Kieran HomerAug 16, 2019
A question that people frequently ask is: can I transfer my ISA to another provider?
The short and simple answer is: yes.
The longer, and more complicated answer is: yes, as long as you follow the ISA transfer rules.
How to transfer your ISA?
If you’ve invested in one ISA and would like to transfer into another, you can do it easily by authorising your new ISA provider by completing an ISA transfer authority form. Your money will then be transferred directly from your old ISA provider to your new one. The form should take between 15 and 30 days to process. You may be subject to transfer fees or early termination penalties. You should never attempt to transfer funds between ISAs manually, as doing so may remove the tax-free ISA status of those funds.
A more difficult question is: which is the best ISA transfer I can make?
Which is the best ISA transfer you can make?
That really depends on your individual circumstances and investment needs.
There are a variety of different types of ISAs available and many ISA providers. ISAs were introduced in 1999 to encourage saving and investment by offering generous tax breaks, so that, through an ISA, you can invest up to £20,000 a year without paying tax on the investments.
There are seven types of ISA accounts: Basic ISAs; IFISAs; Junior ISAs; Inheritance ISAs; Help To Buy ISAs; Flexible ISAs; Lifetime ISAs. Five of these are for specific investment circumstances, so we’ll just look at the first two.
Basic ISAs can be Cash ISAs, Fixed Rate ISAs or Stocks & Shares ISAs.
With a Cash ISA your investment is in the form of cash and you receive tax free interest on it, It’s the same with a Fixed Rate ISA, except that here you commit to locking your money away for a fixed term, typically between one and five years, in return for a fixed rate of interest, which will usually be higher than you can get in a simple Cash ISA.
With a Stocks & Shares ISA, your money is invested in company shares and in government and corporate bonds. Your investment can earn a return from dividend and interest payments, as well as any capital gains. The rates of return will typically be higher than those available in either of the two types of Cash ISA.
IFISAs, or Innovative Finance ISAs, which were introduced in 2016. They were set up in response to the growing peer to peer lending market and more investors taking advantage of the opportunities offered by high growth businesses raising funds on online platforms. But they had to declare their income from these investments, typically through their self–assessment return, and any gains were taxable.
However, with IFISAs, investors can use some, or all, of their annual ISA investment allowance to lend funds through the peer to peer lending market and buy other debt based securities, getting the ISA tax advantages. These securities can include property bonds, issued by a company to fund property projects, including the purchase of land or properties, development finance and planning finance. They are typically held for fixed period, of say to two to five years, and carry a fixed rate of interest, which can be paid to the holder regularly or rolled up to be paid over at maturity, along with the face value of the bond.
Which type of ISA would best suit you and therefore which would be the best ISA to transfer into depends on a couple of factors.
Which type of ISA would best suit you?
The first is your attitude to risk. People have different attitudes to risk and their different risk profiles will lead to different investment strategies. A rule of thumb is that the lower the element of risk that an investment carries, then the lower the rate of return it is likely to give. Investors always want to maximise their returns, but they will also have an eye on the risk. If the risk of loss is too high, then they may see the potential return as not being worth it.
In terms of ISAs, the most secure is the Cash ISA. There’s no risk of a company going bust or failing to pay a dividend or of stock market collapse. But, the investment will only earn around the market rate of interest. A Fixed Term ISA will pay a better rate of interest but there is a slightly greater risk, in that inflation might rise above the fixed rate.
Stocks & Shares ISAs can bring greater returns, particularly when stock markets are rising, but that’s not always the case and the investor can suffer serious short term losses.
IFISAs sit between Cash ISAs on the one hand and Stocks and Shares ISAs on the other in their balance between risk and reward. They’ll usually pay a better rate of return than a Cash ISA, while having a greater element of risk, but they can be more secure than a Stocks & Shares ISA, even if they tend to pay a lower rate of return. Also property bonds held in an IFSA may be secured against the asset whose acquisition or development they were issued to fund.
However, even if an IFISA is asset backed, an economic downturn could affect returns and you may not get back the amount invested. In the event of default the security held doesn't guarantee the return of your capital. Enforcing your security may take time and your returns may be delayed. Investment isn’t covered by the Financial Services Compensation Scheme (FSCS).
Another factor to take into account is the importance of diversification in your investment portfolio. A diversified spread of investments across asset classes, industrial sectors and geographical areas will limit your exposure to loss. The variety of types of ISA accounts available presents great opportunities for tax efficient diversification.
Finally, in deciding on the best ISA to transfer into, you should do some research into the various ISA providers.
Does the provider have an online platform where you can view the progress of individual investments? Has it been established long and has it featured in the media? Does it have a track record in managing the kind of investment you’re considering?
All providers have a minimum investment allowance. Consider what’s affordable.
With fixed term ISA bonds in an IFISA, the investor can put together a diversified portfolio containing a number of bonds, paying at different intervals and with different maturity dates. Always ensure you don’t tie up all your capital so that there’s none available for an emergency.