Whilst surprisingly few UK savers and investors are familiar with the inflation-beating, risk-adjusted returns available from Innovative Finance ISAs (IFISA), flexible ISAs seem to be an even better kept secret.
We think it’s high (interest) time that more people are at least aware of these relatively new alternatives to the traditional low return or high volatility we’ve had for years. And as flexible IFISA providers ourselves, naturally we’re bending over backwards to explain how it all works.
After 17 years of ISA subscriptions and returns being locked in until permanently withdrawn, HMRC has now enabled ISA managers to offer their customers flexible access to their funds. Being optional and with a greater administration burden behind the scenes, flexibility has unfortunately only been embraced by a minority of providers to date and communication of the benefits hasn’t been as widespread as it should be.
What does flexible access mean from an ISA perspective?
In the past you’ll have been used to saving some or all your annual ISA allowance to cash ISAs, possibly investing some to a Stocks & Shares ISA (with more capital risk but higher returns). You left your capital and income in place for as long as you could afford because you wanted to earn as much of your income tax-free as you could, and you knew that any removed funds would lose their tax privileged status. Now flexible ISA Managers like Proplend offer a different way!
If your ISA is flexible you can withdraw funds you’ve subscribed to it AND return those funds to the same flexible ISA or any other flexible ISA you have set up by the end of the same tax year. You can also withdraw any income on those current year subscriptions but can only replace it to the same ISA. If some or all those funds are back in place by close of play on 5 April those replaced funds will retain their tax-free rights once back in the ISA [returns on these funds whilst outside of the ISA will be potentially taxable].
And it’s not just current year funds that can be withdrawn and replaced flexibly. Subscriptions and returns accumulated within the ISA from previous tax years can also be called upon at any time and either re-applied to the account in stages or in one go.
As a flexible ISA holder, if you need the funds you just need to request a withdrawal with the only limitation being the amount of cash available on account. For investment ISAs, for example Innovative ISAs where you hold peer to peer loans, investments may need to be sold to free up a greater proportion of your pot.
If you’re uncertain whether you’ll be able to return some or all the amount withdrawn – it’s not a problem. There’s no obligation to return all or any of the amount withdrawn. If it doesn’t come back in by the end of the tax year, we simply treat it as a permanent withdrawal. For current year subscriptions withdrawn we just record the net amount received as at 5 April.
You’ll just need to take care to ensure that your current year subscriptions to all your ISAs in any given year don’t exceed the annual ISA allowance (£20,000 for 2018-19) at any point and that you don’t breach the one ISA per type per tax year subscription rule.
Flexibility not to be confused with ISA transfers
The freedom to transfer ISA pots from provider to provider (and type to type) has been in place for many years now – although again, awareness of this right should be much higher than it currently is. It might help explain why so many millions remain in Cash ISAs despite the value of those funds effectively falling after inflation (at c.2.5%) is taken into account.
An ISA ‘transfer’ is the movement of tax-privileged funds directly between two ISA managers at the request of the ISA holder. The individual should not attempt to withdraw and reallocate funds to the other provider themselves and they should not confuse ISA flexibility with transferring.
If you’re looking to redistribute current ISA subscriptions from one provider to another, particularly if it’s a provider of the same type – an ISA transfer will still be your best option. If you were to withdraw all £5,000 you had subscribed with IFISA provider A and re-subscribe it to IFISA provider B, your net subscriptions would still be £5,000 to Innovative ISAs but you would be considered to have subscribed to two ISAs of the same type in the same tax year. Provided IFISA provider A transfers all current year subscriptions received to IFISA provider B – the latter is considered to have taken on the role as the one for the year. A subtle but important difference.
In addition, ISA transfers can help you quickly build up funds with new providers and in new types of ISA. So, even if you’ve maxed out your allowance limit for the year, you can still transfer ISA funds to us from elsewhere for example, to make sure you don’t miss out on that next loan investment opportunity you’ve had your eye in the pending list.
So where does ISA flexibility come into its own and why might it be worth reaching for a flexible ISA when shopping around for your next ISA facility? Here are a few of the more likely benefits.
Examples of how flexibility can and should be used
- If you’ve ever been conflicted between subscribing as much as you can, as early as you can at the start of the tax year and wanting to hold some back in case of a change of circumstances, then a flexible ISA could be for you. You can put the funds in and get them earning tax-free with the peace of mind that you can withdraw them when you need them and put them back if you can afford to.It can be particularly useful for that short-term cash-flow need and even for that planned expenditure later in the year. It won’t be earning tax-free whilst it’s out of the ISA but it can be again if you put it back in time.
- We think we provide access to some great risk-adjusted returns on the platform, but it may just be that you have the opportunity to earn more or diversify elsewhere for a while. You can withdraw the funds you need, take advantage of the returns elsewhere (tax free or not) and then replace some or all by 5 April. Of course, it doesn’t need to be those particular funds you need to wait to mature to put back in – perhaps another investment is maturing that can be your replacement funds.We’re aware that some Cash ISA holders do this to supplement their earnings but an ISA transfer to higher earning account means the funds would be accumulating in that tax-free environment for the entire year – not just part of it.
- Flexible ISAs mean you have access to potentially many years of your hard-saved funds. ISA allowances have been around for almost 20 years and with a number of years savings as much as you can, this could be a relatively large sum at your disposal.Remember with traditional non-flexible ISAs, when it’s out it. So double check whether your existing ISAs are now flexible and if you want flexible access to more of it, you always have the option of transferring your non-flexible pots to one or more flexible providers.
- The flexibility rules enable you to keep your options open but it’s important to understand the rules. If perhaps you can’t afford to have a large proportion of your disposable cash in an ISA all year, but you want to maximise future earning potential, you could consider registering a subscription at the end of a tax year. From 6 April, a current year subscription becomes a previous year subscription and you could withdraw some or all of it early in the next tax year.It may be that you’re expecting your financial circumstances to change or more in hope than expectation, but that extra scope could come in handy later on. Take care cutting it too fine though – if the provider receives funds after their close of business on 5 April – they will be credited as new subscriptions for the following year.
As you can see, ISA flexibility along with the more widely available ISA transfers can be useful additions to the tax efficiency and balanced portfolio toolkit. Proplend has made its Innovative Finance ISA flexible to offer to help keep its ‘Lenders’ options open. We hope and expect to see more of them using both facilities in 2018-19 and beyond.
Related to this post …
Want to find out more about P2P Lending and the Innovative Finance ISA?
We have a raft of information available about peer to peer investing in our Investor Help Centre. Alternatively, browse our comprehensive IFISA guide to find out more about tax-free investing through a flexible ISA.
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