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How to switch ISA provider

With just over six weeks to go in the 2018/19 tax year, many savers and investors will be turning their attentions to ISA season, with a view to making the most of their £20,000 ISA allowance. As competition begins to ramp up in the ISA space, finding the best rates of return can make a big difference to the performance of your portfolio.

Yet deciding which ISA account(s) to subscribe to, and ensuring that you maximise your ISA allowance, is only half the battle. For many people who have built up a considerable balance in their ISA(s) over the years, the biggest gains of all stand to be made from ISA transfers, and switching ISA provider.

The ISA market: current state of play

The cash ISA space, for one, is showing signs of movement in the right direction, with easy access returns of up to 1.38 per cent (for accounts with no contribution and/or withdrawal restrictions) on offer. This rises to 1.73 per cent for those willing to commit to a 1 year fixed-term cash ISA, and 1.90 per cent over two years. Given that millions of Brits still have money sitting in cash ISAs paying negligible rates of interest, it leaves plenty of room for improvement, and an ISA transfer holds the key.

That said, almost all cash ISAs still pay interest well below the current rate of inflation, and many Brits are beginning to look further afield in a bid to grow their money in real terms. In particular, the Innovative Finance ISA (IFISA) has been a big hit since its launch in April 2016. In the 2017/18 tax year alone, over 31,000 accounts were opened, and this is expected to increase further in the current tax year.

With a simple sign-up process and interest rates of between 5 to 10 per cent - albeit with a moderate level of risk, as borrower repayments are not guaranteed by the Financial Services Compensation Scheme - investing in peer-to-peer (P2P) loans is proving to be a popular choice among consumers, and many are transferring their cash ISAs across to P2P platforms in order to maximise returns.

The stock market has fallen foul of recent volatility after an impressive two-year bull run, but it still remains an attractive option for savvy investors to transfer their stocks & shares ISAs between platforms, or across from other ISA categories.

And of course, the ISA market offers additional dynamism with the likes of the Help to Buy (H2B) ISA and the Lifetime ISA (LISA), which, courtesy of Government-backed bonus schemes, cater for the needs of prospective first-time buyers, and/or those looking for an additional boost to their retirement pots.

How to switch ISA accounts

You can transfer your ISA between providers in the same category, or to a provider offering a different type of ISA. However, there are two important distinctions when it comes to ISA transfers. If you're looking transfer ISA funds that were subscribed during the present financial year, then you are obliged to transfer the full amount. If, however, you are looking to switch ISA savings or investments accumulated over previous tax years, then you may transfer a partial sum if you prefer.

Switching is a straightforward process too. All you need to do is contact the ISA manager you wish to transfer your account to, and complete an ISA transfer form. The new ISA manager will then initiate the switch with your existing provider, and it is their responsibility to finalise the transfer. 

There is no further action required from you until the process is completed. In fact, it is imperative that you do not attempt to withdraw from your existing ISA at any stage during the switch, as these funds will lose their tax-free ISA status, and you will not be able to reinvest this portion of your ISA allowance either.

If you are transferring from one cash ISA to another, the process should take no longer than 15 business days. If you are transferring within any other ISA category, or between providers of different ISA types, then you should allow up to 30 business days. If this deadline passes without the process being completed, you should contact your new ISA manager immediately, and expect to be compensated for lost interest. If you do not receive a satisfactory solution, you are entitled to escalate the matter to the Financial Ombudsman Service.

Infographic On ISA Transfers Process Duration

How to decide whether to switch

The important thing to note is that transferring an ISA actually requires very little effort from yourself as a customer - all the work is done by your new and existing provider. So, what it really comes down to is whether you believe you could be earning a better rate on your cash ISA, higher or more-stable returns on your investments, or even a State-sponsored bonus.

But before you decide to start shopping around for new providers, you may have a few more questions with regard to ISA transfers. We deal with these in the next section.

Switching your ISA

Can you switch an ISA mid-year?

You can transfer an ISA at any time. Just note the aforementioned difference between transferring funds subscribed during the current tax year, and switching previous-year ISA funds.

The exception to the above would be a case where a provider doesn't accept transfers as part of its terms and conditions - some only accept new money. Also, bear in mind that if you're transferring a fixed-term ISA, there will usually be fees or penalties if you are doing so before it matures.

Does transferring an ISA use your allowance?

No. Provided you follow the correct procedure for switching an ISA (ie: do not withdraw your money, and then reinvest it), your ISA allowance will be unaffected by ISA transfers.

Is there a limit on ISA transfers?

There is no limit to the number of ISA transfers you can make each year, but there could be a limit on the amount you can transfer, depending on when the funds you are transferring were subscribed.

If you are moving funds that were subscribed to your existing ISA during the current tax year, you must transfer the full amount, and the total cannot exceed £20,000 (the ISA allowance for the 2018/19 and 2019/20 tax years). 

However, if you are switching funds accumulated over previous tax years, you can shift as much or as little as you like, and the upper limit of the ISA allowance will not be applicable.

Are there fees for transferring an ISA?

This will usually be subject to the terms and conditions of the bank, building society or investment platform. Bear in mind, you may be liable to pay a fee to the new ISA manager, and/or the outgoing provider. This is most common when switching stocks & shares ISAs, where you may also be charged for closing your account, or selling up shares and funds. Such fees need to be factored in when shopping around for better returns.

The only case where there is a statutory charge for switching an ISA is if you transfer from a LISA into a different ISA category. In such cases, a government withdrawal charge of 25 per cent will apply (note: this charge does not apply when transferring from one LISA to another).

Can I switch from multiple ISA accounts?

If you have more than one ISA, you are free to transfer to and from as many of them (and as often) as you wish. However, just bear in mind that you can only subscribe to one ISA provider within each category during the tax year.

Can I switch a Help to Buy ISA?

Although you can only hold one H2B ISA, there is nothing stopping you from transferring it between providers in search of the best rate. You are also free to transfer your cash ISA to an H2B ISA. However, it's worth noting that, when transferring into an H2B ISA, you will not be able to make the initial £1,200 deposit following the transfer (as you are entitled to when you first open a H2B ISA), and the usual £200 monthly limit will continue to apply.

You may also transfer out from your Help to Buy ISA, although you will not be able to claim the Government bonus on the amount transferred. If you transfer to a Lifetime ISA, you will forfeit the bonus on the amount transferred from your H2B ISA, and it will also count towards your LISA allowance of £4,000.

Can I switch an ISA to a current account?

You are allowed to withdraw from an ISA, but this is usually ill-advised, and should be carefully considered. Moving funds held within an ISA across to a current account will mean they lose the tax-free advantage of their ISA status, and will be subject to tax on savings interest thereafter. Moreover, unless it is from a flexible ISA, you will be unable to replace these withdrawn ISA funds without eating into your ISA allowance.

How do Innovative Finance ISA transfers work?

Transferring into an IFISA - be it from another peer-to-peer platform, or from a different type of ISA - simply involves you initiating the transfer with your new ISA manager, and completing the ISA transfer form as usual. As mentioned above, you should allow up to 30 working days for this process to be completed.

However, there are some considerations when transferring out an IFISA. As with other ISA categories, current-year subscriptions will need to be transferred in their entirety, while partial sums can only be transferred on previous-year contributions.

But, even in the latter case, there is another scenario to factor in. If you are transferring capital and/or interest which has already been repaid (or has not yet been lent), then there is normally no charge for doing so. However, if you initiate a transfer request for funds which are still on loan within the IFISA, then platforms will generally charge a small fee, as they will need to find a lender to replace you.

Infographic Detailing Outward IFISA Transfers

Can I switch a child ISA to another provider?

A Junior ISA, sometimes colloquially referred to as a 'child ISA', has the same rules on transfers as other ISA types, and you are free to switch from one provider to another, or from one type of Junior ISA to another (ie: junior cash ISA to junior investment ISA, or vice versa).

As of April 2015, you are now also free to switch a Child Trust Fund account into a Junior ISA.

How do I transfer a stocks & shares ISA?

There are some additional complexities when it comes to switching stocks & shares ISA providers, but, in effect, there are two types of transfer:

1) a stock transfer (aka 'in-specie transfer')

2) a cash transfer

In both cases, you initiate the transfer in the normal way (ie: confirming the switch with the new ISA manager, and completing the ISA transfer form), but there are some key differences. An in-specie transfer means your existing investments are untouched, and simply re-registered with the new ISA provider. This is a sensible approach if you are happy with the performance of your current portfolio, as your investments remain in-market.

A cash transfer involves selling your investments, and then transferring the cash proceeds to your new provider, who will then reinvest this money under your direction. This approach enables you to start afresh if you feel your investments are underperforming, and can also be a good way to avoid exit fees on stocks. However, it will mean that you spend time out of market while your stocks are sold and reinvested.

Since July 2014, you are now able to transfer a stocks & shares ISA to another type of ISA too. You can only transfer cash from one ISA category to another, so all investments will need to be converted into cash before the transfer can proceed. Importantly, your funds will retain their tax-free ISA status after the transfer is completed, provided you follow the correct procedure, and do not withdraw from your ISA during the switch.

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