Contractors' Questions: How do I switch my ISA?
Contractor's Question: I'm unsure if I'll want to transfer my ISA to another provider as I've just got it settled to take advantage of the extra allowance for the over-50s. However if a rate of interest on a new ISA emerges which I can't refuse, what is the most tax-efficient way of switching my account?
Expert's Answer: You can (currently) save up to £7,200 in an ISA with up to £3,600 in cash. As you know, if you are over 50 years-old you can invest up to £5,100 into a cash ISA and £10,200 in total. These savings pots are a fantastic way to maximise your investment potential as gains are tax free.
Unlike you, some contractors are unaware that they can transfer existing ISAs into another ISA without incurring any tax penalties. Many of us have several ISA pots that we have invested in over the years and whilst this is perfectly fine, you may find it beneficial to transfer them into one, easy to manage account.
Not only could the potential for growth be much bigger with a single ISA wrapper but it will also be much easier to keep track of your money and determine how competitive your ISA account is.
Whether or not you need to transfer your ISA will depend on your individual circumstances, including how much you have saved in ISAs over the years. For example, if you had started saving even just the cash allowance when ISAs were first introduced in 1999, then you could have over £40,000 invested now.
Whilst cash ISA rates are generally quite low at the moment due to the low base rate, it is still worth shopping around to find a better rate. Just 0.2% extra interest on an ISA holding of £20,000 would give you an extra £40 in interest each year so a small change and this will compound over the years to make a big difference to your potential total return.
If you will not require the funds in the short term then you could also consider switching from cash into an equity ISA instead. Over the longer term, history shows us that asset backed investments outperform and, with expectations of inflationary pressures to come, it could be wise to take this opportunity to revisit the choice of cash over stock market based ISAs. Inflation can be toxic for deposit based investments.
Transferring an ISA is simple but you must exercise caution. It would be disastrous for you if you closed your existing ISA account and then tried to move the money as you would lose the tax breaks available. This is because you are only able to contribute a maximum of £3,600 (£5,100 if you are aged 50 or over) into a cash ISA each year and withdrawing your money to pay into a new ISA would count towards this limit.
Instead, you should complete an ISA transfer form to provide the details of your old ISA so that the new provider can sort out the transfer for you. It is worth bearing in mind that ISA transfers are accepted by approximately 85% of ISA providers, but you must check beforehand that the ISA you want to move to will accept the transfer.
The expert was Tony Harris, founder of ContractorMoney, an independent financial advisor to IT contractors.