With rock-bottom interest rates and stock market volatility, many ISA investors may have been cautiously weighing up their ISA transfer options.
When considering an ISA transfer, and reviewing the best ISA to transfer into, investors will likely be assessing the four main adult ISAs:
At the beginning of 2020, the Cash ISA - which is a savings product - seemed like an obvious choice for the cautious investor, albeit with interest rates at an already low of around 1.5% p.a.
Fast forward to now, with cuts to the Bank of England (BoE) base rate meaning the best returns a saver can expect to see with an easy-access Cash ISA are currently hovering around 1%.
Whilst the returns of a Cash ISA certainly look bleak, with no sight of interest rates increasing anytime soon, this type of ISA does still have its place in the market.
With all capital placed within a Cash ISA protected under the Financial Services Compensation Scheme (FSCS) to the current value of £85,000 (2020/21), the account could be seen as a safe haven for investors looking to take less risk.
However, with less risk comes lower returns, especially when compared to other types of ISA, such as the IFISA.
Stocks and Shares ISA
COVID-19 has had a detrimental effect on the notoriously volatile stock markets. With continued uncertainty - particularly around the threat of a second wave - it’s difficult to say how badly investments will be hit in the short-term.
Very few companies were able to escape the stock market falls, meaning most investors holding stock and shares in an ISA will have been affected.
However, stock market fluctuations are normal - and expected. With a Stocks and Shares ISA, investments can fall in value as well as rise, meaning you may get back less than you invested. That’s why a Stocks and Shares ISA is considered a long-term investment, because investors must be willing to allow time for any falls in value to recover (which they began to do in June, after the easing of Coronavirus-related restrictions).
A Stocks and Shares ISA offers target returns in excess of 4% over the long-term, and the opportunity to invest in defensive stocks (those of a company that has constant demand, such as supermarkets). For this reason, a Stocks and Shares ISA could be an attractive option for many experienced investors in particular.
The IFISA has been consistently growing in popularity since it’s introduction in April 2016, with over £1 billion invested to date.
The account gives investors the opportunity to hold peer-to-peer (P2P) loans and debt-based securities under the ISA tax-wrapper - something that they’ve never been able to do before - and is considered to be a form of alternative investment.
IFISAs are not correlated to the fluctuations of the stock market, and they offer target returns of between 4% and 8%. Though they have risks of their own - including no FSCS protection and no guarantee of returns - for experienced investors willing to take a higher risk in the search for higher potential returns, they’re an important ISA transfer consideration.
The IFISA also allows investors to partake in impact-investing, which creates a positive social, economic or environmental impact.
With IFISA eligible assets including property, SMEs and green energy, they’re likely to become an even more important investment consideration for experienced investors navigating their way out of the COVID-19 crisis.
Supporting small and medium-sized UK businesses is a priority throughout the current pandemic, and will continue to be so when the pandemic ends. Similarly, the building of affordable housing will need to continue due to the UK’s chronic housing shortage, and in the wake of the Chancellor of the Exchequer's stamp duty holiday, housing demand is soaring - with UK mortgage applications at a 12 year high.
Through an IFISA, investors are able to facilitate these, helping to boost the UK economy when it’s most needed.
If you know for certain that any funds in your ISA will be going towards your first home or retirement, you may consider transferring into a Lifetime ISA - the account that offers a generous 25% government bonus as well as the ISA tax wrapper.
Cash Lifetime ISAs are currently sitting at low interest rates similar to those of the Cash ISA though, with the current highest rate on offer 1.1%.
It’s also worth noting that the annual subscription limit for a Lifetime ISA - if you’re wanting to receive the government bonus - is just £4,000. This means that £4,000 is the maximum amount you’d be able to transfer from any ISA into a Lifetime ISA.
How do you transfer an ISA?
If you already hold an ISA and would like to transfer to another, you can do so by authorising your new ISA provider by completing an ISA transfer authority form. Be aware that specific ISA transfer processes may differ on a provider-to-provider basis.
Not all ISA providers allow transfers in, so before committing you should check your preferred provider’s transfer rules. IFISA providers may also not allow investors to transfer out while in the middle of the agreed fixed term.
If you’re good to go though, a guideline time-frame suggests around 15 to 30 working days for a transfer to take place - again, this is subject to change on a provider-to-provider basis.
In regards to transferring out of an ISA, it’s important to check for any exit fees. Specifically, these may apply when transferring out of a fixed term Cash ISA or IFISA before the agreed term ends (if your provider allows you to do so at all).
After completing a transfer authority form, your money will be transferred directly from your old ISA provider to your new one.
It’s important that you never attempt to transfer funds between ISAs manually, as doing so may remove their tax-free ISA status.
Transferring a Stocks and Shares ISA
There are some other rules and processes surrounding the transfer of a Stocks and Shares ISA that you should be aware of.
Firstly, if you are transferring from one Stocks and Shares ISA to another, you can either do an in-specie transfer, or a cash transfer.
A cash transfer means the investments you hold in your current Stocks and Shares ISA are sold, and the proceeds are then transferred to your new provider to re-invest as per your instructions.
An in-specie transfer means the investments held in your current Stocks and Shares ISA are retained, and simply passed over to your new provider. You stay invested throughout the process.
You can also transfer from a Stocks and Shares ISA into a Cash ISA, IFISA or Lifetime ISA. However, as Cash ISAs, IFISAs and Cash Lifetime ISAs can not hold stocks and shares, your investments must be sold before transferring.
Transferring a Lifetime ISA
The transfer rules for a Lifetime ISA are also a little different.
Firstly, the maximum amount that you can transfer into a Lifetime ISA is £4,000. This is because unlike the Cash ISA, Stocks and Shares ISA and IFISA - whose annual subscription limits are all £20,000 in 2020/21 - the Lifetime ISAs annual subscription limit for the current tax year is £4,000. Anything saved or transferred beyond this will not be eligible for the government bonus.
If you choose to transfer out of a Lifetime ISA into a Cash ISA, Stocks and Shares ISA or IFISA before you turn 60, you will have to pay a withdrawal fee of 25% - effectively removing any government bonus you have received.
What is the best ISA transfer you can make?
There is no one-size-fits-all answer to this question, it depends on your individual circumstances and investment needs.
If you’re particularly risk averse, you’re likely to find that a Cash ISA is most suitable for you.
With the rock-bottom interest rates that are available at the minute though, it’s advisable that you keep an eye on what different providers are offering to see if you could be getting a better deal.
If you know that funds in your ISA will be used to purchase your first home or save for retirement, you may consider a Lifetime ISA.
However, for those who are willing to take on more risk, an IFISA or a Stocks and Shares ISA may be a more attractive option for your ISA transfer.
The stock markets may currently look unappealing to some, but if you stick it out for the long-term you could receive some generous returns (though this is not guaranteed).
The IFISA could be a good ISA transfer consideration for experienced investors looking for a tax-efficient way of investing into alternative assets. And - as mentioned previously - on top of potential returns ranging from 4% to 8%, the offer of impact-investing is more important than ever at a time when COVID-19 has hugely affected both the economy and society as a whole.
The MAVEN Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).