It’s pretty straightforward to convert your cash ISA into a stocks and shares ISA. Any amount of dosh tucked inside a cash ISA can be rerouted to the stocks and shares version.
As well as continuing to benefit from tax-free growth of interest, a shares ISA enables you to enjoy the giddy pleasures of:
To switch out of your cash ISA you must fill in an ISA transfer form for the provider of your stocks and shares ISA.
It’s normally a short form that you download from your new provider’s website (look out for words like “transfer” or “switch your ISA to us”). Some providers may require you to open an account first.
Note, there isn’t a special form for converting cash ISAs. It’ll be the same form that’s used for moving stocks and shares ISAs.
You’d think the actual cash transfer would be as quick as the click of a mouse but oh no, this is investing we’re talking about. It’s as if the cash has to make several rural bus journeys to reach its new home – a good few weeks can pass before your cash ISA money pops up in your new share ISA account, ready to invest.
Choosing a stocks and shares ISA
Stocks and shares ISAs are hosted by online brokers (often known as platforms). These outfits buy funds, shares, bonds and other investments on your behalf, and keep them safe from the taxman in your ISA.
Of course the bank or building society that holds your cash ISA may also offer a shares ISA, too, but the chances are you can find a better deal elsewhere.
A major difference between a cash ISA and a stocks and shares ISA is that with a shares ISA you’ll be charged a platform fee by your broker for its services. Think of it as renting storage space for your investments.
While all stocks and shares ISAs are the same – they’re effectively just a tax-repelling wrapper around your selected investments – choosing the right broker is important because costs between brokers vary hugely. An expensive option can claim a heavy toll on your returns over the years.
If you’re transferring less than £30,000 and your total share ISA investment pot will remain below that level for a few years to come, then look for a broker that levies its charges as a percentage fee.
For example, if your share ISA investments are worth £5,000 and your broker charges 0.25% a year then you’ll pay a platform fee of £12.50 for your ISA.
If your investments are worth £50,000 then you’ll pay £125 per year.
Above the £30,000 threshold you are increasingly better off with a flat fee broker.
For example if your broker charges a flat platform fee of £80 per year then that is what you pay. It doesn’t matter if your investments held with the broker add up to £5,000 or £50,000.
£80 may not sound like a devastating lop off £5,000 but it works out to a 1.6% cut. With a £5,000 share ISA portfolio, an £80 fee slices a whopping 32% from the 5% average real return that UK equities have historically earned.
You can ill-afford to give up growth in your funds to high charges, especially as there are plenty more fee monsters ready to devour your money.
Today’s favourites
Our broker comparison table will help you find a good stocks and shares ISA deal. Our current top picks are:
- Percentage fee: Charles Stanley Direct or Cavendish Online.
- Flat fee: iWeb or Interactive Investor.
If you intend to invest less than £1,000 at a time on a regular basis then look for a broker that doesn’t charge dealing fees on funds or has a cut-price, regular investment scheme. Check out Charles Stanley Direct or Interactive Investor.
If you’re going to invest a lump sum and you won’t buy or sell more than a couple of times a year then iWeb is nigh on impossible to beat.
Choosing an investment for your new shares ISA
We believe in passive investing strategies here at Monevator.
Passive investing is a low cost investment strategy that is easy to understand, simple to maintain and recommended by one of the greatest investors of all time – Warren Buffet (among others).
If you have a low tolerance for faffing around with investments then take a look at the Vanguard LifeStrategy funds. These all-in-one passive investing products provide instant access to a globally diversified portfolio in a single fund, for a dirt-cheap fee. Life doesn’t get any simpler for reluctant investors.
Still, even with such a simple one-shot fund, investing without knowledge is like wandering through the Amazon jungle in your best clubbing gear – asking for trouble.
Take the time to find out more about a suitable asset allocation and read a good book about investing. This will give you more confidence to stick to your plan for the long-term.
Fine detail
- You can only open one stocks and shares ISA and one cash ISA every financial year (that’s April 6 – April 5) but you can switch any of your ISAs from one provider to another as often as you like without compromising your current allowance.
- Whatever you do, don’t withdraw money from your cash ISA to put it in the stocks and share ISA yourself. That’s a major blunder because once you withdraw money from an ISA, it loses the protection of the wrapper. Moving it into a new shares ISA will then count as part your annual allowance. Always use a transfer form. Funds that are properly transferred never leave ISA protection, and do not count as new money from your annual allowance.
- If you convert a current-year cash ISA into a stocks and shares ISA then you can open yet another cash ISA in the same year and fill it with the remainder of your allowance. It’s as if the old cash ISA never existed! Effectively it’s re-designated as a stocks and shares ISA once you transfer.
- You must switch your current ISA whole, but previous year’s ISAs can be split apart. So if you only want to dip your toe into share investing, you can decide exactly how much you want to transfer from yesteryear cash ISAs into the stocks and shares variety.
NISA to see you
Until July 1 you can’t put more than £5,940 in a cash ISA or more than £11,880 in a stocks and shares ISA, or more than £5,940 in your stocks and shares ISA if you’ve maxed out your cash ISA as well.
But from July 1 the New ISA (NISA) comes into play and the annual ISA allowance jacks up to £15,000 per year.
With NISAs, your money can be held in any combination of cash or investments.
- You can transfer cash into stocks and shares.
- Or move stocks and shares into cash.
- Or hold both assets in the same ISA if the provider allows it.
Final thoughts
Private investors often think of their cash ISAs as separate from their other investing activity, but this doesn’t make much sense. Emergency funds aside, if you stay in cash for a lengthy period then count this against the fixed income portion of your asset allocation.
Beware that brokers currently pay a next-to-nothing rate of interest on cash holdings, if you’re lucky. This may eventually change in the new NISA era, but we’re not holding our breath for any imminent generosity from brokers.
Also beware that brokers like to chuck a handful of marbles beneath the toes of consumer mobility by charging transfer fees to let you leave. £25 per holding in your ISA is common.
Finally, it’s worth knowing that the compensation limit for stocks and shares is £50,000 if your broker fails, not £85,000 as with cash.
Sadly, there’s a lot to think about when transferring a cash ISA to a stocks and shares ISA. But the truth is that if you’re sick of earning pitiful rates of interest on your money in the bank, there’s no reward without risk and a bit of effort.
Take it steady,
The Accumulator
Please correct me of I am wrong but I think it’s worth mentioning that basic rate tax payers may not benefit from a stocks and shares ISA as much as they would from a cash ISA. This is because
– you don’t pay tax on dividends which fall into your basic rate band. ( they are received net of a 10% tax credit regardless of whether they are held in an ISA)
– many people will have a capital gains annual exempt amount which is wasted.
Therefore it may be worthwhile for basic rate tax payers to use their cash allowance as much as possible .
> to use their cash allowance as much as possible .
I’ve heard this theory often. Depends if you can be bothered to fight for the rates of interest at the mo. Put it like this, if you are getting interest of 5% on your cash then tax making that an interest rate of 4% is worth getting out of bed for. At an ISA rate for what, 2%, I can’t be bothered to fight for the 0.4% difference, particularly as you can usually do 0.4% better than the cash ISA interest rate at the moment. I got 5% last year out of the Nationwide (okay on a paltry £2.5k stake) – I’d like to see the Cash ISA that offers that.
ISAs are for S&S investing, even as a non-taxpayer I am of that view. The hurt associated with trying to compute CGT if you bought the shares over years like sharesave is too much to handle, so I’m restricted to flogging off < £10k of that sort of holding each year to heave into my ISA. Whereas had I transferred these into ISAs at the time this would have been sorted.
Even for ordinary PAYE grunts rather than Russian oligarchs after your ISA is a few years old you will get gains that would incur CGT if you sold, why do that to yourself 😉 If I had built my existing ISA in a regular trading account rather than enjoying the sunshine I've be poring over statements with a pencil and paper. Life is too short for that.
On a technicality in the article not all brokers charge a platform fee. TD for one don't if you have more than about £6k and you only hold shares, ETFs or ITs, it's OEICs that seem to have brought in the rash of platform fees. And I'm going to get out of funds and move to ETFs once the holdings get big enough to be worth the sharedealing charges, eating a percentage rake every year is not my idea of a good deal. Whereas I have no problem paying the charge to buy the shares, as its a one-off hit. Well, two-off as you pay on selling up to.
“if you’re sick of earning pitiful rates of interest on your money in the bank …”: 3%-5% is readily available currently in High St interest-bearing current accounts and regular savers; it’s well worth removing money from Cash ISAs to get these rates.
I’m with Ermine. Most people with any wealth under 60 and in good health should certainly not give up precious ISA allowances for a couple of % in a weird era of low ISA rates versus non-ISA that I am very confident won’t last.
This is even assuming they want to stay in cash, which they probably shouldn’t.
I think that iWeb is no longer authorised by the FCA (if I’m reading the FCA’s search engine correctly: http://www.fsa.gov.uk/register/firmSearchForm.do)
worrying development – hopefully its not correct
Doesn’t iWeb come under Halifax Share Dealing Limited which has Previous/Trading As names: Bank Of Scotland Share Dealing, Iweb (Uk) Limited, Lloyds Tsb Share Dealing and is still authorised.
I think iweb is just a trading style of Halifax Share Dealing Limited (which is authorised)
iWeb is operated by Halifax Share Dealing, who are registered with the FCA under #183332.
If your investing within your ISA wrap for the long term, then don’t forget those commodities. Commodities seem to be the poor relation to stocks & shares at the moment and many could prove fundamentally very cheap (ie. Silver).
Within your ISA you can also invest in ETF’s that track commodity prices.
Personally I believe stocks are a little ‘toppy’ at the moment but could be proved wrong!
Good luck!
Sov,
http://www.break50.com
on a similar note – i have a few magic beans with selftrade. anyone else in the same boat, is it time to jump ship?
Does anyone have any idea when we’ll know details of the offers that will be available under the NISA regime? I’m hoping to transfer some old S&S ISAs into a cash ISA, or even better would be if brokers will start to offer a cash pot with a reasonably competitive rate of interest side by side with their S&S offerings, to facilitate derisking. I suspect the latter is a naive hope on my part though.
Interesting article.
I too am hoping the brokers will advertise good cash rates to entice people to move their money to them, with the expectation they’ll get giddy and use it all to invest. Again perhaps (probably) naively
[Editor’s note from The Investor: This comment is incorrect, see my comment below]
You are correct on the tax on dividends Paul. Dividend income in ISAs incur the 10pc tax credit of the basic rate. You can’t claim this back. If you are a higher or additional rate tax payer then you have a tax saving as you pay the 10pc rate rather than 32.5pc or 37.5pc rate respectively.
I also agree with Ermine. Filling out tax returns on non-ISA investments is painful. Something I suggest anybody could do without.
@Sure; @The Rhino; @PassiveNoob –
I stand corrected – apologies.
Would anyone else here apart from TA be able to vouch for iWeb or III as good platforms for a budding passive investor (interested in Vanguard funds)? Any good experiences or other alternatives?
Am nervous about investing outside a “brand name” (but the “brand names” are all more expensive – and perhaps I’m being paranoid).
@jonathan
who knows? are we being prudent, saving some hard-earned pounds by reducing costs or are we picking up pennies in front of a steam-roller?
only hindsight will deliver the answers
but at least iweb has a big name behind it in that respect.
you could always split you’re wares between two or more platforms, but you pay in terms of maintenance hassle and probably increased cost
no straightforward easy answers untfortunately
On the tax on dividends issue..
Note that if you hold a bond fund in an ISA then the “distribution” it pays you is treated as “interest” and so is taxed at 20%/40%/45%. So there is a tax advantage even for basic rate taxpayers. Those with a mix of ISA and taxable accounts might (depending on CGT issues in taxable) favour holdings bonds in ISA and equities outside to match their overall asset allocation.
Sorry my last comment somewhat confusing Obviously it is only taxed outside the ISA and the tax is avoided by putting it in. Doh!
Two aspects here:
Charges:- As I ranted (ahem “blogged”) recently, my ISA-wrap is now with Fidelity who are now tooting 0.35% platform fee vs iii at £20 a Quarter. So I’m like a classic granny with the bank / electricity company. I *know* that there’s money to be saved, ooh but the bother of switching… And what if it all goes wrong and they cut me off?
Vulnerability:- Something that I have horrible memories of. In my stupidity around 2006/7 I ridiculously and erroneously tried to “time the market”. I sold my London flat and went into rents. I sought out high-interest deposit accounts, such as IceSave, and NorthernRock [good rates at the time!] and had a slug in each. Cue BBC News and “oh sh*t” thoughts.
But given that we ‘rich’ folks have had our bail-out, I’m not so sure that it will come again. So, should you go through the inconvenience of spreading your £55k/£85 pots around funds/brokers – and missing out on good (?) funds, ie no Vanguard 80:20 on Fidelity? Or what – ’tis a conundrum.
@L — That dividend information is wrong I am afraid. Outside of a tax shelter you effectively pay 0% on dividend income if a basic rate tax payer, or 25% if a higher-rate payer.
See this article:
http://monevator.com/how-uk-dividends-are-taxed/
The 10% tax credit you speak of effectively brings down the rate of taxation outside of ISAs to the ones I have stated above.
As I have said before, it would be best if everyone just forgot about the 10% issue, it’s a relic and causes massive confusion, and it only has any practical impact on a very small number of people for reasons too tedious to get into at 10.35pm. 🙂
You are quite right TI. I stated the marginal rates rather than the effective rate. My language should have been tighter.
I think my point still stands that if you expect shares to grow at 10% PA (I wish), then isn’t it worth holding 100k in shares outside of an ISA?
Assuming you have more to invest in shares then great, put it in an S&S ISA and save further CGT. However the reality is that many people will have less than 100k in shares and therefore an ISA may be better utilised to save income tax rather than capital gains tax.
Clearly dividends will complicate matters as it means a stocks and shares ISA will save both income tax and CGT, however, it should also be highlighted that a stocks and shares ISA will not save a basic rate tax payer any income tax.
To sum up my point, people should be aware of the CGT annual exempt amount and the fact that 10% of tax on dividends is notional and effectively plan their finances with this in mind.
@ermine
are you swapping to ETFs because you are after inc rather than acc unit’s? I’ve heard that there aren’t that many ETF’s in the acc basket (though I haven’t investigated very thoroughly)
So if you’re in the distribution phase of life then ETFs seem to make sense (even the infamous HL don’t charge to hold them (outside of an ISA or SIPP)) otherwise if you’re in the accumulation phase then they’re are a bit more hassle and costly as you have to do all the reinvesting yourself?
PS i think paul does probably make a fair point about the CGT allowance, its ~10k per year tax free which is not to be sniffed at, but at the pain of having to submit a tax return
I guess a problem arises if for whatever reason you want to sell a lot of something outside of an ISA all at once, e.g. to buy a house, then you are going to rue not having squirreled it into an ISA over time (assuming you’ve actually made any gains that is)
@ Paul – I agree that people should be aware of the situation, but it’s quite often stated that basic rate tax-payers have little to gain from share ISAs because they won’t save any dividend income tax.
However:
Any fund with 60% or more of its assets in bonds is subject to income tax and therefore basic rate tax-payers are better off with it in an ISA.
Tax bands can change. I myself was caught out by this earlier in life and more people than ever are being sucked into the 40% band because the government isn’t raising the 20% ceiling with inflation.
The Investor will testify to the pain of being too clever and investing outside of ISAs only to regret it later on as he spends too much life defusing capital gains.
Currently I can earn more interest outside of a cash ISA in an ordinary bank account.
I don’t think you’re wrong at all, I’m just making the counter-point because I think it’s quite a finely balanced judgement call that will vary by circumstance.
Having just come out of a 4.1% 2 Year Fix ISA I was horrified at the sub 2% rates on offer. But decided I’m not changing my asset allocation for any more equity exposure, and now found a 2.3% 2 Year Fixed that at least beats CPI, for now.
Is there an argument to convert a cash ISA into ‘low-risk’ government bonds held in a S&S ISA? After following Hale’s advice I’ve a 100% equities S&S ISA and am treating a seperate cash ISA (and some NSI index-linked certs) as the non-volatile, low-risk part of my investments (the ‘water’ in Hale’s whisky & water analogy).
I’m aware bonds are in a period of record low yields. From a passive investing viewpoint (ie non-market timing), when is a good time to convert cash into bonds (gilts)?
Well, a passive investor would select their asset allocation e.g. 60% equities, 30% bonds, 10% cash and then invest along those lines. Therefore if bonds are part of your allocation – because you value the potential of bonds to lower the volatility of your portfolio and diversify risk due to a low correlation with the returns on equities – then you should be in them now. Looking for some other trigger to make your move is market timing.
Thanks for the reply. I guess it’s a circumstance of how I began investing, reading Hale & Monevator a few years ago; I built a 100% equity portfolio, safe in the knowledge that my overall assets were actually split 60/40 between this equity portfolio and cash, and am now faced with turning my cash into a ‘proper’ bond allocation (the 30% in your example above).
My problem is I’ve read comments (here, mainly) from some people explaining they would rather hold cash than bonds at the moment…
But I realise from your simple answer above that this is the timing the whole ‘passive approach’ should be avoiding! 🙂
I should just get on and do it, and rest easy in the knowledge that the bonds will perform their role in the mix (over the long term, etc). Thanks again.
Perhaps ‘dollar cost average’ into bonds from cash, reducing the risk you’ll put it all in today, and the bond market bombs tomorrow.
I’m at the point where funds available for investments are more than my annual ISA limit. Given the choice, does it make sense to hold the low-volatility, less risky assets outside an ISA, as these assets wouldn’t be expected to generate as much growth over the long term?
ie Should I hold the bonds (gilts, index-linked, etc) in a non-ISA account, and the equities in the ISA?
Thanks
Bonds should be in held in tax sheltered accounts because interest payments are taxed at income tax rates in comparison to the more benign rates on dividends.
Your capital gains allowance will absorb much of the the growth you get with shares and you can tax loss harvest too.
Hi, quick question,
I assume the isa allowance is the money actually paid into the S+S account each year. Therefore once paid into the account can be used to buy/sell/re-buy at whatever rate you fancy?
Ie: I could pay the full 15K in each year, invest the 15k, then sell and buy another 15k all in the isa obviously?
Similarly i assume i could pay in 15k a year to the s+s isa, but only invest 10k a year leaving me with a growing pot (5k a year cash within the isa) to invest as and when i wanted even if this was 3 years down the line. So that i have money in my s+S isa to buy big one day but don’t have to worry that i may have already filled my isa allowance for that year?
@Phil — I think you’re understanding it right. Once money goes into an ISA, it can stay in ISAs for the rest of your life if you so choose. You don’t have to declare it to the authorities ever again, and it’s protected from tax *until* you withdraw it. If it’s in a stocks and shares ISA you can buy and sell shares within your ISA without worrying about the ISA allowance at all — because you are using money/assets that is already in your ISA.
The £15K is the *new* money that you can put in every year.
So for instance I have a six-figure sum in ISAs, which I invest in shares that I sometimes trade. Every year I top it up with the full allowance.
Hi,
Quick question on ISAs:
If I have more to invest than my annual ISA allowance, and wanted to put the excess in shares through the same platform (eg iweb) until I can use next years allowance, would I have to sell the shares and buy them back in the ISA next year, or do platforms usually allow you to just transfer the shares across into the ISA?
Or perhaps it depends on the platform?
@arty — Yes, unfortunately you will have to sell next year and then rebuy in the ISA. For some reason HMRC does not allow transfers in of shares directly, perhaps because of rhe CGT shielding potential…