Flexible ISA fund interest withdrawal (and adding back in)

sg1009

I've just been reading a review of an ISA provider I've used for a few years and noticed there is a section on withdrawing interest and adding it back at a later date. I'll paste it below.

It never occurred to me that it's possible to take out interest payments and pay them back in at a later date in that tax year. I've often added cash in and withdrawn it later that year and added back, all in the same tax year. This seems sensible with a flexible ISA. 

With the 2024 tax year ISA rules we can add funds to multiple ISA platforms, so this idea of taking out small interest across multiple accounts seems even more appealing.

Q1. I'm sure the article is right but can anyone else back this up or do it?
Q2. Long shot, but can unallocated cash from previous tax years be withdrawn and added back in again? (and not counted as this tax year allocation)


The article Re: ISA:
What more do I need to know?

With the minimum you can invest in a loan being £1,000, you might sometimes find money waiting to be allocated for a while, as you accrue interest to be allocated again. Some investors withdraw their cash and earn higher interest while waiting for the next opportunity.

In the IFISA, it’s not quite as easy, but still doable. At least one investor using the IFISA figured out the solution.

The investor was earning over £100 interest per month. He elected for the platform to pay out the interest to his bank account automatically.

Since the ISA is “flexible”, it means you’re allowed to take money out that you have put in during the current tax year, and yet put it back in during the same tax year without losing any of the current year’s ISA allowance. So, before a tax year ends, he’s earned over £1,000 in interest that he returns to the ISA.

So long as you top up with at least £1,000 in new ISA contributions each year, you’ll be able to keep doing this technique for a long time.

Investors see a running total of the amount paid out in their account, so they can keep track of what they’re allowed to put back in. And you get an email reminder towards the end of the tax year.

masonic

It doesn't matter whether the money that is flexibly withdrawn is capital or interest. This example is no different than setting up a standing order / drawdown arrangement on an account that supports that. IFfy ISAs often suffer from cash drag when P2P loan origination doesn't keep up with demand, which is probably why so many providers felt it was necessary to make their ISAs flexible.

sg1009

I think what I'm finding hard to decipher from the article is about whether it is previous tax years' money and interest. I'm reading into this that his interest is from previous tax years' investments.
I was always under the impression that any interest or cash from a previous tax year can't be withdrawn without it losing the ISA wrapper and then being counted as new money in this tax year as it is added back in.

'So long as you top up with at least £1,000 in new ISA contributions each year, you’ll be able to keep doing this technique for a long time.'

- Implies to me that it happens year after tax year.

Martin's golden rule in 'Never take money out of an ISA or it will lose the wrapper' (ISA transfers aside)

slinger2

Martin's golden rule doesn't really apply to flexi ISAs. For flexi ISAs any cash can be withdrawn and paid back in later in the same tax year (for "new" money there's other options too)

The idea here is that the interest is paid out but, because it a flexi ISA, it can paid back into the ISA later in the same tax year. I don't really see that it's any different to having the interest added to the ISA and then withdrawing it. Maybe its an issue relating to the specific type of account (IFISA).

masonic

Flexible withdrawals can be of current year subscriptions, previous year subscriptions, or income on either. It doesn't matter the source of the money, but withdrawals are first treated as coming from current year subscriptions until depleted and subsequently from previous year subscriptions. Current year subscriptions can be replaced in any valid ISA whereas previous year subscriptions must be returned to the same ISA. It is no more complex than that.

Flexible ISAs have broken Martin's rule since their Inception.