How to make the most of your Isa

It is much easier to transfer your account than you may think

MANY consumers are aware of the benefits that come with an individual savings account (Isa). You won’t pay capital gains tax on your Isa investments, nor will you pay income tax on your Isa savings, and you don’t have to mention Isas on your tax return. But in this tough economic climate, it is important to ensure that you’re getting the best interest rate, and that you’re not paying unnecessary charges on your shares Isas. Cash Isa rates are constantly changing, meaning the best buys a few years ago could now be giving you measly returns.

So with the end of the tax year fast approaching, now is a good time to review your investments to take full advantage of the tax breaks available to you. Not all cash ISAs accept transfers in, especially the top paying ones. But some do, and transferring is both quick and easy. But there are a few things to bear in mind before making the move.

As cash Isas are generally variable rate, MoneySavingExpert recommends checking every six months that your rate is still competitive. If not, transfer to a better payer, or you could look to a fixed rate account. This is particularly appropriate if you’re happy to put cash aside – but you will run the risk of rates improving in the meantime.

Be aware that the “self-transfer” of Isas isn’t allowed. If you withdraw the Isa and move it yourself, it will lose its tax-free status. Instead, you need to speak to your new provider and complete a transfer form, which should include a note you can send to your existing Isa company. More often than not, your new company will then take care of everything, including transferring the money for you.

Transferring your Isa will only be beneficial if the costs are not too prohibitive. Christina Bridge of the Investment Management Association highlights two fees to watch out for on stocks and shares Isas – dealing fees, covering the cost of the outgoing manager selling securities and the new manager purchasing securities so you can leave and enter the funds; and a transfer fee that may be charged by the outgoing manager to process your switch. A small fee from your current provider may not affect you too much, but a higher penalty could mean the financial gain from switching is negated by the transfer charge.

Existing Isa balances must be transferred in full, but you have the option to transfer all or part of any Isa savings from previous tax years to a new provider. It isn’t possible to transfer money from a stocks and shares Isa to a cash Isa, but you can transfer money from a cash Isa into a stocks and shares Isa. So if you do choose to move your cash into an investment Isa, you won’t be able to reverse the decision later.

Although you may want the security of a cash buffer for emergencies, bear in mind that low interest rates and high inflation means your cash Isas’s real capital value will slowly be eroded. Research by Moneyfacts has found that the average rate on an Isa now is just 1.74 per cent rate, compared with 2.55 per cent this time last year. Stocks and shares Isas offer the possibility of greater long-term returns – provided you are “prepared to accept the risk to your capital, and the fluctuations in income that investments produce,” says Catherine Penney, vice president of Barclays Stockbrokers.

But if your risk appetite is fairly low, you do have the option of corporate bonds or gilts, less volatile investments that will still generate regular interest. These can be “useful to supplement pensions in retirement,” adds Penney. But, says Jason Hollands of BestInvest, “yields are currently low and valuations high, so they may not be such a ‘safe haven’ after all”.

With many Isa providers charging an annual management fee, consolidation could be a good option. Having your Isas – and other investments like unit trusts or Sipps – in a single account means charges could be reduced and it will give you better control of your investments. You can login online to see valuations, performance analysis, and you may be able to adapt your portfolio to capitalise on changing market conditions. If you do decide to make changes, they can then be enacted quickly and easily.

In contrast, “if you hold your investments in multiple Isa accounts with different providers, you may find you are limited in each to switching into another fund offered solely by that provider,” says Hollands. Make sure, however, that consolidating multiple old cash Isas doesn’t push your combined savings with one financial institution over £85,000, as that would put your funds over the government’s deposit insurance scheme’s limit.

BestInvest’s Spot the Dog guide has highlighted that a large number of investors have billions stuck in poor- performing investment funds and many more in pedestrian investments that could be upgraded. So don’t let inertia stop you from taking action: there is no need to stick with poor returns when a few forms will enable you to move elsewhere.