Bizarre ISA Allowance Question

AP3

Hi All,

I have a fixed term ISA with Barclays. This account offered to either pay me the interest into the ISA at maturity, or pay the interest monthly into another account. I chose the latter, as I can then put it into another account and earn interest on it. (I know this sounds bizarre, but this is exactly how it's working)

The downside of this would have seemed to have been that the interest has left the ISA wrapper, which I was fine with.

However, in the Barclays app, in their "Wealth Hub" section, it showed me as having unused ISA allowance. This didn't make sense, as I had put in £20k in this tax year.

Further investigation showed that every time I get paid interest out of the ISA, my "unused" ISA allowance increases by the amount of interest paid.

I called the Barclays Premier team and asked if this was genuine, and if I could use this "unused" allowance, assuming that it was a bug in their software.

The chap made quite a few calls while I was on hold, then came back and told me that I COULD use the "unused" allowance, and transfer the cash into the ISA up to this newly expanded limit.

Does this make any sense at all?

If I didn't have the interest paid out monthly, then it would have remained in the ISA, but how can I have had it paid out, and then be able to pay it back in without penalty?

I'm very confused.

eskbanker

If it's a flexible ISA, these allow money to be withdrawn and then replaced without counting as new contributions, so this is usually reflected as unused allowance:

https://www.moneysavingexpert.com/savings/flexible-isas/

PRAISETHESUN

Interest added to an ISA by the provider doesn't count towards the annual limits, so I imagine from Barclay's end they might be viewing it as a flexible ISA that you are making monthly withdrawals from. Not sure if withdrawing the interest monthly rather than letting it compound in the ISA wrapper is the better option though.

AP3

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

slinger2

It's a strange product if it pays the same interest rate for monthly interest as it does for annual interest.

As noted the other aspect implies that it's a flexible ISA. You'd need to replace any withdrawn money in the same tax year.

SadieO

AP3 said:

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

But it will carry on earning compound interest if left in the ISA, won't it? 

eskbanker

SadieO said:

AP3 said:

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

But it will carry on earning compound interest if left in the ISA, won't it? 

Yes, and the monthly interest rate will be calibrated to be lower to reflect that, i.e. if leaving the interest in the account to compound, the overall interest earned will be the same as if it had been paid annually, rather than this being some cunning money-making wheeze to earn something extra!

OP - if you look at the summary box for the product, you should see an AER figure, plus two gross rates, one for annual interest (should be same as AER) and one for monthly (lower than AER)....

Albermarle

AP3 said:

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

But if you left it in the ISA, you would also get interest on interest, so you are not gaining anything by withdrawing it and putting it back again.

AP3

eskbanker said:

SadieO said:

AP3 said:

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

But it will carry on earning compound interest if left in the ISA, won't it? 

Yes, and the monthly interest rate will be calibrated to be lower to reflect that, i.e. if leaving the interest in the account to compound, the overall interest earned will be the same as if it had been paid annually, rather than this being some cunning money-making wheeze to earn something extra!

OP - if you look at the summary box for the product, you should see an AER figure, plus two gross rates, one for annual interest (should be same as AER) and one for monthly (lower than AER)....

Here's the current version of the product. Same rate for both: https://www.barclays.co.uk/premier-banking/1-year-flexible-cash-isa/

AP3

Albermarle said:

AP3 said:

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

But if you left it in the ISA, you would also get interest on interest, so you are not gaining anything by withdrawing it and putting it back again.

Albermarle said:

AP3 said:

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

But if you left it in the ISA, you would also get interest on interest, so you are not gaining anything by withdrawing it and putting it back again.

The interest in the ISA would only compound yearly, and it's a 1 year fix...

eskbanker

AP3 said:

eskbanker said:

SadieO said:

AP3 said:

Thanks folks, that looks like it!

PRAISETHESUN the reason I took Monthly is so I could stick the interest paid into a different account, where it could also earn interest.

So essentially I'm earning extra interest, on the ISA interest, and then it seems I can pay the ISA interest back into the ISA and keep the extra interest!

That was a lot of "Interest"'s

But it will carry on earning compound interest if left in the ISA, won't it? 

Yes, and the monthly interest rate will be calibrated to be lower to reflect that, i.e. if leaving the interest in the account to compound, the overall interest earned will be the same as if it had been paid annually, rather than this being some cunning money-making wheeze to earn something extra!

OP - if you look at the summary box for the product, you should see an AER figure, plus two gross rates, one for annual interest (should be same as AER) and one for monthly (lower than AER)....

Here's the current version of the product. Same rate for both: https://www.barclays.co.uk/premier-banking/1-year-flexible-cash-isa/

I'd forgotten the point that you mentioned at the start about how monthly interest had to be paid out rather than left in the account to compound!

Having said that, if it's a flexible ISA with no deposit restrictions throughout the term, the monthly interest can just be returned straight into the ISA to compound, thereby exceeding the stated AER....