon and was unheard of in the 90s when we used videotape, an analogue format. And we have been able to chat with people half way round the world in real time since the 70s. So your chronology is seriously out. But anyway neither example has anything to do with moving a valuable commodity (money) from one institution to another with proper security and record keeping at every stage. We do not require lightning speed financial transactions, we require secure and accurate financial transactions.

Archi_Bald

I think some people are seriously overreacting here. The OP asked whether there would be problems / pitfalls if they withdrew their less than £15K cash ISA funds and put them as new deposit into an S&S ISA. In their situation this is exactly the right thing to do as there would be no benefit at all to using the formal ISA transfer process and to waiting some 3 weeks or more before they can start their investment.

Assuming the cash ISA is online, OP can probably complete the entire process themselves in less than 10 minutes, using existing facilities. No need for any bank or anyone to devise new processes and systems.

bowlhead99

Well yes, the OP already got a perfect answer from you in post #2, end of thread. They were not asking why it took a while to execute a transfer inside an ISA wrapper, merely looking to understand whether there was a benefit of following that formal process if they had no way of utilising the current year allowance anyway.

However if people want to get into the whys and wherefores of how a specialist regulated financial transaction can take a while even though my telephone has more computing power than a space shuttle, that's a natural side effect of having a lively discussion forum. Next up: UK houses have had hot and cold running water for over a hundred years. Technology has moved on . So why doesn't my house have a jacuzzi? Do I complain to my builder or my local MP?