An Individual Savings Account (ISA) is like a tax invisibility cloak. You don't pay tax on any investments held in the ISA. Lots of companies offer ISAs, but if you are not happy with your existing provider you can switch to another one. Find out how to find a platform that suits you in our Finding The Right Investment Platform resource. In this article we show how to work out the cheapest way to do the transfer without losing your ISA allowance.
What not to do
Let's call the account you want to move from "Source" and the account you're moving to "Target". What you must never do is sell all your assets in the Source account and withdraw the cash into your bank account. If you do that the money will lose its tax exemption and you can't get it back. Instead you have to initiate the transfer using your "Target" account and they will handle the transfer on your behalf.
To use the invisibility cloak metaphor, you can never take the money outside the invisibility cloak. It must never lose its invisibility. The money has to be passed directly from Source cloak to Target cloak. That way the money keeps its tax invisibility.
The process is usually as follows:
- Do Your Sums: Work out whether it's cheaper to sell your share, bond and fund assets and transfer cash or move the assets themselves (sometimes called "in specie" and pronounced "spee-shee"). If the Target account does not allow you to buy the assets you currently hold then you have no choice but to sell those funds and move them as cash.
- Keep Your Money In Your ISA: Don't pull money out of your Source account - it has to be transferred by the ISA managers themselves.
- Notification: Tell the Target account provider that you want to transfer your ISA to them.
- Details You Will Need: The Target account provider will ask you for the Source account number and the approximate amount you want to transfer. They should then manage the process.
- Patience: Wait up to 30 working days. If you go beyond this period of time ask what the hold up is and if you don't get a satisfactory answer you can complain to the Financial Ombudsman Service.
Some of these costs come from the Source account and some from the Target account.
Some platforms charge an exit fee to close an ISA. This is terrible business practice. Instead of hitting people on the way out platforms should retain existing customers by providing a great service. The largest platform provider in the UK, Hargreaves Lansdown, charges an exit fee. If you transfer out in the form of cash Hargreaves charges £25, and if you transfer out as stock you will pay £25 per holding. If the exit fee is quoted as a percentage this can be very expensive if you are moving a large amount of money.
As if exit fees weren't bad enough some ISA accounts charge you an entry fee to open a Stocks and Shares ISA account. Be careful to work out what this will be in cash terms if it is quoted as a percentage. For example, if the entry fee is 1% and you are investing £100,000 then you would have to pay £1,000 entry fee.
Missing Out On Market Gains & Income
Another cost to consider is losing out on market gains if you transfer your holdings as cash. For example, say you have a FTSE 100 tracker which you sell just as the transfer begins. Then two weeks later your money is transferred to your new account where you buy your FTSE tracker back but the price has risen 10%. You missed out on the 10% rally.
Market movements might move in your favour if asset prices fall while you are in cash.
You may lose out on dividend income on stocks or funds. For example, say that an ex-dividend date occurs during the transfer you will lose out on the dividend. To learn more about that see our blog and video on ex-dividend dates:
Let's say you decide to transfer your account as cash. If this is the case you will have to sell your assets in the Source account, do the transfer, then buy assets on the Target account. This may incur trading fees and trading taxes. You have to take these into account when working out whether it's cheaper to transfer as cash or as assets. The comparison will look like this and it is worthwhile researching the individual costs before you do the transfer.
Remember to convert percentage fees to cash fees when doing this comparison i.e. amount you are transferring times the percentage fee. Your costs list should look like this:
Transfer As Cash
Cost of selling assets in Source account
+ Cost of buying back assets in Target account
+ Exit Fee for Source account
+ Entry Fee for Target account
Transfer As Assets
Exit Fee for Source account
+ Entry Fee for Target account
+ Asset Transfer Fee for Source account
How long will it take?
The government wants to encourage competition between ISA providers so it has tried to make switching as fast and easy as possible. It has set targets for ISA transfers which you can see here:
The rules state that it should take no more than 30 working days for the transfer of a stocks and shares ISA and that if your transfer takes longer than this you should contact your ISA provider. If you are unhappy with the response you can take the matter up with the Financial Ombudsman Service.
An Example: Nutmeg to Vanguard
To give an example of the transfer process here's what happened when I transferred my Nutmeg Stocks & Shares ISA to Vanguard. To see what happened on each day just click on the line to expand the text, rather like an ISA Advent Calendar.
Day 0 Start The Transfer (August 20, 2018)
I initiated the transfer on the Target account which in my case was Vanguard. I already had an account so I didn't have to set one up.
First I give the current ISA provider, the Source account, which is Nutmeg. Vanguard has a dropdown box that "knows" about all the major ISA providers which makes this easy. I also have to know my Nutmeg ISA account number so they can identify which account to transfer.
Vanguard needs to know whether this is a current year's ISA or a previous year, or a combination of both, whether it's a full transfer (all of the money is being transferred or just some of it) and the rough amount that's being transferred.
Finally there are a few questions about whether there are non-Vanguard funds in the account. On Vanguard's platform you can only buy Vanguard funds so that means the non-Vanguard funds or shares or bonds have to be sold then the cash proceeds are transferred into your Vanguard account. You can also choose which Vanguards to buy at this stage but I chose to do that later on.
That's it for today.
Day 3 Email from Nutmeg asking whether to transfer three funds (August 22, 2018)
Three days after initiating the transfer I got this email from Nutmeg (Nutmail as they call it) saying that Vanguard had asked for 3 lines of stock to be transferred. That's because three of the funds in the Nutmeg portfolio were Vanguard funds which could be held on the Vanguard platform. However, the email points out that each stock transfer costs £20 so those three funds would have cost me £60 to transfer. The alternative was to liquidate the three funds and transfer the cash free of charge. You can see which options I went for: cash.
Day 4 Vanguard notices the holdup (August 23, 2018)
Vanguard told me there was a holdup at Nutmeg. I assumed they hadn't got the memo that I'd decided to go for an all-cash transfer. So I replied to this and told them that was what I'd decided.
Day 5 Vanguard acknowledges that this is a cash transfer (August 24, 2018)
Tina from Vanguard support acknowledged my message and said that their records were altered to reflect that this is a cash transfer.
Day 10 Nutmeg acknowledges that this is a cash transfer (August 29, 2018)
A confirmation that this would be a cash transfer from Mike at Nutmeg.
Day 18 Transfer Complete! (September 6, 2018)
Finished! It took 18 days which is pretty good. This was well within the Government's 30 working day guideline: it took just 13 working days.
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