Transferred is a and they included the interest

wrenlegs

Hi, hope someone can advice please. My husband and I recently transferred our Isas to new isas from last tax year this this - both in the same bank and the new isas remain in the same bank. They are fixed rate cash isas. Filled out the forms to transfer and the letter which has arrived to say the new isa is active shows the total invested is the original 20k plus the interest accrued at the end of the term in the last tax year. So essentially 20, 700 is now in this tax years isa. I presumed they would pay the interest into our bank accounts and transfer the 20k! I didn’t even think you could have an isa with over 20k in it. Is what they have done normal or do we need to get onto them about this? We will be opening new isas this tax year so I’m worried this will affect them.

refluxer

£20k is the limit for paying new subscriptions into an ISA each tax year - interest generated within it doesn't count towards that limit and you can hold more than £20k in an ISA, so everything you described sounds normal to me.

There's no need to think of the fixed rate ISA you opened as 'this tax year's ISA' if it's been funded with an ISA containing subscriptions from a previous tax year. This year's tax ISA(s) will be those which contain new subscriptions paid in during the current (new) tax year.

youngretired

Yes transferring ISA's do normally include the interest unless you specifically say pay elsewhere. It is perfectly fine for the interest to be included, as the £20000 limit is only for new money.

wrenlegs

I never knew that! So when we reinvest our isas, we can reinvest the interest and get interest free interest on that? In future then, if we wanted to use the interest at the end of a tax year, we instruct the bank to only reinvest £20k? Or do we HAVE to let them reinvest the interest accrued at the end of the previous tax year?

youngretired

You can even pay this years ISA allowance into the same ISA if you wished and the ISA allows it, so it would have £40700.

refluxer

wrenlegs said:

I never knew that! So when we reinvest our isas, we can reinvest the interest and get interest free interest on that? In future then, if we wanted to use the interest at the end of a tax year, we instruct the bank to only reinvest £20k? Or do we HAVE to let them reinvest the interest accrued at the end of the previous tax year?

Yes, if you don't need the interest as income and want to build a growing pot of money from which interest can be earned tax-free, then it's best to keep the interest earned within the ISA.

If you do decide you want access to some of the money, then you can simply withdraw it and transfer what remains elsewhere (provided the T&Cs of the account allow it). Just make sure you don't do this before the date of maturity of a fixed rate account, otherwise you'll pay a penalty to do so. Requesting that the maturing fixed rate ISA matures into an easy access cash ISA first (if the provider offers that option) would normally allow you to do that.

Peter999_2

wrenlegs said:

I never knew that! So when we reinvest our isas, we can reinvest the interest and get interest free interest on that? In future then, if we wanted to use the interest at the end of a tax year, we instruct the bank to only reinvest £20k? Or do we HAVE to let them reinvest the interest accrued at the end of the previous tax year?

Yes, that is the case.   There are people out there who are ISA millionaires.       One of my friends has a lot of money in ISAs, he just makes sure that he has no more than £85,000 in each banks ISA to make sure the money is protected.       As you can imagine, he was over the moon when the interest rates rocketed.

surreysaver

wrenlegs said:

I never knew that! So when we reinvest our isas, we can reinvest the interest and get interest free interest on that? In future then, if we wanted to use the interest at the end of a tax year, we instruct the bank to only reinvest £20k? Or do we HAVE to let them reinvest the interest accrued at the end of the previous tax year?

Earning interest on interest is called compounding. When you transferred your ISA, you must have asked them to transfer the whole ISA. Otherwise you would need to ask them to only transfer £20k, and it would leave the remainder in the old ISA (unless the T&Cs of the old ISA specified a minimum amount needed to remain, such as £1, then you would need to state to transfer only £19,999)

Albermarle

wrenlegs said:

I never knew that! So when we reinvest our isas, we can reinvest the interest and get interest free interest on that? In future then, if we wanted to use the interest at the end of a tax year, we instruct the bank to only reinvest £20k? Or do we HAVE to let them reinvest the interest accrued at the end of the previous tax year?

There is a sub forum just for ISA's. If you read through that it is a good way to get up to speed with all these kind of issues.
ISAs & tax-free savings — MoneySavingExpert Forum

jimjames

Peter999_2 said:

wrenlegs said:

I never knew that! So when we reinvest our isas, we can reinvest the interest and get interest free interest on that? In future then, if we wanted to use the interest at the end of a tax year, we instruct the bank to only reinvest £20k? Or do we HAVE to let them reinvest the interest accrued at the end of the previous tax year?

Yes, that is the case.   There are people out there who are ISA millionaires.       One of my friends has a lot of money in ISAs, he just makes sure that he has no more than £85,000 in each banks ISA to make sure the money is protected.       As you can imagine, he was over the moon when the interest rates rocketed.

If you're an ISA millionaire it's definitely not from holding cash ISAs so the £85k limit is irrelevant in that instance as investments are covered differently.

Vanguard did some research and if you'd paid the maximum into ISAs since 1999 then you'd have paid in around £300,000. With interest added you'd now have around £360k. If you'd invested it in a tracker fund instead you'd have nearly £900,000.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-success/25-years-of-isas-how-much-could-you-have-made

slinger2

jimjames said:

Peter999_2 said:

wrenlegs said:

I never knew that! So when we reinvest our isas, we can reinvest the interest and get interest free interest on that? In future then, if we wanted to use the interest at the end of a tax year, we instruct the bank to only reinvest £20k? Or do we HAVE to let them reinvest the interest accrued at the end of the previous tax year?

Yes, that is the case.   There are people out there who are ISA millionaires.       One of my friends has a lot of money in ISAs, he just makes sure that he has no more than £85,000 in each banks ISA to make sure the money is protected.       As you can imagine, he was over the moon when the interest rates rocketed.

If you're an ISA millionaire it's definitely not from holding cash ISAs so the £85k limit is irrelevant in that instance as investments are covered differently.

Vanguard did some research and if you'd paid the maximum into ISAs since 1999 then you'd have paid in around £300,000. With interest added you'd now have around £360k. If you'd invested it in a tracker fund instead you'd have nearly £900,000.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-success/25-years-of-isas-how-much-could-you-have-made

Of course it depends what tracker you pick. I had a pension fund from about 1999 that I put 20% in FTSE, 80% overseas. 20 years later the 20% in the FTSE had turned into 10% of the total. So I abandoned the UK completely and now I'm 100% overseas in that pot.