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Flexible ISA: What is ISA Flexibility And What Are Its Rules

ISAs became flexible in April 2016. The flexibility was a big announcement in the 2015 Budget, and it revolutionised the savings and investment industries. But we’re now in 2022, and a surprising number of ISA providers still don’t offer any flexibility.

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What is a flexible ISA?

If an ISA is flexible, you can withdraw from your individual savings account (ISA) and still be able to use that portion of your ISA allowance in the same tax year.

Previously if you had used your full £20,000 ISA allowance but suddenly needed £2,000 for house repairs, you would sacrifice £2,000 of your ISA allowance. Even if you could put that £2,000 back in a few months later, you wouldn’t be able to. With the flexible ISA, you would be able to put that £2,000 back into your ISA when you can afford to within the same tax year and still enjoy tax-free benefits on income tax, capital gains tax and dividend tax.

Flexible ISA allowance rules

As you now know, a flexible ISA means that you can put money back into an ISA without affecting your £20,000 annual ISA allowance. You can also take out more money than you put in within the same tax year, creating a flexible allowance. 

For instance, let’s say you currently have £65,000 invested in a cash ISA. £55,000 is from your ISA contributions over the past six years, while £10,000 is from a deposit made into the current tax year’s account. You are left with a £10,000 ISA allowance for the current year. If you withdraw £15,000 from your ISA, you can add back £25,000 to the same account in the same tax year. The £25,00 amount is the sum of the £15,000 withdrawn and the rest of the £10,000 ISA allowance that you haven’t used.

However, if you withdraw the full ISA allowance, you can pay it into any current ISA account, but you can only pay it into one ISA account.

Are all ISAs flexible? 

Flexible ISA withdrawals apply to most ISAs. With cash ISAs, stocks & shares ISAs and innovative finance ISAs, flexibility is possible as long as you have cash investments within the ISA. However, it’s up to individual providers whether or not they offer this service. Therefore, you should check your ISA provider before investing in an ISA, especially if you believe you will need this feature in the future.

 

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Lifetime ISAs are a little complicated. They are not flexible ISAs, and withdrawals come with certain conditions. For example, if you withdraw money from a lifetime ISA before its term ends, you’ll lose the 25% government bonus earned on the amount withdrawn. To avoid this penalty, lifetime ISA withdrawals come with specific rules and age restrictions. For example, without a penalty, you are only allowed to withdraw money from a Lifetime ISA if you are terminally ill, if you want to purchase your first home and when you reach age 60.

Does the flexible ISA add any value?

According to HMRC data, the flexible ISA could be worth an extra £3 billion to UK savers over the next five years. Flexibility often has the opposite impact that many would expect. If we believe that we can access our money without damaging our tax savings, we are more likely to use it in the first place. ISA flexibility is a fantastic way to help close the savings gap which is why the Government introduced it.

Not all ISA providers offer flexibility

Whilst the Government has introduced the flexible ISA, it is up to the provider whether or not they make this possible. The consumer group Which, recently criticised ISA providers for refusing to offer this flexibility.

As stated earlier, a common misconception is that the flexible ISA only applies to cash ISAs. However, stocks and shares ISA can also be flexible, but you need to sell your assets to withdraw from your stocks and shares ISA. Unfortunately, a huge proportion of stocks and shares ISA providers don’t offer this flexibility.

Also, some flexible ISA providers may charge extra fees for withdrawals, while some providers also limit how much money you can withdraw each month. This is unfair as individuals shouldn’t be penalised for taking their money out when they need to. So, you might need to change providers if you want more flexibility.

What happens if I transfer my flexible ISA

You might lose the ability to withdraw funds from a flexible ISA if you transfer your ISA to a different ISA provider. Repayment of funds that were withdrawn under the flexible ISA rules become impossible. Any repayment into your ISA account will count towards your remaining annual ISA allowance. 

Moneyfarm offers flexible ISAs

We introduced our flexible ISAs earlier this year. Many of our investors see their ISA as a way to grow their money over the next few years, so they haven’t actually withdrawn from their ISAs, but we felt it was important to go through the process to be able to offer this. Customers should never be charged or penalised for accessing their money in our view.

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