It’s pretty straightforward to convert your cash ISA into a stocks and shares ISA [1]. 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:
- No tax on dividend income [2].
- No capital gains tax. [3]
- No tax return tedium [4].
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 [5].
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 [6] (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 [7].
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 [8] 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 [9].
You can ill-afford to give up growth in your funds to high charges, especially as there are plenty more fee [10] monsters ready to devour your money.
Today’s favourites
Our broker comparison table [7] 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 [11] 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 [12](among others).
If you have a low tolerance for faffing around with investments then take a look at the Vanguard LifeStrategy funds [13]. 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 [14] and read a good book [15] 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.
[16]
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 [17] aside, if you stay in cash for a lengthy period then count this against the fixed income portion of your asset allocation [18].
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 [19] 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 [20], there’s no reward without risk and a bit of effort.
Take it steady,
The Accumulator