Why transfer and not withdraw ISA?

earthlover

Hi everyone,

I apologise in advance for my question which will probably make you all groan. I just do not understand why you cannot just withdraw an ISA and set up a new one.
I didn't know about this and I closed an ISA I had set up for my teenage son and put the cash into a better rate ISA. What did I lose by doing this? The interest was paid and I got him a better rate.

Will someone with patience please spell it out to me?

Thanks very much.

10_66

The reason why it's best not to close an ISA, and to transfer instead, is because, if an ISA is opened, and it's left in an ISA (or transferred to another ISA), it can continue year on year earning gross interest. Each year either adding to it or opening another new one. If the ISA is closed each year and you simply open another ISA, you are left with just one ISA on which you can earn gross interest, instead of an accumulated number of years worth. I hope that helps, but I'm not sure if I may have confused matters even more, but if someone else can explain better than I have, I'm sure they'll do so!

espresso

If you close down an ISA and withdraw the cash, then all the tax benefits immediately disappear, so yes you got some interest paid but not gross interest, which is the advantage of an ISA.

10_66

espresso wrote: »

If you close down an ISA and withdraw the cash, then all the tax benefits immediately disappear, so yes you got some interest paid but not gross interest, which is the advantage of an ISA.

Sorry, but just to clarify for earthlover, the interest would be paid gross, but you have then lost the opportunity of future years' gross interest on that year's contribution.

thumshie

You are only allowed to deposit a certain amount each year into an isa. So by using the same money, you loose is the ability to invest upto this limit - £3000 this year, £3600 from next year - as you're re-investing the same money.

For instance:
Scenario 1:
1. Invest £1000 on april 6th 2007
2. close account today and invest ther £1000 in a new isa today

You have now made contributions of £2000(+ the interest) this year - even though its the same £1000 - meaning you can only top up by <£1000 before april 5th 2008

worse scenarios:
Scenario 2:
1. Invest £2000 on april 6th 2007
2. close account today and invest ther £2000 in a new isa today
You've broken the regulations as you've attempted to 'invest' £4000+ in one year...

Scenario 3:
1. Invest £3000 on april 6th 2006
2. Invest £3000 on april 6th 2007
3. close account today - given £6000+ technically you can invest £0 but no institute will allow a deposit in cash of £6000 even if they think you've not subscribed this year.

So, if you were to keep closing and re-opening an isa with the same money, the highest balance you could get is £3000..£3600 from april 6th..

earthlover

Thanks very much to 10_66, thumshie and espresso for your replies, all of which have helped me understand better.

After reading what you guys say it would seem that withdrawing only adversely affects those who are in a position to pay in more each year. In my case I was investing a lump sum less than 3000 and not investing new cash each year so I suppose it didn't matter so much.

But I understand now and will know for the future.

Thanks again!

tiptoe_mouse

earthlover wrote: »

Thanks very much to 10_66, thumshie and espresso for your replies, all of which have helped me understand better.

After reading what you guys say it would seem that withdrawing only adversely affects those who are in a position to pay in more each year. In my case I was investing a lump sum less than 3000 and not investing new cash each year so I suppose it didn't matter so much.

But I understand now and will know for the future.

Thanks again!

And if you're not going to use your full allowance, your method sometimes has advantages over transfers - in that you can take advantage of "new money" only offers like Barclays 6.5%. My other half and myself are both taking one of these out this year, and as we don't have enough "new money" to fully fund them both we'll withdraw some from a pre-existing ISA instead.

tiptoe