Guide to Switching Cash ISAs

Guide to Switching Cash ISAs

by David Redmond on 30 Mar, 2011

Cash ISAs are an excellent way of earning tax-free interest on your money. Generally speaking, they offer some of the best rates on the market, in exchange for you not moving your money. However, if you suddenly see a deal that catches your eye, you often can switch between ISAs, but there are a few rules you need to know.

Not all ISAs allow it
The first thing you need to know is that if you’re the type of person who keeps an eagle eye on rates and is likely to want to switch ISAs during the tax year, then you need to make sure that a) you can transfer the money out of your existing ISA, and b) the ISA you’ve got your eye on allows transfers in.

This is because you are only allowed one ISA per tax year, and you should never close an ISA as the income generated from it will lose its tax free status. As such, you cannot close one ISA to open another; you must transfer between the two.

There may be penalties
In addition, there are many ISAs that, although they allow you to move your money, will charge a penalty for doing so. This is more often than not a penalty of 180 days interest. Taking this into account is vital to deciding whether or not to switch your cash ISA. The improved rate in the new ISA needs to more than make up for the penalties incurred when moving the money.

Some ISAs charge lesser penalties, or none at all, but this tends to be at the expense of interest rates.

There may be a notice period
Just as most ISAs will charge a penalty for moving your money, notice periods are common. This shouldn’t be too much of a problem for medium-long term ISAs, but if you only have a 12 month account, this may make the difference between switching being a benefit and not. Once the transfer is agreed, regulations stipulate that the transfer must take no more than 15 days. Depending on your new provider, they may start paying interest from the day they receive the application, but equally, you may end up with a 15 day interest gap.

Getting it right first time
Depending on the small print of your ISA, switching to a new cash ISA is entirely possible, but penalties and notice period should serve as a tell-tale sign that it’s better to just make sure you get the best deal in the first place.

That being said, the market changes all the time. As long as you take everything into account, switching cash ISAs could be the right move.

About the Author

David Redmond


David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.