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ISA withdrawal: what happens if I take money out of my Stocks and Shares ISA?

ISA withdrawal: summary table

😕 Can you take money out of an ISA?Yes
🏦 Is withdrawn money taxable?No, it is not
⏲️ Required time for withdrawing from a S&S ISA3 to 7 working days
⚖️ Are rules for withdrawing money the same across all different types of ISAs?No, each type of ISA has its own rules

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 investments made from them (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 Cash ISA is like a tax-efficient savings account, it holds savings in cash while Stocks and Shares ISAs consist of investments. 

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 2021-22. The total annual allowance of £20,000 can either 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 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 £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 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, you can easily transfer ISAs from previous years and older providers into one consolidated ISA. It makes 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.

Can you take money out of an ISA?

There is high flexibility when it comes to ISA withdrawals. They don’t tend to lock money in, and it allows savers to withdraw the funds when needed without forfeiting any tax benefits. 

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. So 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.

Withdrawal instructions: Rules to withdraw from different types of ISA

There are the rules governing ISA account withdrawals.

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 any time you want without any penalties. 

On the contrary, fixed-rate Cash ISAs lock the money in for a certain period, often offering a higher interest rate. However, flexible fixed-rate Cash ISAs do exist, permitting 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 very flexible. You can initiate a Stocks and Shares ISA withdrawal at any time, but the Stocks and Shares ISA withdrawal must come from cash investments. If you want to withdraw your money and don’t have cash investments within a Stocks and Shares ISA, you must sell the shares you have invested in your Stocks and Shares ISA at the current market price. The proceeds are then 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, when you withdraw your money from Stocks and Shares ISAs, you won’t 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 Stocks and Shares ISA withdrawals.

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Junior ISA: The rules of a JISA states that withdrawal can not 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 as compared to 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 SIPP or ISA retirement accounts). 

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 you pay tax when you withdraw from an ISA?

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 any 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 you withdraw from an ISA?

Withdrawing from an ISA reduces your annual ISA allowance unless you have a flexible Cash ISA account. If you withdraw your money from an ISA, that part of your allowances remains used. Flexible ISAs allow you to withdraw and put back money within the same tax year without affecting the annual ISA allowance limits. Fixed ISAs 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?

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, 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. 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. 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 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 money from my stocks and shares ISA?

Yes, you can withdraw money out of your stocks and shares ISA at any time.

Is there a penalty for withdrawing from stocks and shares ISA?

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

How long does it take to withdraw money from stocks and shares ISA?

It usually takes 3 – 7 working days.

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