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Put 150 years into your retirement calculator and smoke it

Put 150 years into your retirement calculator and smoke it post image

A decade ago I wrote about investing for 100-year olds. I wondered how we should work, save, invest – even have children or time our retirements – given ever-rising longevity?

If kids born in the developed world in the early years of 21st Century could expect to see the 22nd, what would that do for their investment time horizon?

Interesting questions – but my article proved to be a masterly example of the perils of market timing.

A few years later UK life expectancy actually fell!

Talk about being suckered in at the top.

Pundits dutifully penned gloomy pieces bemoaning how younger Britons would not live as long lives as their elders. But actually, it’s not quite so clear.

Full Fact reports UK life expectancy has stalled, not fallen:

According to the ONS: “Life expectancy at birth in the UK did not improve in 2015 to 2017 and remained at 79.2 years for males and 82.9 years for females.”

If you look at the trend over time in those figures, both male and female life expectancies rose slowly until about 2014, and they haven’t discernibly changed since.

On the other hand, the UK pension industry cut life expectancy forecasts by six months in 2019.

Some researchers such as those at The King’s Fund expect Covid-19 to further depress longevity forecasts:

The scale of excess mortality associated with Covid-19 thus far, and evidence that many lives have been cut short (for example almost 11% of Covid-19 deaths were among people aged under 65 years), is unprecedented in recent decades.

The wider socio-economic impacts of the pandemic could also have an adverse impact on health and mortality overall.

They state the influence that the pandemic will have on life expectancy in 2020 will become clear in due course.

Oh, joy.

What the Dickens?

Even leaving aside the recent choppiness in the prognosis for longevity, it’s clear that in the UK the most dramatic advances happened long ago.

To quote those same researchers:

Males born in 1841 could expect to live to only 40.2 years and females to 42.2 years, mainly because of high mortality rates in infancy and childhood.

Improvements in nutrition, hygiene, housing, sanitation, control of infectious diseases and other public health measures reduced mortality rates, increasing life expectancy to 55 years for males and 59 years for females by 1920.

That’s a big leap by the early 20th Century. Compare though the 1841 figures with life expectancy in the year 2000. By then newly-born girls could expect to live until their 80s, and men hope to see their late 70s.

That means life expectancy almost doubled!

Perhaps it’s no surprise if there’s some frustration with this century’s more erratic advances:

Looking at this graph, you might infer that life expectancy advances have slowed to a crawl.1

However it’s not as if there’s been no progress. (I’m sure most people who got an extra three years wouldn’t have wanted to give them back…)

It’s also worth noting that life expectancy is increasingly stratified between different social groups.

Socially-deprived male smokers in ex-industrial towns who haven’t worked for two decades could indeed (unfortunately) be seeing their life expectancy fall.

But clued-up Monevator readers with the wherewithal to gaze ahead 40 years and to save towards it – keeping fit en-route – probably have more to look forward to.

Want more? My co-blogger The Accumulator wrote a great post on how to think about your personal life expectancy (and another one for couples).

Tweak your financial plan(s) accordingly.

Who wants to live forever?

What if the big advances in life expectancy aren’t over? Not just in terms of how long you live – but how long you will stay healthy?

Imagine if you lived until your 150th birthday, and you were still very active at 140.

What would that do to how you work, save, spend, and invest?

Another 50% or more added to our life expectancy sounds like science fiction. Currently it is science fiction…

…unless you’re a yeast cell, a modified mouse, or even a primate that has taken part in one of the various longevity research projects making waves around the world.

In that case certain supplements, eating protocols, and gene-related therapies may have already increased your lifespan by 20-50%.

My interest in this was piqued by my girlfriend, who told me on our first date that she planned to live until 150.

“Go on a few more dates with me and it’ll certainly feel that way,” I said.

Morbid banter aside, she also pointed me towards the work of Harvard Medical School biologist David Sinclair and his 2019 book Lifespan.

Sinclair believes we should treat aging as a disease to be cured, rather than an immutable law of nature.

In Lifespan he introduces the ‘information theory of ageing’. The idea is that instability in an organism – grey hair, wrinkly skin, cancer, ageing – amasses over time due to the loss of the organism’s ability to repair genetic damage.

From Wikipedia:

The authors begin by seeking to characterize how professionals view the hallmarks of aging, including genomic instability caused by DNA damage; alterations to the epigenome that controls which genes are turned on and off; loss of healthy protein maintenance, known as proteostasis; exhaustion of stem cells; and the production of inflammatory molecules.

“Address one of these, and you can slow down aging,” the authors argue.

“Address all of them, and you might not age.”

I was skeptical when I began the book. Sinclair is a persuasive evangelist, and he largely won me over. I was already an intermittent faster and a firm believer in exercise, as I shared on Monevator years ago. I’m now looking into other anti-ageing hacks cited by Sinclair, such as resveratrol and metformin.

I already think we’re at the start of a transition towards self-directed health – soon to be better informed by genetic testing – that will further widen the gap between the healthy and unhealthy.

For instance, I subscribe to the home blood testing service Thriva. It helped me to get my cholesterol down without resorting to the statins that doctors were pushing towards me:

Source: Thriva

I suspect cholesterol isn’t the whole story when it comes to heart disease. But I also believe the actions I took to lower it – dietary changes, and further reducing body fat – will lead to a healthier life. I used cholesterol as a marker.

Thriva tracks cholesterol and many other metrics in one place, making it very easy to monitor. Consider giving it a go. (That’s an affiliate link incidentally. Sign-up via it and we both get £10 off our next Thriva test.)

Monitoring today takes a pinprick blood test. It won’t be too long though until most parameters can be measured in real-time by wearables or implants.

FIRE for centenarians

What all this means for planning for retirement is anyone’s guess.

Your first move might be to massively inflate the numbers you pop into your nearest retirement calculator.

Perhaps age-reversing treatments might enable you to retire fairly healthy at 85 and then to live for another 50-70 years?

You might fear this will strain your withdrawal rate calculations to the limit – until you remember you’ll also have another 20 years of working and earning for your nest egg to compound before you need to touch it!

Though we can obviously assume the state retirement age will have risen above – ahem – 67 in a live-to-150 world.

Which is a clue to the real elephant in the room. Our economies are just not ready for lots of human beings to routinely live well beyond 100.

I’d imagine every annuity-providing life assurance company would go bust tomorrow if some protege of Sinclair’s announced a surefire way to give retirees an additional 30 years of extra life expectancy.

As for all those companies who still have legions of final salary pension claimants on their books…

Right now the world looks gloomy. Domestic politics is dire, the earth is on fire, a new Cold War between the US and China looms – oh, and there’s a pandemic raging. It’s easier to imagine lives getting shorter than longer.

The history of progress since the start of the scientific era tells us we should hedge our bets.

I still don’t expect to live to 150, or anything like it.

But I wouldn’t rule it out!

  1. It’s tempting to do a spurious correlation with similarly flattish interest rates. Hedge funds have been marketed on less. []
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Stocks and shares ISAs: everything you need to know

ISAs shelter investments from tax

A stocks and shares ISA protects your investments from tax on growth and income. If you are serious about investing then one of the best ways to boost your wealth in the UK is to build your portfolio inside an ISA.

ISAs are tax-efficient ‘wrappers’ created by the UK government to encourage saving. Any investment inside the ISA wrapper can grow tax-free as long as you don’t break the rules.

Stocks and shares ISAs are provided by high street banks, fund managers such as Vanguard, financial advisors, and specialist online brokers or platforms.

You get a new ISA allowance every tax year. You can put the entire amount into a stocks and shares ISA if you wish.

£20,000 is the maximum amount of new money you can pay into a stocks and shares ISA during the tax year 2020-21. The tax year runs from 6 April to 5 April.

The ISA deadline is 5 April every year. That’s the last day of the current tax year you can use up your allowance. You get a new allowance from 6 April but you can’t roll over unused ISA capacity from the previous year.

If you’ve left things late then it’s enough to have the cash taken off your debit card and inside your ISA by close of business on 5 April. You don’t need to have actually invested the cash for it to qualify for tax-free protection.

Why open a stocks and shares ISA?

A stocks and shares ISA combines three critical features:

  • The ability to invest in assets that are expected to grow faster than cash.
  • Legally recognised tax protection means you don’t have to worry about HMRC handing you a large bill because you invested in some sketchy offshore caper.
  • Instant accessibility – you can invest in liquid holdings that can be sold to meet unforeseen difficulties or other life events that occur before you reach pension age.

In short, ISAs are a private investor’s top tax-protection shield, along with pensions.

Which taxes are not paid in a stocks and shares ISA?

The main taxes that you do not have to pay on investments in a stocks and shares ISA are:

  • Income tax on interest – as earned on bonds and bond funds.
  • Dividend income tax – as paid by shares, equity funds, and property funds.
  • Capital gains tax on profits – as paid on the growth in value of taxable assets when you sell them.
  • Inheritance tax – sometimes, although it’s complicated, and depends on the ISA passing to a spouse or civil partner who’s not been estranged from the deceased.
  • Interest and dividends paid straight out of your ISA are not taxed.
  • Withdrawals aren’t taxed unlike with a pension. (Although you will pay a penalty if you withdraw from a Lifetime ISA at the wrong time).

Investing in a stocks and shares ISA is a no-brainer, even if you think your holdings are too small to be caught up in the taxman’s net.

  • Many providers charge you no more for holding an ISA than they do for keeping your assets in a taxable account.
  • Though most of us start out small, your investments can grow surprisingly rapidly over the years and outstrip your ability to manage everything within your tax allowances.
  • Taxes can go up in the future and the government has heavily trailed that likelihood given our mountainous national debt. Wealth taxes are an obvious target. Use your tax shelters while you can.
  • You don’t even have to tell HMRC about your ISA transactions (and believe me, if you ever have to fill in a tedious capital gains tax form, you’ll fall to your knees with thanks that all your investments are in an ISA.)

If you’re on a mission to achieve financial independence before your minimum pension age1 then stocks and shares ISAs will accelerate you towards your goal.

The best course for most will be to combine ISAs and SIPPs to achieve the FI dream by using ISAs to bridge the gap between your FIRE date and minimum pension age.

The minimum pension age for accessing your personal pension is currently 55 but the government has confirmed it will rise to age 57 at some point in 2028. Thereafter the minimum pension age is due to be set ten years before your State Pension age.

A stocks and shares ISA is also a great place to stash your pension’s 25% tax-free lump sum so that you can expand the amount of income you can take without being pushed into a higher tax bracket.

Investment ISA types

You can hold investments in the following types of ISA:

  • Stocks and shares ISA
  • Lifetime ISA (choose a stocks and shares version not cash)
  • Junior ISA (choose a stocks and shares version not cash)

ISA providers call stocks and shares ISAs by various names including:

  • Shares ISA
  • Self-Select ISA
  • Ready Made ISA
  • Share Dealing ISA
  • Investment ISA
  • Workplace ISA
  • AIM ISA

They’re all stocks and shares ISAs that have been given different marketing labels depending on how the provider is trying to appeal to consumers.

A stocks and shares ISA may also be a flexible ISA. This means you can replenish withdrawals without running down your ISA allowance.

You can invest in a stocks and shares ISA from age 18 onwards by opening an account with your chosen platform (bank, fund manager, IFA or similar).

We’ve put together a list of providers in our cheapest online broker table. These providers enable you to invest in a DIY stocks and shares ISA. You can see who offers a flexible stocks and shares ISA in the left-hand column.

Stocks and shares ISA rules

You can have as many stocks and shares ISAs as you like, so long as you don’t put new money into more than one per tax year.

You can split money across a stocks and shares ISA, lifetime ISA, cash ISA, and innovative finance ISA, provided you don’t put in more than £20,000 between them,2 nor open more than one of each type, in the same tax year.

You can transfer money from previous years’ ISAs (of any type) into multiple stocks and shares ISAs with any provider. And vice versa.

Transferring old ISA money or assets does not:

  • Use up your ISA allowance for the current tax year
  • Break the one-type-of-ISA-a-tax-year rule

You can transfer any amount of your previous years’ ISA’s value. You can transfer the whole lot into one ISA, or transfer a portion of it into several ISAs, or any other combo you desire.

You must transfer the whole balance if you’re transferring your current tax year’s stocks and shares ISA

You can transfer it into a different type of ISA – provided you haven’t already opened one of that type this tax year. In that instance, you can also open a new stocks and shares ISA later that tax year. This is an exception to the one-type-of-ISA-a-tax-year rule.

Always transfer an ISA to retain the tax-free status of its assets. Don’t withdraw cash and plop it in a new ISA – doing so uses up your ISA allowance!

Transfer assets in specie (this avoids them being sold to cash) if you are given the option. In specie moves are also known as re-registration.

You can’t invest new money in a workplace ISA and a stocks and shares ISA.

You can invest £9,000 per tax year in a JISA for each of your children. This doesn’t reduce your own ISA allowance.

Most stocks and shares ISAs have minimum required contributions. They are often as low as £50.

Replacing cash withdrawn from a flexible stocks and shares ISA does not use up your ISA allowance. However you can’t replace the value of shares, or other investment types, that you moved out of the account.

It’s worth checking your ISA’s T&Cs whenever you choose a product. Not all of the government’s ISA rules are mandatory and ISA managers do not have to support all features.

Best ISA funds

The main investment vehicles that you can include in a stocks and shares ISA are:

  • Mutual funds such as OEICs and Unit Trusts
  • Exchange Trade Products such as ETFs and ETCs
  • Investment trusts
  • Individual company shares
  • Individual government and corporate bonds

The government maintains a comprehensive list of the complete menagerie.

If you are new to investing then our passive investing HQ can explain more.

Remember that all of these assets above are riskier than cash – you can get back less than you put in.

See here to help gauge how much risk you might be able to handle as you build your investing portfolio.

Index trackers are an investment vehicle that combine simplicity and affordability and are recommended by some of the best investors in the world. Here’s a list of some particularly useful index trackers.

The Financial Services Compensation Scheme (FSCS) provides some investor compensation should your ISA or investment manager go belly up. Do take a look at the link – the scheme is convoluted to say the least.

Stocks and shares ISA costs

You can expect to pay stocks and shares ISA investment fees that cover:

  • Your ISA provider’s management costs
  • The cost of owning investment funds
  • Dealing fees for trading investments in the open market
  • Fees for special events such as transferring your ISA

All fees should be transparently laid out by your ISA provider and investment fund managers.

Charges that can be paid from monies held outside of your ISA, if your provider agrees, include:

  • ISA provider’s management costs
  • Fees for special / one-off events, such as closing your account

Charges that must be paid from funds held within the ISA include:

  • Dealing fees
  • The cost of owning investment funds

A flexible ISA doesn’t enable you to replace the cost of ISA charges against your allowance.

Beware of transfer fees that can rack up when your provider charges you ‘per line of stock’. For example, they might charge you £15 per company stock and investment fund that you own.

Tax efficiency

You can’t transfer most unsheltered assets straight out of a taxable account and into your stocks and shares ISA wrapper.

You generally have to sell the assets first and buy them again inside your ISA. This is colloquially, if not popularly, known as Bed and ISA.

Selling an unsheltered investment can cost you capital gains tax on your profits but you can duck that by staying within your capital gains tax allowance and defusing your capital gains.

You can transfer employee share save scheme shares directly into an ISA in some circumstances.

If you want to invest more than you can squeeze into your annual ISA allowance, then research tax efficient investing to avoid building up a capital gains tax time bomb.

Inheriting a stocks and shares ISA

Check that the T&Cs of your stocks and shares ISA allow for it to remain tax-free and invested after your death.

The main wrinkle that applies specifically to stocks and shares ISAs is that you can only receive assets in specie by transferring them to the same provider as your spouse or civil partner held them with. You can transfer the assets to another manager once they are held in your name.

The other clause is that assets transferred in specie must be the ones held on the date you were told of the death of the investor. (Some might see this rule as pretty heartless. However I don’t know about you but the very first thing I want to know after hearing the news of my partner’s death is the list of non-cash assets they’ve got tucked in their ISAs. Let’s cut to the chase!3)

In specie transfer must be made within 180 days of the assets passing into the beneficial ownership of the surviving spouse / civil partner.

Some wealth managers and platforms market AIM ISAs that twin the advantages of a stocks and shares ISA’s tax efficiency with the inheritance tax-elusiveness of Alternative Investment Market (AIM) shares.

Some but not all AIM shares qualify for inheritance tax relief under peculiar government rules that are subject to change. An AIM ISA is:

  • Risky
  • Not guaranteed to work out
  • Subject to high minimum investments, which add a naughty elite frisson to the escapade

The links are there if you need ‘em.

Stocks and shares ISAs aren’t just for the rich

Many people think ISAs are a rich person’s concern, since very few have experience of paying capital gains tax, or even income tax on share dividends. But modest savings can really add up to a big portfolio in a bull market, at which point the tax protection is invaluable.

Shielding your investment returns from tax like this can make a huge difference to your end result from investing.

Take it steady,

The Accumulator

  1. The moment you can first crack open your personal pension. []
  2. Or more than £4,000 in the case of the lifetime ISA. []
  3. Sarcasm. []
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Weekend reading logo

What caught my eye this week.

Most people have given up on a V-shaped recovery. The concept of a U-shaped one is positively passé.

As for the Swoosh – please!

Nope, the latest red hot letter to explain the state we’re in comes with the K-shaped recovery.

As Barry Ritholz rather reluctantly explained this week:

If you were to describe the 11th letter in the English alphabet to someone who has never seen it, you would note that it is distinguished by a bold vertical line, from the midpoint of which begins two rightward traversing lines, one slanting 45 degrees upward from the horizontal, and the other 45 degrees downward.

This description of the economy fairly captures the two separate paths of the recovery.

The line heading upward symbolizes those parts of the economy that have benefited from pandemic […]

The line heading downward symbolizes, well, pretty much everyone else.

Here’s an illustration from the US Chamber of Commerce:

Source: US Chamber of Commerce

Does it apply to us, too?

Many Monevator readers are richer than they were in January. We’ve retained our jobs, spent less due to being locked-in, and may also have seen our US-heavy portfolios rise, especially if we’ve some bonds and gold, too.

At the same time, other Britons caught in the wrong place when the music stopped – particularly those who fell outside of the safety nets, such as directors of the wrong limited companies – have been hit hard.

Ritholz sees the K-recovery as a continuation of wider trends:

Over the past four decades, the U.S. has become a nation that has seen the benefits of economic growth, productivity and innovation accruing to fewer and fewer people.

Once a nation of ‘Haves’ and ‘Have Nots’, we are now a nation of ‘Haves’, ‘Have Nots’, and Have Much More’.

The last category has left the first two in the dust.

Here’s an example of the K-shaped recovery applied to the US workforce by The Washington Post, cited by econlife:

OK Computer (says no)

Here in the UK I’d say we’ve only seen the ghost of a K-shaped recovery so far.

Government support and the generous furlough scheme curbed – or at least delayed – the lived impact of the UK’s brutal GDP collapse.

While we have plenty of rich individuals who are doing alright, sector wise we don’t have a vast tech industry that can benefit from the upper leg of the K. At the same time, the Eat Out to Help Out scheme may have helped the K’s lower leg look kinkier for the hospitality sector.

Not wildly convincing.

Ultimately the letter K will probably prove about as useful as the letters that preceded it in predicting what will happen next.

Which, to my mind, is not very useful at all!

[continue reading…]

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The ISA allowance: how it works and how to use it

How much can you put in your ISA piggy bank this year?

The ISA allowance1 is the maximum amount of new money you can put into the range of tax-free savings and investment accounts that make up the ISA family.

The ISA allowance for the current tax year to 5 April is £20,000.

The tax year runs from 6 April to 5 April the following year.

ISAs are a brilliant vehicle for growing your wealth tax-free but the rules are complicated and seemingly made up by a bureaucrat with a grudge against humanity.

The purpose of this article is to help you make the most of your ISA allowance. We aim to iron out the many wrinkles within the system that aren’t readily apparent on the government’s ISA pages.

What is an ISA?

ISA stands for Individual Savings Account, and it’s the UK’s top tax-free account for savings and investments that you want to access before retirement age. ISAs are known as a tax-free wrapper because they legally protect the assets inside the account from these taxes:

  • Income tax on interest paid by cash, bonds and bond funds.
  • Dividend income tax on dividends paid by shares and equity funds.
  • Capital gains tax paid on the growth in value of assets such as shares, bonds, and funds.

You don’t even have to declare your ISA assets on your self assessment tax return. This can save you a bellyful of tax paperwork.

Your assets remain tax free as long they’re held in an ISA account and you don’t have the cheek to die. You don’t even lose out if you move abroad.

Unlike a pension, your ISA funds are typically accessible2 at any time.

You’re also not charged income tax on withdrawals from an ISA unlike a pension, so there’s no danger of being pushed into a higher tax bracket by the wealth you accumulate.

Read this article for more on ISAs Vs SIPPs.

ISA accounts: what types are there?

ISA type Allowance3 Eligible investments Notes
Stocks and shares ISA £20,000 OEICs, Unit Trusts, Investment Trusts, ETFs, individual shares and bonds Age 18+. Can be flexible but only the cash component
Cash ISA £20,000 Savings in instant access, fixed rate, and regular varieties Age 16+. Can be flexible
Innovative Finance ISA (IFISA) £20,000 Peer-to-peer loans (P2P), crowdfunding investments, property loans Age 18+. Can be flexible. Not covered by FSCS compensation scheme
Lifetime ISA (LISA) £4,000 As per cash ISA or stocks and shares ISA Open account from age 18-40. Pay in until age 50. Only use for buying first home, or from age 60, otherwise penalty charge
Junior ISA (JISA) £9,0004 As per cash ISA or stocks and shares ISA Open until age 18. Child may withdraw funds from 18+

New Help to Buy ISAs are no longer available. If you have one already you can continue to save into it until 30 November 2029.

What is a NISA? NISA stands for New Individual Savings Account and was a term used to describe the new-style ISAs that were brought in by the Coalition Government of 2014. George Osborne’s NISA rules swept away the awkward restrictions of the past, and replaced them with a raft of new complications instead. Nowadays every ISA uses the NISA rules and so the NISA term has dropped out of use.

How much can I put in an ISA in 2020?

You can save up to £20,000 of new money into your ISAs during the tax year 6 April 2020 to 5 April 2021.

You can put all £20,000 of your ISA allowance into one ISA5 or split it across any combination of the following ISA types:

  • Cash ISA
  • Stocks and shares ISA
  • Lifetime ISA (£4,000 annual limit)
  • Innovative Finance ISA

A diagram that shows how to split your ISA allowance between the 4 different ISA types.

The rule is that you can only pay new money into one of each ISA type per tax year.

For example you could put £20,000 into a stocks and shares ISA and nothing into any other type.

Or you could split your £20,000 something like this:

  • Stocks and shares ISA = £14,000
  • Lifetime ISA = £4,000
  • Innovative Finance ISA = £1,000
  • Cash ISA = £1,000

Or any combination you like, as long as you don’t pay in more than £20,000 within the tax year, and don’t put new money into more than one of each ISA type.

What about money in previous years’ ISAs? That money does not count towards your annual ISA allowance for the current tax year.

For clarity’s sake, we’ll refer to assets in your previous years’ ISAs as old money and assets in the current tax year’s ISAs as new money.

Interest, dividends, and capital gains do not count towards your ISA allowance, either.

Your £20,000 ISA annual allowance is a ‘use it or lose it’ deal. You can’t rollover any of it into the following tax year.

The ISA deadline for using up your allowance this tax year is 5 April 2021.

More wrinkles:

  • Each ISA can be held with the same or a different provider.
  • Payment into a JISA uses up the child’s allowance, not yours.
  • Some providers have all-in-one cash ISAs so you can split new money between instant access and fixed-rate options within a single ISA wrapper. That means you only count as contributing to a single cash ISA.
  • The Help to Buy ISA counts as a cash ISA. If you pay new money into your Help to Buy ISA then you can’t also pay new money into a Cash ISA. A few providers include their Help to Buy ISA within their all-in-one cash ISA.
  • A workplace ISA counts as a stocks and shares ISA. If you’re one of the three Britons6 who own one then you can’t pay new money into a standard stocks and shares ISA, too. See below for our cunning workaround.
  • You can only claim the government bonus when buying your first home from a Help to Buy ISA or a Lifetime ISA, not both.

Withdrawing from an ISA

If you withdraw money from your ISA then can you replace it and not reduce your ISA limit?

Yes, but only if your ISA is flexible.

If your ISA is not flexible then a withdrawal reduces your tax-free ISA savings.

For example:

  • You put £10,000 into your ISA. That reduces your ISA allowance to £10,000.
  • You withdraw £5,000.
  • You can still only contribute another £10,000 into your ISAs this tax year.
  • The maximum you’ll have put into your ISAs this tax year is £15,000.

Flexible ISAs get around this problem – see below. Ask your provider if your ISA is flexible or check its key features.

How many ISAs can I have?

You can have as many ISAs as you like. Or as many as providers are willing to open for you.

You just can’t contribute new money to multiple ISAs of the same type in the same tax year. That rule remains the same whether we’re talking about a freshly opened ISA or one that you hold from previous years.

You can put new money into a previous year’s ISA if your ISA provider allows.

If you put new money into a previous year’s ISA (for example a stocks and shares ISA) then you can’t put new money into another stocks and shares ISA.

The government calls this the one-type-of-ISA-a-tax-year rule. Snappy.

However you can open new ISA accounts by transferring old money into them from previous years’ ISAs.

You could open ten stocks and shares ISAs with multiple providers by transferring old ISA money into them. Let sanity be your guide!

That leads to an obvious workaround for moving new money into more than one ISA of the same type. More on this below.

ISA transfers

An ISA transfer enables you to switch your ISA to another provider without losing the tax exemption on your assets.

The rules for any ISA opened in the current tax year are straightforward:

  • You must transfer the whole balance of your ISA.
  • You can transfer it any time to another provider.
  • You can transfer it to any other type of ISA, or even the same type. Let’s live a little.
  • If you transfer from one type of ISA to another, then you count as subscribing to the receiving ISA type. For example, if you transfer from a cash ISA to a stocks and shares ISA, then can now open a new cash ISA without contravening the one-type-of-ISA-a-tax-year rule.
  • If you transfer from a Lifetime ISA to a different ISA type before age 60, then you’ll have to pay a nasty penalty charge.
  • Beware any transfer fees imposed by your current ISA provider like a grasping sports agent.
  • Transfers into a Lifetime ISA must not exceed the £4,000 current tax year limit.

The golden rule with any ISA move is to transfer your money and not just go “sod it!” and withdraw it in a flounce. If you transfer your ISA to another provider, your assets retain their tax-free status. If you withdraw the money then they don’t.

Find out how to transfer a stocks and shares ISA.

ISA transfer rules for previous years’ ISAs

You have more options with ISAs opened in previous tax years. You can transfer any amount from any of your old ISAs to the same or any other type of ISA.

  • Any number of your old ISAs can be consolidated into a new ISA of the same or different type.
  • Any of your old ISAs can be split by transferring a portion of the balance into multiple ISAs of the same or different types.
  • You can transfer to the same or different providers.

Transferring previous years’ ISAs leaves your current tax year’s allowance untouched.

For example, moving £40,000 from an old ISA into a new ISA still leaves you with a £20,000 ISA allowance for the current tax year.

You can transfer £4,000 into this year’s LISA from an old ISA (of any type), gain the government bonus, and leave your £20,000 allowance entirely intact.

This move maxes out your LISA allowance for the tax year, and you must not exceed that £4,000 limit by transferring in extra cash into the LISA during the current tax year.

As before, make sure you transfer an ISA using the new provider’s ISA transfer process to maintain its tax-free status. Don’t withdraw cash or re-register assets using any other method.

As you can see, your old ISA optionality amounts to a near Bacchanalian free-for-all.

Which brings us to our heavily trailed workaround for the one-type-of-ISA-a-tax-year rule. Hang on to your hat.

If you wanted to split £20,000 between two new stocks and shares ISAs then you could do it like this:

  • £10,000 into a new stock and shares ISA.
  • £10,000 into a new cash ISA.
  • Transfer £10,000 from previous years’ ISAs into a new stocks and shares ISA.
  • Repeat as necessary.

Money is fungible as they say.

Obviously this manoeuvre requires you having, say, an emergency fund of cash tucked away in your old ISAs, but that’s a very good idea anyway.

Flexible ISAs

Flexible ISAs let you withdraw cash and put it back again later in the same tax year without grinding down your current tax year’s ISA allowance, or reducing how much you’ve saved tax-free. The following ISA types may be flexible:

  • Stocks and shares ISA
  • Cash ISA
  • Innovative Finance ISA

Flexibility is not an inalienable right. The ISA provider has to offer it and be prepared to deal with the administrative faff. Providers often offer flexible and inflexible versions of the same ISA type.

Here’s an example to show how the flexible ISA rules work:

  • ISA allowance = £20,000
  • Contributed so far = £10,000
  • Remaining contribution = £10,000
  • Withdraw = £5,000

You can still pay £15,000 into your flexible ISA before the ISA deadline at the end of the tax year.

Remaining ISA allowance = £15,000 (£10,000 remaining contribution + £5,000 replacement of the withdrawal.)

A formula for calculating the remaining ISA allowance when you withdraw from a flexible ISA

If your ISA was inflexible then your remaining ISA allowance would be just £10,000. In other words, you couldn’t replace the withdrawal amount, which loses its tax-free status.

Contributions made in the same tax year as withdrawals work in this order:

  1. Replace the withdrawal.
  2. Reduce your remaining ISA annual allowance.

Withdrawals from an old flexible ISA can be replaced in the same tax year and won’t reduce your current ISA allowance, if the ISA is no longer active.

Flexible ISAs with assets from previous tax years and the current tax year work like this:

Withdrawals

  1. From money contributed in the current tax year.
  2. From money contributed in previous tax years.

Replacement contributions

  1. Replace previous tax year’s withdrawals.
  2. Replace current tax year withdrawals.
  3. Reduce your remaining ISA annual allowance.

All replacement contributions must happen in the same tax year as the withdrawal.

Some providers say that the withdrawal has to be replaced in the same ISA account that you took it from.

The ISA rules allow you to put your withdrawn money back into different ISA type(s) with the same provider, if they make that facility available. Check your provider’s T&Cs. Or send them thousands of emails in BLOCK CAPITALS to make them respond.

A flexible stocks and shares ISA allows you to replace the value of cash withdrawn. You can’t replace the value of shares, or other investment types that you moved out of the account.

You can sell down your assets, withdraw the cash, and then replace that cash later in the tax year, and buy more assets with it.

Dividend income should also be flexible in a flexible ISA scenario. Looney Tunes.

If you transfer your flexible ISA to another provider then check that their product is also flexible.

You may lose the ability to replace withdrawals if you don’t replace them before you transfer a flexible ISA. Again, this is determined by your provider’s T&Cs rather than the rules. (Subject them to a paid Twitter campaign to get an answer on this one.)

If your withdrawals result in account closure then your provider can allow you to reopen your flexible ISA in the same tax year and replace the money. That applies to old and new ISA accounts but check with your provider… (Via a billboard installed outside their window if necessary.)

Flexible ISA hack to build your tax-free ISA allowance

  1. Open a flexible, easy access ISA that accepts ISA transfers.
  2. Transfer your non-flexible old ISAs into the flexible ISA.
  3. Your flexible ISA now accommodates the value of the old ISAs – say £40,000.
  4. If your flexible ISA doesn’t pay table-topping interest then withdraw your cash and spread it liberally among the humdinger accounts of your choice, or into an offset mortgage account.
  5. Move your cash back into the flexible ISA by 5 April of the current tax year, and fill as much of the current year’s ISA allowance as you can, too. For instance another £20,000.
  6. In our example, you now have £40,000 + £20,000 = £60,000 tax-free and flexible.
  7. From April 6 of the new tax year: withdraw your cash and liberally spread it…
  8. Repeat as required.

It may look like a vain hope at the moment, but this method builds up a flexible tax-free position that could prove valuable later in life.

Perhaps it could be a place to shelter and grow your 25% tax-free pension cash, which could be instantly transferred into a stocks and shares ISA come the day. Or maybe you’ll sell a business one day, or receive some other windfall, or taxes could go up…

Watch out for the £85,000 FSCS compensation limit (see below) and open a new flexible ISA with a different authorised firm before you go over that line.

What happens if you exceed the ISA allowance?

HMRC will be in touch if you exceed the ISA allowance. You may be let off for a first offence but otherwise they will instruct your ISA provider on what action to take.

Action is likely to include your extraordinary rendition to an offshore black site where you will be forced to read HMRC compliance manuals for the rest of your life.

Sorry, I must stop reading conspiracy theories.

Or maybe HMRC will require overpayments and excess income to be removed from your account. And invite you to pay income tax and capital gains (potentially on all assets in the ISA) from the date of the invalid subscription until the problem is fixed.

You can call HMRC on 0300 200 3300 to discuss. Just don’t expect them to admit the Deep State stuff. Open your eyes sheeple!

Your ISA provider may also charge you a fee for all the hassle.

You can similarly get into hot water for dropping new money into your ISA as a UK non-resident, or for breaching the one-type-of-ISA-a-tax-year rule, or for breaking the age restrictions.

FSCS compensation scheme

If your ISA provider goes bust and your money can’t be recovered, then the Financial Services Compensation Scheme (FSCS) waits in the wings.

  • Cash – You can claim up to £85,000 compensation on cash held with each authorised firm.
  • Stocks and shares – It’s more complicated, quelle surprise, but you can also claim up to £85,000 compensation on investments held with each authorised firm.
  • Innovative Finance – These products are not covered by the FSCS scheme. You’re on your own.

Watch out for the definition of an authorised firm. Often multiple brand names sit under the same authorised firm umbrella.

For example, if you have cash at HSBC and First Direct then you’re only covered for £85,000 across both because they are one and the same authorised investment firm.

Investments parked at the same bank should be covered for another £85,000 on top of your cash.

What happens to my ISA if I move abroad?

You can still put new money into your ISA for the remainder of the tax year when you stop being a UK resident. You can’t contribute new money again until your residential status changes back.

Your ISA assets will continue to grow free of UK tax but watch out – your new country of residence may demand a slice.

  • You should still be able to transfer ISAs without losing your tax exemption. Check with your provider first.
  • Ditto for withdrawing money from a flexible ISA and replacing it.
  • Ditto for inheriting an ISA.

You should tell your ISA provider when you are no longer a UK resident. The UK means England, Wales, Scotland, and Northern Ireland. The Channel Islands and the Isle of Man are excluded.

If you split your time between the UK and other territories then you can do a residency test to determine your status. Fun!

You don’t lose your ISA annual allowance if you’re a Crown employee serving overseas, or their spouse / civil partner.

Any questions?

Well, I’m sure that snappy post has cleared everything up but let us know in the comments if there’s any other ISA related business you’d like us to cover.

Inheriting an ISA is a whole other post. But just in case you’re planning on inheriting one very soon, (Hark! Is that the sound of sawing through brake cables?) then check that link to stop you salivating in the meantime.

Take it steady,

The Accumulator

Note: This article about The ISA allowance was updated in 2020. This means reader comments below may refer to a previous version of the article and may reference details that are now out of date. Check the dates for when the new comments start if confused to ensure you are getting the latest feedback on how ISAs work.

  1. Also known to the government but to nobody else as the ‘subscription limit’. []
  2. Exceptions: funds in a Junior ISA before the child reaches age 18, Lifetime ISA, Innovative Finance ISA loan lock-ins, and fixed-term/regular saver Cash ISAs where you’ll pay various penalties for early release. []
  3. Max per year. []
  4. per child []
  5. The max contribution into a LISA is £4,000 a year. []
  6. Disclaimer: exaggeration for comic effect. []
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