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Does your broker offer flexible Isas?

Flexible Isas were introduced in last year's budget but banks and brokers have been slow to introduce them
August 18, 2016

If you are thinking of using of the new Individual Savings Account (Isa) flexibility that became possible in April, make sure your broker or platform offers it as a number of providers are not making use of the new rules.

In the March budget 2015 the government announced that investors would be able to withdraw money from cash and stocks and shares Isas, and replace it within the same tax year without reducing that year's allowance. The annual Isa allowance for the current tax year is £15,250. In theory that means that if you had only put £10,000 into your Isa for this tax year, you could withdraw and replace that amount, and still have an allowance of £5,240 left. Previously, replacing the £10,000 would have pushed you over your Isa limit for that tax year.

Cash Isas, innovative finance Isas and cash held within stocks and shares Isas should all be flexible under the new rules. Junior Isas, Help to Buy Isas and any non-cash element of another Isa will not be flexible. The rules came into effect on 6 April this year and apply to previous years' Isas, too. However you can only replace an amount you have taken out within the current tax year - you could not put back more than you took out even if you have not used up previous years' allowances.

The new flexibility is useful if you need cash from your savings for a short-term cost but want to carry on saving later in the year. But providers are not obligated to provide the new flexibility and they differ vastly in the degree to which they are implementing the new rules.

Many only allow it for new Isas, and some allow it for cash Isas but not stocks and shares Isas. And several providers do not offer the ability to take out money from your Isa and replace it at all.

"Savers should never assume that their bank offers an Isa with the flexible rules, because a handful of brands such as NatWest and Santander are not offering the flexibility," says Rachel Springall, finance expert at MoneyFacts. "Some of the other biggest brands are offering flexible rules, such as Barclays Bank, Nationwide and Virgin Money, so savers have a good choice of where to invest their cash as well the knowledge that a nearby branch shouldn't be beyond reach."

"Something like Isa flexibility might be worrying some providers because they don't want clients to take money out later down the line," says Henry Black, head of UK investment consultants at MoneyFarm, which does offer flexibility. "But if clients know they can reverse an investment if they need to, maybe for a short-term cost like repairing the house, it is good to have the extra flexibility."

 

When to make use of Isa flexibility

It is likely to be better to use flexibility with a cash Isa, rather than a stock and shares Isa. stock and shares Isas are designed for investors who aim to stay invested for at least five years or more, and can accept the risk of losing capital. Dipping into your investments at the wrong time could mean you sell at a loss, and will also reduce the potential for compounding portfolio returns.

It might make sense to dip into your Isa if you have a short-term cash goal, but dipping in because you are worried about market volatility would not be a wise move.

For a purchase in the near term or a short-term objective it makes sense to use Isa flexibility. And using it in your cash Isa could allow you to make the most of a useful loophole. You could use the new flexibility to keep money tax free and make the most of higher savings accounts elsewhere.

"Some savers may avoid cash Isas due to their low rates and the introduction of the Personal Savings Allowance (PSA), but with the flexible rules savers really can use the Isa to their advantage over the long-term," says Ms Springall. "Customers could open a flexible Isa at the start of the tax year, and then move their cash into a better paying account or more than one - such as RCI Bank's 1.45 per cent easy access account or a high interest current account such as TSB's which pays 5 per cent. Then before the next tax year starts you could put the cash back into the flexible Isa without losing any of your annual Isa allowance and keep the cash 100 per cent tax-free over the longer term, while earning more interest in the process."

Virgin Money, Bank of Scotland and Aldermore are among the providers offering cash Isa flexibility, although many high street banks don't.

 

Flexible stocks and shares Isas

It is possible to make use of the flexibility rules with stocks and shares Isas and innovative finance Isas, but you must first convert your holdings to cash. Sale proceeds and dividend withdrawals are eligible without conversion.

But many stocks and shares Isa providers do not offer flexibility: of the 13 brokers we asked, only two currently offer flexible stocks and shares Isas. Five providers were currently planning to implement it, though many had no set timescale.

IG told Investors Chronicle exclusively that it would launch its first flexible Isa next month. The move will be retrospective so that anyone who has withdrawn money since 6 April 2016 will be able to benefit. The broker is also planning to launch a Lifetime Isa from 6 April 2017.

Charles Stanley Direct is also planning to launch Isa flexibility and said: "Functionality is currently being built" but it has no clear timescale for development.

Fidelity Personal Investing said it "planned to offer this in the future" but had no set timescale.

And Tilney Bestinvest said: "We are in the process of launching the flexible Isa which will be available within 2016. All functionality of the Isa will remain the same, beyond the fact that it will be a flexible Isa."

AJ Bell said it was considering the move but had not yet taken the leap.

Some platforms are not planning to offer the flexibility citing a lack of customer demand and claiming that flexibility is more appropriate for cash Isas. "At this stage we are seeing little interest from clients in the flexible option," says Danny Cox, chartered financial planner at Hargreaves Lansdown.

TD Direct says that "Stocks and shares Isas are designed to support medium to long term investment returns, as such we are not yet clear that there is sufficient demand for this additional flexibility."

And Sara Wilson, head of platform proposition at Alliance Trust Savings, says: "We are looking at options to introduce flexible functionality to our stocks and shares Isa this tax year, but we think it is probably more of a priority for those saving into cash Isas."

 

Why save into a cash Isa?

Cash Isas are undeniably less appealing than in the past, particularly following the Bank of England's recent interest rate cut which has resulted in banks and building societies cutting the interest rates on their Isas. The new personal savings allowance has also undermined the appeal of the cash, as this grants many savers £1,000 of tax-free interest on savings earned from banks, building societies, credit unions and peer-to-peer loans. Higher rate tax payers have a £500 Personal Savings Allowance and additional rate tax payers do not have any allowance.

However there are still valid reasons to hold cash in an Isa if you are investing for a short period and might need it for a short-term objective.

"While basic and higher rate income taxpayers can benefit from the Personal Savings Allowance, cash Isas are tax free and are likely to always be tax free," says Patrick Connolly, chartered financial planner at Chase de Vere. "This is particularly beneficial to those whose savings interest exceeds the Personal Savings Allowance or might in the future, if they save more or interest rates rise.

"Cash Isas are also more flexible in that money can be transferred to and from stocks and shares Isas as required, keeping the Isa wrappers, and spouses can inherit an Isa allowance equivalent to their deceased partner's Isa holdings."

But a Personal Savings Allowance cannot be passed on and for investors with a large amount to save, personal allowances can be used in tandem with Isas.

 

Case study: how investors can use flexible Isas to free up money to help out their children

John Gordon, who is 67 and a retired company director from the Wirral, used flexible Isa rules to take out a sum of money to loan to his daughter so she could buy her property outright, and avoid having to take out an expensive bridging loan.

Mr Gordon transferred the money on the morning the new rules came into force, and then immediately withdrew the funds he needed for the loan.

"If I had done this in the traditional manner of securing a loan against, say my house, there would have been huge fees, resulting in an overall charge of circa £70,000," says Mr Gordon. "Instead I use my own Isa money and just pay a CHAPS fee in and out, in total of £50.

"My daughter and son-in-law were very keen to move out of their London house to Oxfordshire and I had promised to provide the necessary bridging loan. I approached several banks and a few mortgage companies, but not only were their rates excessive - despite interest rates being at an all-time low - but additional up-front fees and paperwork rendered this approach a non-starter.

"This was especially frustrating as I had sufficient security by way of an Isa plus core equity portfolios.

The actual transfer was as smooth, partly assisted by the fact I was transferring funds which were already in cash from my existing manager. I intend to put the money back in as soon as my daughter's house is sold."

Source: The Share Centre

 

Flexible cash Isas (variable rates)

ProviderAccountNoticeGross annual interest on £10K
Aldermore30 Day Notice Cash ISA Issue 630 Day1.05
Bank of ScotlandAccess Cash ISAInstant0.50
Barclays BankInstant Cash ISA Issue 1Instant0.80
Clydesdale BankFlexi Cash ISAInstant0.70
Coventry BSEasy Access ISA (4)Instant1.10
Family Building SocietyFlexible ISA (1)Instant0.86
HalifaxISA Saver VariableInstant0.40
Lloyds BankCash ISA SaverInstant0.40
Metro BankInstant Access Cash ISAInstant1.00
Monmouthshire BS*Cash ISA 830 Day1.30
National Counties BS4th Issue 45 Day Notice Cash NISA45 Day1.15
Nationwide BS*Flexclusive ISA (Issue 13)Instant1.20
Nationwide BSInstant ISA Saver Issue 7Instant1.00
Newbury BSEasy Access Cash ISA Instant1.00
Newcastle BSCommunity Saver ISA (Issue 1)Instant1.00
Principality BS                     30 Day1.15
Principality BSe-ISA Issue 11None1.10
Principality BSCash ISAInstant0.60
Progressive BS*Cash ISA Issue 3Instant1.10
Scottish Widows Bank*E-Cash ISA 3None0.60
Skipton BSLegacy ISAInstant1.50
Skipton BSCash ISA Saver Issue 4Instant0.80
Skipton BSOnline Cash ISA Saver Issue 4None0.80
Tesco BankInstant Access Cash ISANone0.75
Triodos BankOnline Cash ISA33 Day1.10
Triodos BankCash ISA33 Day0.65
TSBCash ISA SaverInstant0.75
Virgin MoneyEasy Access Cash ISA Issue 17Instant1.01
Virgin MoneyEasy Access E-ISA Issue 17None1.01
Virgin MoneyEasy Access Cash ISA Issue 18Instant0.75
Virgin MoneyEasy Access E-ISA Issue 18None0.75
Yorkshire BankFlexi Cash ISAInstant0.70

Source: MoneyFacts, as at 9.08.16

*Opening restrictions apply, check for further details

 

DIY stocks and shares providers

DIY broker/platformFlexibility allowed?
IGLaunching next month. All stocks and shares Isas will become flexible as will future Isas. Will also be offering Lifetime Isa from 6 April 2017 
Barclays StockbrokersYes, offer it now.
Charles Stanley Direct Not currently. Functionality being built to offer this but no timescale for development.
AJ BellNo but something they are considering.
Hargreaves Lansdown No and no plans to offer it currently.
TD Direct Investing No and no plans to offer it currently.
Alliance Trust SavingsNo plans to offer it as yet but looking into options.
Fidelity Personal Investing Not currently but planning to offer it in the future. No timescale set.
Tilney Bestinvest Not currently but implementing now and hoping to have in place by end of 2016.
Halifax Share DealingNo and no plans to offer it currently.
Interative InvestorNo and no plans to offer it currently.
The Share CentreYes, offer it now.
Trustnet DirectNot currently but planning to offer it in the future. No timescale set.

Source: Investors Chronicle survey, as at 10.08.16