ISAs - Switching between providers

As with any type of financial
product, sometimes ISA holders
will spot an account that looks
more attractive than the one they
already have. Any one of a number of factors may prompt this –
for example, the range of investments available within a Stocks and Shares ISA, a desire to move from cash into equities or the interest rate offered on a competing Cash ISA.

Cash ISA rates, like those on any deposit account, do change and today’s winning deals may be tomorrow’s also-rans.

If you want to switch, it should not be a problem. Investors are allowed to change their ISAs from one manager to another whenever they want, and may transfer their:

• Current- year ISA subscriptions, together with any related income.

• All or part of their previous subscriptions plus related income.

However, if the ISA contains only current-year subscriptions, then the entire account must be transferred.

Note that subscriptions from a previous year retain that year’s ‘label’ – you can’t add any money to them but neither do they count as part of the current year’s subscription on transfer. When you apply for an ISA with the intention of transferring a previous account into it, make sure you don’t deposit any new money unless you specifically want to, as it will count towards the current year’s allowance and you will not be able to start a separate new ISA.
 Any number of old ISA accounts may be consolidated into a new one but keep an eye on the total deposits you are placing under one roof: if it goes above the Financial Services Compensation Scheme limit, the extra amount will not be protected if the institution goes bust. The limit was increased from £50,000 to £85,000 (the approximate sterling equivalent of €100,000) from 01 January 2011 following European directive requirements.

Subscriptions to a Cash ISA can be transferred either to another Cash ISA or to a Stocks and Shares ISA. However, Stocks and Shares ISA money can only be transferred to another Stocks and Shares ISA account.


If you do move from a Cash to a Stocks and Shares ISA, HMRC treats current-year subscriptions as if they had been made to the Stocks and Shares ISA. In other words, the investor is regarded as never having subscribed to the Cash ISA.


The effect of this is 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’ rule, as long as the total amount remains within the over- all subscription limit.

Complaints were rife last year about the time some institutions were taking to Complaints were rife last year about the time some institutions were taking to put through ISA transfers. Part of the reason for the delays was a surge of money into Cash ISAs from savers worried about the effect of the credit crunch on the stock market.

HMRC rules state that all ISA providers must allow transfers out, but there’s nothing to say they must allow transfers in and for a while the Nationwide stopped all transfers into its Cash ISAs while it tackled the backlog.

Since then, though, it appears transfers have been going more smoothly.

In June 2010, the Office of Fair Trading announced a reduction in the time it should take to transfer accounts between Cash ISA providers, following agreements with providers. From the end of 2010, under revised industry guidelines Cash ISA transfers should take 15 working days, down from the previous 23 days. Interest should also be paid by the new manager within two days of receiving the funds.

Somewhat confusingly, HMRC’s rules allowed an existing ISA manager a maximum of 30 days to respond to the new manager’s request and complete the transfer. New guidelines were due on December 31, however, and were expected to reflect the industry’s shorter transfer timeline.

The OFT’s action followed a ‘super-complaint’ from the watchdog body Consumer Focus about the Cash ISA market. Consumer Focus also asked the OFT to look at concerns including the transparency of interest rates and introductory bonus rates.

The OFT said the industry had agreed to publish clearly the interest rates on the face of Cash ISA statements. Around 15% of customers were receiving statements that included their interest rate but from early 2012 all statements will include this information.

However, it found that introductory bonus rates were not causing substantial harm to consumers since the existence of such rates was clear and they were informed when the introductory bonus rates ended.

In support of its complaint, Consumer Focus had said it estimated 15m Cash ISA holders could be losing out on interest worth up to £3bn a year because of the way the market operated. The body said, ‘A third of people in the UK have Cash ISAs and many enjoyed an interest rate of around 3% in the first year of saving. But most ISA interest rates fall to around 0.5% after the first year, and those attempting to transfer their accounts to get a more competitive rate encounter difficulties, delays and bureaucracy caused by the complicated processes providers use.’

Among the Cash ISA providers, the Halifax was quick off the mark in September to announce it would pay interest on transfers from the day it received a signed form.

 

This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements.

The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance.

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