ISAs can be a little confusing. I received this email last week from one of my readers worried they’d lost their interest.
Hi Andy,
In the run-up to Christmas (okay, from October) I managed to open-yet-not-read-carefully a letter from Halifax, warning me that my ISA Saver Fixed was about to mature and suggesting I move it into another ISA.
I didn’t act and my ISA matured, but I’m not sure what this means: have I lost the interest accrued? Can I still move it?
This is my first ISA, I have no idea what I’m supposed to do!
Many thanks,
Clare.
You’ve still got your interest
Don’t worry Clare, when I first had an ISA I was confused about how they worked too.
The ISA you had was fixed at a better rate of interest for a couple of years, but at the end of the fixed term period that account closed – which is what matured means here.
The good news is you haven’t lost any interest. It’s just been moved, along with the savings, to an instant access ISA.
However, you’ll now be earning far less interest on your savings. The Halifax website says the Instant ISA Saver pays just 0.25%!
You can still move your savings
But it’s not as simple as withdrawing the money and paying it into a new account.
You need to find an ISA which accepts “transfers in”, then go through that bank or building society’s transfer process when you open the account.
If you were to withdraw it, it’s not the end of the world, but it limits how much you can pay into your new ISA.
Each financial year, which runs April to March, you’re allowed to pay £15,240 into an ISA. That’s called your personal allowance. When the year ends, you can start paying in again to the same ISA or a new one.
So if you’d withdrawn the money you’d be limited to paying up to your personal allowance minus anything extra you’d already paid that year. So say you’d paid in £2,000 since last April, you could only pay in £13,240 this financial year.
A transfer however will let you move as much as you want, though some banks might have their own limits.
Why an ISA is different to a normal current account
When we talk about tax -free savings in ISAs, it just means you aren’t taxed on the interest.
In a normal current or savings account, tax is deducted from interest before it even reaches your account. The table below gives an example on £5,000 savings for a year.
| Type of savings account | Interest rate | Interest earned | Interest after tax |
|---|---|---|---|
| ISA | 2% | £100 | £100 |
| Non ISA | 2% | £100 | £80 |
This all changes in April 2016 though. Anyone on a basic tax-rate will be able to earn £1,000 in interest without paying tax on it. And it doesn’t matter where the money is saved.
That’s a huge amount of interest to earn so you might find there are better interest rates in non-ISAs. The TSB Classic Plus current account will earn you 5% on a max balance of £2,000, and the Lloyds Club offers up to 4% on savings up to £4,000.
But if you’ve a large amount of money, you’ll probably still get a better rate in a fixed term ISA.
>> What are the best interest rates on offer in current accounts?
>> More on ISAs and how they work