You might have already heard that an ISA is a tax-efficient way to save or invest your money. But do know what the withdrawal rules of an ISA are? Can you actually take money out of an ISA? And if you can, what are the consequences?
Let’s take a look.
What is an ISA?
ISA is short for Individual Savings Account. It’s a special type of savings and investment account that is more or less immune from tax. An ISA allows you to invest a limited amount annually in assets that are not subject to income tax or capital gains tax.
ISAs are offered by a wide array of institutions, including banks, building societies, asset managers and National Savings and Investments (NS&I).
Currently, there are six main types of ISAs you can get in the UK:
Can you take money out of an ISA?
For most ISAs, the rules around withdrawal are largely the same. You can take money out whenever you want without affecting the tax benefits. Any amount you withdraw from an ISA is not taxable.
However, some penalties or fees may apply for taking money out of certain types of ISAs, so always check the terms and conditions carefully first.
For example, there are strict rules around withdrawing money from a Lifetime ISA. Any withdrawal outside these rules attracts a penalty of up to 25% of your withdrawal amount.
What happens when you withdraw from an ISA?
The consequences of taking money out of an ISA depend on whether it’s a flexible ISA or not.
If you have a flexible ISA, you can take out money and replace it during the same tax year without the replacement counting towards your annual ISA allowance.
Let’s say you deposit £20,000 into a cash ISA (which is the total allowance for this type of ISA) and then take out £3,000. You can replace the £3,000 at a later date in the same tax year without breaching your allowance even though you will technically have deposited a total of £23,000.
In contrast, with a non-flexible ISA, if you reach your limit and then withdraw money, you can’t put it back within the same tax year.
Not all providers offer flexible ISAs so always check before you make any withdrawals.
Currently, in the UK, flexibility in only offered through cash ISAs, Innovative Finance ISAs and cash held within stocks and shares ISAs.
It’s not available for Junior ISAs, Help to Buy ISAs, Lifetime ISAs and any element of stocks and shares ISAs that are not cash (e.g. shares, bonds or funds).
How long does it take to withdraw money from an ISA?
If you withdraw from a cash ISA, it should take a maximum of one day for the money to show in your account.
For a stocks and shares ISA, withdrawals typically take between three and seven days, but can sometimes take longer. That’s because your investments may need to be sold first.
If you need your money by a particular day, it’s a good idea to make your withdrawal request ahead of time to make sure it’s processed by the time you need it.
Bear in mind that if you want to make an emergency withdrawal from a stocks and shares ISA, there is a risk that the value of your investment will have gone down due to fluctuations in the market.
Can you transfer money from one ISA to the other?
If you want to change providers, for example, because you’ve found another provider that’s offering a better interest rate, then you must ask your new provider to arrange the transfer in order to maintain the tax-free status of your savings. Note also that some providers may not accept ISA transfers.
If you simply withdraw your money or close the account, it becomes taxable again.
In addition, your current provider might charge you a penalty for transferring, so check for any fees or charges beforehand to determine whether the transfer is worth it.
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