ISAs were introduced back in 1999 and replaced Personal Equity Plans and Tax-Exempt Special Savings Accounts. During the 1999/2000 tax year, around 4.5 million people set up a form of cash ISA. Nearly 20 years later, this figure has rocketed to just shy of 9 million accounts opened in 2016/2017.
The popularity of ISAs has continued to grow, following the launch of both the Help to Buy and Lifetime ISAs. What’s more, people are now more determined to make their money work for them and this can involve switching up where your savings reside.
How do ISAs work?
ISAs are Individual Savings Accounts. They work in a similar way to regular savings accounts. However, you do not pay tax on the interest you earn. There are a variety of different ISAs available depending on your requirements. You can save up to £20,000 in in a single account per tax year or split the tax-free allowance across different ISA accounts.
In basic terms there are three types of ISAs; . However, there are a variety of options available with different banks and building societies.
Cash ISA
You can open one cash ISA per year and any interest you receive is free of income tax. These are available at most banks and building societies. Some cash ISAs are fixed-term savings accounts and you can be charged for withdrawing your funds early.
Stocks and Shares ISA
If you want to invest your money but do not want to pay any tax a stocks and shares ISA could be a good choice. You can only pay into one stocks and shares ISA each year and they are often an option for those wanting to invest for five or more years.
Why would you transfer your ISA?
The number one reason the majority of people transfer their ISA is to simply get more from their money. This is particularly applicable to those with low interest rate ISAs. It is generally considered that most of the standard cash ISAs have quite low interest rates, so it is often worth seeing if there is a better rate to be had with another provider or ISA option.
Some cash ISA holders that do not have immediate or foreseeable plans for their money will place funds into a stocks and shares ISA for better interest rates over a longer period of time. Stocks and shares ISAs often present better interest rates but it is key to remember that there is risk involved whenever money is invested.
Depending on the bank or building society, some stocks and shares ISAs come with certain fees. Sometimes individuals will transfer from one stocks and shares ISA to another to benefit from lower fees or better long-term returns on investments.
Similarly, consolidating single stocks and shares ISAs into one account can not only boost long-term net returns, but also reduce any management costs.
Lastly, one popular reason for transferring ISAs is simply down to paperwork and admin. Consolidating any type of ISAs often makes finances much more manageable.