If the objective of an ISA is to earn the highest tax-free return possible, it stands to reason that you will be regularly moving your ISA funds into investment or savings vehicles that earn the highest possible rate of return. This means that transfers of your ISA funds will probably be a consistent component in your financial portfolio.
If you don’t understand the guidelines for the different types of ISAs, you could end up losing much of your tax benefits as you are trying to obtain a better rate of return on your money. To ensure ISA transfers are done correctly and according to guidelines established by the Financial Services Authority, there are a few key points to keep in mind.
Know Your Account Type
There is typically no penalty for transferring from one ISA to another, but that rule is dependent on the type of account you open in the first place. If your cash ISA is tied to a specific term, you may be assessed a penalty if you withdraw funds before your term is over. Read the fine print of your account agreement carefully to ensure you know when you can transfer ISA funds without problem.
There is also a distinction made between cash and shares ISAs. While shares ISAs can be transferred to a different fund, they cannot be moved into a cash ISA. They also cannot be split between more than one shares account. However, a cash ISA can be transferred into a cash account at a different institution or be used to purchase ISA shares without penalty. This is true if the full amount of the cash ISA goes into a cash or shares account. In addition, the funds cannot be split between providers or account type.
These rules are applied to transfers made on funds contributed during the current tax year. If you are transferring contributions made in previous years, you are allowed to split the funds into different accounts. For example, a cash ISA can be transferred to another cash ISA, or split between different cash accounts. It can also be split between different shares accounts. A shares ISA can be split between more than one new shares account. However, shares ISAs may never be placed in a cash advance, regardless of when the contributions were made.
Initializing a Transfer
It is very important that you never make a withdrawal from an ISA to put those funds into a different ISA vehicle. This type of transaction counts as a withdrawal rather than a transfer, and you lose your tax shelter benefits in the process.
To initiate a transfer, begin the process at the institution that will be receiving the funds. Once they get your signature on the appropriate paperwork, they can handle the transfer process with your current institution to ensure the funds get moved according to FSA guidelines.
Knowing how to properly transfer ISA funds is an important part of getting the full benefit from your account. With these guidelines in mind, you will ensure the best rate of return on your investment each year, without the worry of losing your tax shelter advantages.
