MILLIONS of consumers know all about the benefits of sheltering savings under the umbrella of a tax-free Individual Savings Account (Isa), and for good reason. However, many people are losing hand over fist on previous years’ cash Isas and paying unnecessary charges on shares Isas. Transferring both is easy; although there are a few things you should know before making the move.
WATCH YOUR RATE
Consumer Focus recently revealed that the average interest rate for cash Isas is a staggeringly low 0.43 per cent. This is because rates often plummet after the first year. To put this into an inflationary context, if you had held cash in an Isa earning 0.43 per cent from 2001 to 2010, it would have lost around 17.7 per cent of its value, based on retail price index (RPI) inflation figures. You should keep an eye on your Isas throughout the financial year. Although base rates have been at 0.5 per cent since March 2009, at some point they will go up. Because most cash Isa rates are variable, hikes in the base rate could make another provider more comparatively attractive.
KNOW THE TRANSFER RULES
The most important thing to remember when transferring an Isa is not to withdraw it. “If you take the money out and move it yourself, it will lose its tax-free status,” warns Michelle Slade of Moneyfacts. The process of transferring is easy. Martin Lewis at MoneySavingExpert.com directs investors to “speak to the new provider and fill out a transfer form. This will usually include a note you can send to your existing Isa company. Your new company should then sort it all out, including moving the money over for you.”
According to Perry Braithwaite of the Investment Management Association (IMA), “subscriptions to a stocks and shares Isa can only be transferred to another stocks and shares Isa,” while “subscriptions to a cash Isa can be transferred to another cash Isa, or to a stocks and shares Isa.” If you have some cash under an Isa umbrella, but want to move it into shares, you can do so even if you took it out this year. “This means that the investor is regarded as never having subscribed to the cash Isa. Within the overall subscription limit, therefore, the investor may subscribe to a cash Isa later in the current year, with the same or a different manager, without breaching the one–Isa-of-each-type-a-tax-year rule,” says Braithwaite.
CONSOLIDATE SHARES ISAS
For shares Isas, Georgette Harrison of Selftrade advises that savers “always check that the receiving broker can cater for your existing investments, especially if holding overseas stocks.” Unless there is a strategic reason for holding lots of different shares Isas, consolidation might be worth considering. “Many Isa providers charge an annual management fee, so consolidating all Isas under one roof means that in all likelihood, Isa charges will be reduced,” says Harrison.
Daniel Kahneman won the Nobel Prize for Economics on the back of prospect theory. It argues that people feel more pain from losing something they already had, than happiness on gaining something they didn’t. Given how much is lost on the average cash Isa, this suggests either an uninformed public or an incomplete theory. Either way, now is the time to do your bit to help prove the theory right.