ISA woes - closing to open a non-transfer-in ISA

joshw86

I have had a cash ISA with a building society, but I want to switch to one with Nationwide so I can manage it alongside my current account.

The most attractive ISA with Nationwide to me currently is for existing customers only, and allows for instant-access. Trouble is, it doesn't allow for transfers in from external providers.

So. I know I shouldn't close down my current ISA and use the liberated cash (£5,600) to open a new one with Nationwide, so my question is: what happens if I do do that?

Do I just lose this year's accrued interest to my current ISA (it's instant access, so in theory I can withdraw the whole amount)? Do I get taxed on the interest accrued to date the instant I withdraw the balance? Do I need to wait until the next financial year to open the Nationwide ISA, even though I opened my current ISA before the current financial year?

Help!

jimjames

With the current ISA limit at £15,000 the historic advice to never close an ISA is of far less relevance now and for most people that is the best thing to do.

If you haven't opened an ISA this year then you can just close your existing one and open new one with £5600 now. There is no downside to it, the previous advice was only made as it was hard to get the money back into an ISA but that is no longer the case with bigger limits.

Are you aware that for that sort of amount you can get 5% with current accounts including one with Nationwide? I assume your ISA doesn't beat that?

Ifts

joshw86 wrote: »

So. I know I shouldn't close down my current ISA and use the liberated cash (£5,600) to open a new one with Nationwide, so my question is: what happens if I do do that?

Nothing. If the new ISA does not allow transfers in, and you don't have any new money to put in the Nationwide ISA, you can just close the old one and use the money for the Nationwide ISA you want to open.

Do I just lose this year's accrued interest to my current ISA (it's instant access, so in theory I can withdraw the whole amount)?

No you will not lose any interest if its instant access.

Do I get taxed on the interest accrued to date the instant I withdraw the balance?

No you will not be taxed, the accrued interest will be added to your Isa up to the time you close it.

Do I need to wait until the next financial year to open the Nationwide ISA, even though I opened my current ISA before the current financial year?

No you do not need to wait. You can even open a new Isa with the Nationwide for this current tax year before closing the easy access one you hold.

Whatever you do decide to do its very likely that you are getting a very low rate on the easy access Isa (esp if its a few years old) that you already hold, so probably be better to move it to a better deal.

bowlhead99

joshw86 wrote: »

So. I know I shouldn't close down my current ISA and use the liberated cash (£5,600) to open a new one with Nationwide, so my question is: what happens if I do do that?

Do I just lose this year's accrued interest to my current ISA (it's instant access, so in theory I can withdraw the whole amount)?

You won't lose any interest if it's instant access. They'll calculate interest up to the date of closure and send it to you. If the balance is £5600 at the moment but that doesn't include the interest earned on the £5600, perhaps you'll really get £5650 out, once they've calculated it. If instead your ISA was a fixed term for 2 years or something and you are going to break the terms by taking it out early, then you might lose some of the interest that they would otherwise have given you

Do I get taxed on the interest accrued to date the instant I withdraw the balance?

You don't get taxed on anything you accrued inside an ISA. Say your liberated cash is £5600 invested plus £50 interest. The £50 was and is tax free. The taxman doesn't ask how you earned it, all the earning happened inside the tax-free wrapper.

From the point the £5650 is sitting outside the ISA in a current account, it will earn interest itself(if the current account pays interest). So if it earns 5p while it's sitting in your cash account before you subscribe it to a new ISA, you will pay 1p tax on that 5p earning. But this is just you paying tax on new earnings that isn't in an ISA like everyone does. There's no tax to pay on the old £50 earnings that you earned in the ISA.

Do I need to wait until the next financial year to open the Nationwide ISA, even though I opened my current ISA before the current financial year?

You can contribute £15000 of new money into an ISA in any tax year. If you haven't contributed anything in the current tax year you still have £15,000 allowance. After you put the £5650 or whatever into it, you'll still have 9350 of subscription allowance to use up before next April.

Alternatively if you had moved the ISA by way of transfer to one of the nationwide accounts that accepts transfers (e.g. champion ISA, fixed ISA), your money would have stayed inside the ISA wrapper and never come out to go back in again.

The advantage of that would be that you'd have used £zero of your current year subscription allowance - your £5600 would simply have moved from the other bank to Nationwide, but still classified as a previous year ISA, so you'd still have £15,000 allowance for new money in the 2014/15 tax year. If you're not going to hit that limit, it doesn't matter that you took it out and used a bit of the current year allowance. You can't carry forward that allowance if you don't use it, so no harm done.

Jim is right that if you are not going to be able to max out your ISA allowances this year and next year and the year after with new money, there's no real need to keep this money inside an ISA allowance. Yes it's convenient to have it all in one place. But 1.5% in a Flexclusive ISA is not very much money to be earning. The Flexdirect current account pays 5% on the first £2500 of any balance. So if for half the month your Flexdirect was going to be sitting empty, you could instead be earning interest on £2500 of this cash at a rate that's much much more than 1.5%, even after tax.

Alternatively Lloyds have a current account paying 4% on £5k and Santander have one paying 3% on £20k. Those amounts are before tax, but 4% is 3.2% after it's been taxed and 3% is 2.4% after basic rate tax. So, by choosing to only earn 1.5% after tax, simply to "manage it alongside my current account" seems a bit of a wasted opportunity. You could get double the interest off it by keeping it at Lloyds, well worth having two logins.

Anyway, what do you mean by 'manage it'? You can't keep withdrawing and redepositing hundreds of pounds every week because that way you might hit your £15k annual limit for new money going into an ISA. If by 'manage it alongside' you just mean 'look at it and occasionally put a bit more in', you might as well have accounts with two different providers and just remember that other login password. It's not like the money is going to run off when you're not looking. It doesn't need active mangement. And the current accounts we would recommend are all instant access.

If you can double the interest rate from 1.5 net in a Nationwide ISA to over 3% net (e.g. with Lloyds) then that's over £75 a year extra being earned.

joshw86

Ifts wrote: »

Whatever you do decide to do its very likely that you are getting a very low rate on the easy access Isa (esp if its a few years old) that you already hold, so probably be better to move it to a better deal.

I'm getting 1.45% on my current ISA. It was a fixed rate, fixed term one which has since lapsed into a low rate, instant access one. The Nationwide one is 1.5%, so no real benefits there, but much easier to manage (online transfers rather than cheques).

jimjames wrote: »

Are you aware that for that sort of amount you can get 5% with current accounts including one with Nationwide? I assume your ISA doesn't beat that?

I am now. 4.89% gross for the FlexDirect account. I'm planning to take out a big chunk from my savings to fund a trip next summer, so it probably makes sense for me to transfer £2,500 (the upper imit for the 5% rate) to that sort of current account, and to shop around for the best place to stash the other £3,100, ISA or no.

Good to know that I can remove the money from my current ISA and pretty much do what I like with it without penalty. Thanks both.

joshw86

bowlhead99 wrote: »

Anyway, what do you mean by 'manage it'? You can't keep withdrawing and redepositing hundreds of pounds every week because that way you might hit your £15k annual limit for new money going into an ISA. If by 'manage it alongside' you just mean 'look at it and occasionally put a bit more in', you might as well have accounts with two different providers and just remember that other login password. It's not like the money is going to run off when you're not looking. It doesn't need active mangement. And the current accounts we would recommend are all instant access.

If you can double the interest rate from 1.5 net in a Nationwide ISA to over 3% net (e.g. with Lloyds) then that's over £75 a year extra being earned.

"Look at and occasionally put more in and even more occasionally take some out" is what I meant. I don't mind managing multiple logins, but I like the Nationwide interface, and my current ISA provider has a borderline unusable one.

Besides the ISA and Nationwide account, I have another current account with HSBC paying negligible interest and £2500 in credit. It sounds like it would make sense for me to withdraw my ISA giving me ~£8K in total, and put £2,500 in a FlexDirect current account, £5,000 in a Lloyds account at 4%, and put the remaing few quid wherever.

I'd have to do a bit of fudging (get my salary paid into the Nationwide account to hit the necessary £1,000/month payments in, and transfer some out to the Lloyds account so that it could be used for the required 2 direct debit payments/month), but that's all worth it for the interest rates.

joshw86

On that note, I notice that the Lloyds account also needs montly payments in (£1,500) to get the 4% rate. Can anyone say whether this would be an issue:

• Seed Nationwide with £2,500, Lloyds with £5,000
• Get salary paid into Lloyds to hit the monthly £1,500
• Pay 2+ direct debits from Lloyds
• Transfer £1,000 monthly from Lloyds-Nationwide to hit the latter's pay-in requirement

It's the latter step I'm unsure of: whether a standing order/one-off transfers from one current account to another would count as valid payments-in, and whether anything odd tax-wise would happen from having the same £1,000 pass through two accounts month after month. I'm totally PAYE, if that is relevant.

colsten

Sending money from one bank to another counts as valid payments in.

The Club Lloyds might not be such a good idea if you are planning on taking money out as the interest rate drops substantially on balances below £4K,

Look at adding a TSB Plus, Tesco, and may be also a Halifax Reward account.

joshw86

colsten wrote: »

Sending money from one bank to another counts as valid payments in.

The Club Lloyds might not be such a good idea if you are planning on taking money out as the interest rate drops substantially on balances below £4K,

Look at adding a TSB Plus, Tesco, and may be also a Halifax Reward account.

I'd plan to keep the balance above £5,000. Basically I'd move £5,000 of my savings and current account balance in, and have my salary paid in there and take my monthly outgoings from it. The balance would actually increase over £5,000, so I'd regularly skim the excess to put in savings or another decent current account.

Eco_Miser

If you open a Club Lloyds and are going to have a growing excess, open the matching Club Lloyds Monthly Saver, and put £25 to £400 a month there, also at 4%. Might be worth funding the whole £400 every month using savings in lower paying accounts.

There are threads about all the high interest current accounts on here, have a read to see how some people are getting 3+% on £50k - without even having a salary to pay in.