Since they arrived in 1999, individual savings accounts have been an integral part of the UK’s financial landscape. Millions of Brits have saved thousands in tax by putting their money in ISA wrappers, whether in savings accounts or seeking further growth by investing in the stockmarket.
So it seems strange that, until last month, it wasn’t possible to directly switch money from a cash ISA into a stocks and shares ISA without losing the tax benefits.
However, an overhaul in the way ISAs work now makes it easier for savers to dip into the world of stocks and shares. Many of the changes included as part of the government’s revamp of ISAs have been reported in great depth, such as the increase in the amount you can put away in a tax-free ISA to a total of £7,200, up to £3,600 of which can be held in cash.
But perhaps the more important change is that savers who have been stashing money away in cash ISAs can now transfer this money into a stocks and shares ISA.
Crucially, this can be done without the money leaving the safety of the ISA wrapper or affecting the annual ISA allowance – as long as the money isn’t physically withdrawn.
It was possible to transfer cash ISAs before, but only from one ISA provider to another – for example, if you found a bank offering a better interest rate – and not from cash to stocks and shares.
Under the latest changes, however, you can now transfer some, or even all, of the cash saved into an ISA in previous tax years into a stocks and shares ISA, without fear of using up that year’s ISA allowance. You can even transfer across cash that you deposited in the current tax year – but you have to transfer the full amount. Once you’ve done so, it’s as if that cash ISA never existed.
This means that if you saved £2,000 in a cash ISA this year, then transferred it into a stocks and shares ISA, you could still put another £5,200 into ISAs this year: up to the full amount into a stocks and shares ISA or up to £3,600 into a cash ISA.
Beware: it doesn’t work the other way around. You cannot move money in a stocks and shares ISA back into a cash ISA if you change your mind again, although many in the industry are lobbying for that to change.
Another change taking effect: people who have child trust funds (CTFs) will now be able to roll the proceeds into an ISA when they mature, without incurring any tax penalties. However, the benefits of this are unlikely to be felt until the first CTFs mature in around 15 years.
Only the names have changed
As part of the government’s ISA spring-clean, it also decided to sweep away all the confusing terminology that surrounds them. What were known as mini-cash ISAs, TESSA-only ISAs and the cash part of a maxi-ISA will now all be called, simply, cash ISAs.
Mini stocks and shares ISAs, as well as the stocks and shares part of the investment vehicle formerly known as a maxi-ISA, will all now be called stocks and shares ISAs. To top it off, Personal Equity Plans (PEPs) are to be rebranded as stocks and shares ISAs too.
HM Revenue and Customs says PEP investors will get a wider range of investments to choose from under the ISA banner. However, the interest earned on uninvested cash held in what was formerly the PEP will now be taxed at 20% in the ISA, a rule that has always applied to stocks and shares ISAs. Investors may also want to consider merging existing stocks and shares ISAs with their newly rebranded PEP to help keep costs down.
It’s the new ability to transfer money from cash ISAs into stocks and shares ISAs that has been most warmly received by the experts.
History shows that over the long term, equities – or stocks and shares – tend to give you a better return than cash. Within equity ISAs you can invest in collective investments like unit trusts for example, as well as in shares listed on a recognised stock exchange and other investment vehicles such as bonds.
That said, it is important to understand the risks associated with investing in equities before you take the plunge. As they say, with stocks and shares the value of your investment could go down as well as up. There are also lifecycle considerations to factor in: taking a risk on equities close to retirement may not be such a good idea.
Transferring your allowance
But if you do want to transfer money from your cash ISA into stocks and shares, you can do this in just the same way as you would shift your cash ISA to another provider. That is, you don’t withdraw the funds and move it across yourself, or this will count against your current ISA allowance. You select who you want to have your new stocks and shares ISA with and they will arrange the transfer for you.
However, whatever you do, getting advice from an IFA before taking the plunge is always a smart idea.