People may have ISA withdrawal questions, such as, can I take money out of my ISA, how much can I take out, and do I pay ISA withdrawal tax? Moneyfarm will answer all your queries with this article.
| Can you take money out of an ISA account? | Yes, but there are rules |
| What is the required time for withdrawing from a Stocks & Shares ISA? | 3 to 7 working days |
| What happens if I take money out of my ISA account? | It depends on the type of ISA |
| 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 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. A Cash ISA is like a tax-free savings account that holds savings in cash, while Stocks and Shares ISAs hold investments in the form of equities.
Stocks and shares ISAs contain the 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 2023-24. 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 when I make an ISA withdrawal request to 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 for making an ISA withdrawal request from different types of ISA
Now that you know the answer to “Can I take money out of my ISA” is a definite yes, but there are rules when it comes to withdrawing money from ISA accounts.
Cash ISA: Making an ISA withdrawal request from a Cash ISA varies, and the ISA withdrawal processes depend on the type of ISA. The instant access Cash ISA is more suitable for short-term goals as it permits you to withdraw any amount of cash at any time you want without any penalties.
But there is also the fixed-rate Cash ISA, which locks the money in for a certain period, and these often offer a higher interest rate as a result. Then there is the flexible Cash ISA, with withdrawal rules that allow you to make a limited number of withdrawals of up to 10% of the balance without losing any benefits.
Stocks and Shares ISA: An ISA withdrawal transaction 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 rules stipulate that any 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. tors
When you withdraw money from an ISA and reinvest it 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 regarding withdrawing money from an ISA, when the type of ISA is a JISA, state that withdrawals cannot be made 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 (LISA): The 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).
The LISA withdrawal rules specify a 25% penalty fee on the amount you take out if you contravene the LISA withdrawal age rule, which refers to taking money out before you reach 60 years of age. However, there are two exceptions to this rule when withdrawing from a Lifetime ISA: 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.
Lifetime ISAs replaced Help to Buy ISAs when it was cancelled in 2016. But if you have one, you can continue to contribute to it until 2029, and then you have a further 12 months to claim your bonus. The Help to Buy ISA withdrawal rules are similar to the withdraw Lifetime ISA rules, but whereas the LISA rules penalise you 25% for withdrawals before the age of 60 if you do not use the money to buy your first home with a Help to Buy ISA, you lose the 25% bonus your solicitor could otherwise have claimed.
Whatever type of ISA you are considering taking out, it’s advisable to read the terms and conditions with care.
Why you should think twice before withdrawing money from your ISA
One of the advantages of an ISA is the fact that it is reasonably easy and quick to make an ISA withdrawal. However, you need to be aware that when withdrawing money from stocks and shares ISA, or any ISA for that matter, you reduce the amount of funds in that ISA which can have a significant effect on how much your investment grows over time. This can be of huge importance if you are saving for retirement.
The interest that is applied to ISAs is compound interest. In effect, it pays interest on top of interest. So, for example, if your fund is worth £10,000, and the interest rate that is applied is 8% after one year, your fund will have increased in value to £10,800. This is then carried forward, and the following year, interest is applied to the £10,800. So, if in year two, the interest rate applied is, say, 6%, the new total at the end of the second year will have grown to £11,664 (£10,800 + £864).
As you can see, compound interest is a powerful tool. An ISA withdrawal reduces the value of the fund, which means it will grow less year on year than it would have done if the withdrawal had not been made.
Do I pay tax on ISA withdrawals?
Taking money out of an ISAs, including taking money out of stocks and shares ISA accounts is, in most 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.
It is generally free to withdraw money from most ISAs, but some providers may charge a fee for cash withdrawals.
What happens when withdrawing money from ISAs – Stocks and shares ISA?
When withdrawing from stocks and shares ISA, the ISA withdrawal 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 the ISA withdrawal rules – can I take money out of my ISA immediately? For obvious reasons, it is important to note that a Cash ISA withdrawal 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 within one to two working days.
However, withdrawing money from an ISA when the ISA is a Stocks and Shares ISA requires settlement on the sale of shares and other securities. Therefore, when withdrawing your money, you’ll typically have to wait 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.
If you intend to close a fixed-rate ISA, you should be aware that closing the account could incur a fee that is equivalent to 90 days’ worth of interest on the balance of the said account.
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 benefits and are highly flexible. Withdrawing money from ISAs, including Stocks and Shares ISAs, is free of tax in terms of profits, interest, or dividend income. A stocks and shares ISA withdrawal made from a flexible ISA that is subsequently put back into the account within the same tax year will retain all its 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 fully understand the ISA withdrawal money process.
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.
How much can you take out of an ISA tax-free?
All ISAs are tax wrappers, so when you withdraw from stocks and shares ISA, you can take out as much money as you like without paying taxes.
What happens if I take money out of my ISA?
There is no penalty for withdrawing money from an ISA, but as the remaining funds in the ISA will be smaller, any growth will be reduced accordingly.
Do you pay tax on ISA withdrawals?
No, all ISAs are tax wrappers, so you do not have to pay tax on ISA withdrawals.
Can I transfer my ISA to my daughter?
No, you cannot transfer your ISA to your daughter. ISAs can only be held in the account holder’s name, 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.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
