ISA Withdrawals: Can I take money out of my ISA, especially from a Stocks and Shares ISA?

People may have questions about ISA withdrawals, such as, can I take money out of my ISA, how much can I take out, and do I pay tax on ISA withdrawals? Moneyfarm will answer all your queries with this article.

Individual savings accounts (commonly known as ISAs) are a popular way of putting away money for the future, thanks partly to the tax rules and tax benefits. For instance, you don’t pay any taxes on the interest on money saved in an ISA or capital gains from the investments held in an ISA (under a certain threshold). So, they are tax-efficient ways of saving money with a lot of flexibility.

The three most popular types of ISA are the Cash ISA, the Stocks and Shares ISA, and the Lifetime ISA. While a Cash ISA is like a tax-efficient savings account, it holds savings in cash, while Stocks and Shares ISAs hold investments in the form of equities.

Stocks and shares ISA contain shares of companies, corporate and government bonds, unit trusts and investment funds, among other things. Lifetime ISAs can consist of either cash or stocks and shares.

As we’ve mentioned, there is an upper limit on how much you can save in an ISA. The annual allowance is fixed at £20,000 for the financial year 2022-23. The total annual allowance of £20,000 can be put in a single type of ISA or split between the different types of ISAs. The maximum contribution limit towards a Lifetime ISA, on the other hand, is £4,000 per tax year.

If you need help deciding which type of ISA to fund, take a look at our Cash ISA vs Stocks and Shares ISA study, which examines and compares the performance of these two types of ISA and touches on what happens when withdrawing money from a Stocks and Shares ISA, or a Cash ISA.

Adults can also open an ISA for their kids, called a Junior ISA (JISA). The annual allowance for a JISA is £9,000 per tax year and can be held in Cash ISA, a Stocks and Shares ISA, or a mix of both. Withdrawing from a JISA is something only the child can initiate at age 18, and it can be used for anything. ISAs are a great way to plan your family’s financial future.

You can hold as many ISAs as you like across the different types from different providers. However, you can only contribute your annual allowance for a particular financial year with one provider. This means that if you’ve invested in one Stocks and Shares ISA in the current financial year, you cannot contribute to another Stocks and Shares ISA in the same tax year.

Additionally, you can easily transfer ISAs from previous years and older providers into one consolidated ISA. It makes managing and keeping track of investments easier without losing your tax-free benefits. However, some ISA providers may charge a penalty for transferring your ISAs to other providers.

Can you take money out of an ISA?

“Can I take money out of my ISA?” is a question some people may ask, especially during emergencies. Fortunately, there is high flexibility when it comes to withdrawing money from a Stocks and Shares ISA. This type of ISA doesn’t tend to lock money in, and it allows savers to withdraw the funds when needed without forfeiting any tax benefits.

What happens if I take money out of my ISA? Well, it depends on if you have a flexible ISA account. ISA flexibility means you can take money out and put it back in during the same financial year without affecting the annual allowance for that year. So, for instance, if a saver adds £20,000 to their account and later goes through withdrawing money from that Stocks and Shares ISA to the tune of £5,000, they can still top up the ISA later within the same financial year without breaching their personal allowance.

Withdrawal instructions: Rules to withdraw from different types of ISA

Now that you know the answer to “can I take money out of my ISA” is a definite yes, there are rules when it comes to withdrawing money from ISA accounts.

Cash ISA: Withdrawing from a Cash ISA varies, and the ISA withdrawal processes depend on the type of ISA. Instant access Cash ISAs are more suitable for short-term goals as they permit you to withdraw any amount of cash at any time you want without any penalties.

But there are also fixed-rate Cash ISAs which lock the money in for a certain period, and these often offer a higher interest rate as a result. Then there are flexible fixed-rate Cash ISAs. These permit a limited number of withdrawals of up to 10% of the balance without losing any benefits.

Stocks and Shares ISA: Withdrawing money from Stocks and Shares ISAs is extremely flexible. You can initiate a Stocks and Shares ISA withdrawal at any time, but the Stocks and Shares ISA withdrawal must come from cash. If you want to withdraw your money and don’t have cash within a Stocks and Shares ISA, you must create the cash by selling some or all of the shares you have invested in your Stocks and Shares ISA at the current market price. The proceeds can then be transferred into your bank account.

However, because the value of securities is volatile, you may end up losing money if the market conditions are not favourable and the value of your shares, bonds, or funds has gone down. At the same time, withdrawing money from a Stocks and Shares ISA means you won’t enjoy full reinvestment flexibility.

Even if the money is withdrawn and reinvested within the same financial year, it gets added to the annual allowance for the tax year. Additionally, some wealth managers may charge a fee for withdrawing money from a Stocks and Shares ISA.

Junior ISA: The rules of a JISA state that withdrawals cannot be made from a Junior ISA until the child that owns the account reaches the age of 18. The exception to this rule is terminal illness or death. By age 18, the Junior ISA account will be converted into a regular ISA account where the same ISA withdrawal rules for Cash ISA and Stocks and Shares ISA will apply.

Lifetime ISA: Lifetime ISA withdrawal rules are more stringent than withdrawals from Cash ISAs or Stocks and Shares ISAs. The Lifetime ISA is designed as a tool for saving for retirement (you can find more information about the choice between ISA vs SIPP retirement options).

Lifetime ISA withdrawal has a 25% penalty fee on the amount you take out if you withdraw before the age of 60. There are two exceptions to this rule: when the money is used as a deposit on your first home up to £450,000, or when you are terminally ill with less than 12 months to live.

Do I pay tax on ISA withdrawals?

Money taken via an ISA withdrawal is, in many cases, both flexible and tax-free. Any amount withdrawn from a Cash ISA, a Stocks and Shares ISA, or a Lifetime ISA is not taxable. The ISA withdrawal does not need to be reported on income tax forms.

Other tax benefits include no tax on profits made on share price increases, interest earned on bonds, or dividend income. The annual allowance limits deposits made to the ISAs. The tax-free benefits are only limited to a cap of £20,000 per financial year.

What happens when withdrawing money from ISAs – Stocks and shares ISA?

Withdrawing money from a stocks and shares ISA reduces your annual ISA allowance unless you have a flexible ISA account. Usually, when you withdraw from ISA accounts, that part of your allowances remains used. However, flexible ISAs allow you to withdraw and return the money within the same tax year without affecting the annual ISA allowance limits. Fixed ISAs, however, do not offer this benefit.

For example, you’re currently contributing £10,000 to a £20,000 ISA account. You withdraw £5,000 before the end of the current tax year. The amount you can still contribute within the same tax year for most ISA accounts is £10,000. With a flexible ISA, you can put back a £15,000 contribution in the same tax year.

Access to ISA information is readily available. Therefore, your financial plan should include all withdrawal options available to you based on your individual circumstances. Before you open an ISA account, consider the types of ISAs, the flexibility status offered by the ISA provider, and any possible penalty fees.

How long does it take to withdraw money from an ISA?

When it comes to ISA withdrawals, can I take money out of my ISA immediately? For obvious reasons, it is important to note that withdrawing money from Cash ISAs is faster than withdrawing money from Stocks and Shares ISAs. This is because the money taken from a Cash ISA can be in your bank account either the same day or the next working day.

However, withdrawing money from a Stocks and Shares ISA requires settlement on the sale of shares and other securities. Therefore, it typically takes about 3-7 working days to sell the securities, settle transactions, and transfer money into your bank account. These are also important considerations to be taken into account when choosing the best ISA for your needs.

As a bottom line, ISAs in general – and Stocks and Shares ISAs, in particular – are excellent ways to save for the future. They offer several tax advantages and are highly flexible. Withdrawing money from Stocks and Shares ISAs is free of tax, be it profits, interest, or dividend income. Additionally, the money withdrawn from flexible Stocks and Shares ISAs can also be put back within the same financial year to retain the tax benefits. We recommend consulting a financial advisor or firm authorised and regulated by the financial conduct authority to take full advantage of the benefits of ISAs and make the best of them.

FAQ

Can I withdraw from ISA accounts (stocks and shares ISA)?

Yes, you can withdraw funds from your stocks and shares ISA. A stock and shares ISA withdrawal is an option you can make at any time.

Is there a penalty for withdrawing money from stocks and shares ISAs?

No, there is no penalty for withdrawing money from a stocks and shares ISA.

Can I transfer my ISA to my daughter?

No, you cannot transfer your ISA to your daughter. ISAs can only be held in the name of the account holder, and the funds within an ISA cannot be transferred to someone else’s account or gifted to someone else. However, you can make a cash gift to your daughter, and she can use that money to open her own ISA account.