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Withdrawing money from a Stocks and Shares ISA: Important things to know

Individual savings accounts (commonly known as ISAs) are a popular way of putting away money for the future, thanks in part to generous tax benefits. You pay no taxes on the interest on money saved in an ISA or capital gains from investments made from them (under a certain threshold). So, they are tax-efficient ways of saving money, with a lot of flexibility.

The four most popular types of ISA are the Cash ISA, the Stocks and Shares ISA and the Lifetime ISA. While Cash ISAs, predictably, hold savings in the form of cash, Stocks and Shares ISAs consist of investments. They 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 2020-21. The total annual allowance of £20,000 can either be put in a single type of ISA or split between different types. 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 10-year study which compares the performance of a stocks and shares ISA against that of a cash ISA.

Adults can also open an ISA for their kids, called a Junior ISA (JISA). The annual allowance for a JISA is £4,368 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 do, at age 18, and 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 different types and 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 year.

Additionally, ISAs from previous years and older providers can easily be transferred into one consolidated ISA to make it easier to manage and keep track of the investments, without losing your tax-free benefits. However, some ISA providers may charge a penalty for transferring your ISAs to other providers.

The withdrawal flexibility of ISAs

ISAs are, largely, highly flexible when it comes to withdrawals. They don’t tend to lock money in and allow savers to withdraw the funds as and when needed, without forfeiting any tax benefits. 

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Flexible ISAs mean you can take money out and put it back in during the same financial year without affecting the annual allowance for that year. For instance, if a saver adds £20,000 to their ISA and later withdraws £5,000, they can still top up the ISA later within the same financial year without breaching their personal allowance.

Cash ISA: Withdrawing from a Cash ISA varies depending on the type of ISA it is. Instant access Cash ISAs are more suitable for short-term goals as they permit you to withdraw any amount of cash any time you want without any penalties. On the contrary, fixed-term Cash ISAs lock the money in for a certain period, often offering a higher interest rate. However, flexible fixed-term Cash ISAs do exist, permitting a limited number of withdrawals of up to 10% of the balance without the loss of any benefits.

Stocks and Shares ISA: Withdrawing money from a Stocks and Shares ISAs is very flexible. You can sell the shares and funds that you have invested in through the Stocks and Shares ISA at any time, transferring the proceeds into your bank account. However, as 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, withdrawals from stocks and shares ISAs do not enjoy full flexibility of reinvestment. 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 on withdrawals from Stocks and Shares ISAs.

Lifetime ISA: The rules of withdrawal from Lifetime ISAs are more stringent as compared to withdrawals from Cash ISAs or Stocks and Shares ISAs. The Lifetime ISA is designed as tool for saving for retirement (you can find here some more information about the choice between a SIPP or a ISA). Therefore, there is a penalty of 20% of 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.

Taxation on withdrawals from ISAs

Withdrawing money from ISAs 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 withdrawal does not even need to be reported on any income tax forms. Also, there is no tax on profits made on share price increases, interest earned on bonds, or dividend income.

However, the deposits made to the ISAs are limited by an annual allowance. The tax-free benefits are only limited to a cap of £20,000 per financial year. Flexible ISAs allow you to withdraw and put back money within the same tax year without affecting the annual allowance limits, while fixed ISAs do not offer these benefits. Therefore, you must consider the flexible status of your ISA before withdrawing money from it.

Time taken to withdraw money from ISAs

It is important to note that withdrawing money from Cash ISAs is faster than withdrawing from Stocks and Shares ISAs, for obvious reasons. The money taken from a Cash ISA can be in your bank account either the same day or the next working day. However, withdrawals from Stocks and Shares ISAs require settlement on the sale of shares and other securities. Therefore, it typically takes about 3-7 working days for the sale of securities, settlement of transactions, and the transfer of money into your bank account. Thesere 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. All withdrawals from Stocks and Shares ISA are 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 to take full advantage of the benefits of ISAs and make the best of them.

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