How to withdraw money from an ISA
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The only way you can ensure that you will have enough to cover your needs in your old age, give your children a head start in life or buy your first house is to start saving while you are still young. Unfortunately, inertia is a powerful force, and switching from not saving to saving can be overwhelming for most. Making up your mind to start saving is an essential first step, but the road to having a sensible savings strategy can be long and winding. The key challenge is to find the solution that best suits your needs and financial profile. Even though savings possibilities are vast and confusing, some solutions trump others. Most countries have a tax-advantaged savings program, and we investigated what the UK had to offer its residents in that category. Individual Savings Accounts (ISAs) have wide appeal in the UK as they offer a sweet proposition—a chance to grow your money free from taxes. If you are a UK resident and saving for your financial goals, not holding an ISA is essentially leaving money on the table for the taxman. Below is an in-depth guide on ISAs and their most essential features.
What is an ISA
What is an ISA
How ISAs Work: Tax-Free Savings and Investment Explained
Many people assume that Individual Savings Accounts (ISAs) are complicated because there are several different types available. In reality, the concept is quite straightforward. An ISA is essentially a tax-efficient account that allows you to save or invest money up to a certain annual limit without paying tax on the returns. Another benefit is that ISA holdings do not need to be reported on your annual tax return.
Under normal circumstances, profits generated from investments—such as selling shares for more than the purchase price—would be subject to capital gains tax, which can range between 10%, 18%, 20%, or 28%, depending on your income tax bracket. Because investments held within an ISA are exempt from these taxes, the potential tax savings can be significant over time.
The UK government sets a yearly limit on how much money can be placed into this tax-free structure, known as the ISA allowance. For the 2021/2022 tax year, which runs until April 5, the allowance is £20,000. There is also a Junior ISA allowance, designed for children under the age of 18, which is £9,000, increased from £4,128 the previous year.
It is important to understand that this allowance applies across all ISAs you hold. This means you cannot open several accounts and use the full tax-free allowance in each one during the same tax year. Additionally, ISA allowances follow a “use it or lose it” rule. If you do not use your full allowance within the tax year, the unused portion cannot be carried forward to the next year. For this reason, many savers try to maximize their contributions each year.
Funds can be allocated across different types of ISAs, including cash ISAs, stocks and shares ISAs, innovative finance ISAs, and Lifetime ISAs. You can place all your allowance into one type or divide it among several. However, there is a specific rule for the Lifetime ISA, which limits contributions to £4,000 per year. This means the remaining £16,000 of the annual allowance could be placed into other ISA types if desired.
For example, an investor may choose to allocate the entire £20,000 allowance to a single ISA type or split the amount across multiple accounts such as cash and stocks and shares ISAs. The only requirement is that the total contributions across all ISAs do not exceed the annual allowance.
Another advantage of many ISA accounts is that they offer easy access to funds, making them suitable for holding tax-efficient savings that might be needed in case of emergencies. In some cases, money withdrawn from an ISA can also be re-deposited within the same tax year without losing the account’s tax advantages.
What is an ISA
Main advantages of ISAs
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Money saved or invested within the ISA wrapper earns interest and benefits from tax-free status. You do not have to pay tax on any income you receive from ISA investments, including capital gains, dividends, interest and bonuses. You do not even need to tell the taxman about your ISA. In the long run, this can save you a significant amount of money and increase the returns on your investment.
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You can access the funds in an ISA almost any time you want (except Lifetime ISA) without having to pay a withdrawal or penalty fee. Note that some cash ISAs have a fixed term, meaning that you lock your money away for a set period in return for a better interest rate and you may have to pay a penalty if you break the term. With a Lifetime ISA, you won’t be able to take money out until you turn 60 without paying a penalty unless you withdraw it for specific reasons.
What is an ISA
Types of ISAs
ISAs come in different types to suit various needs. While all SAs enjoy a tax-free status, there are differences in the types of assets you can hold in each and the purpose of the savings. There are four main types of ISAs that adult UK residents can hold:
- cash ISAs
- stocks & shares ISAs (also known as investment ISAs)
- innovative finance ISAs
- Lifetime ISAs.
| Saxo Bank | Fusion Markets | CMC Markets | Interactive Brokers | Capital.com | |
|---|---|---|---|---|---|
| EURUSD spread | 0.8 | 0.0 | 0.7 | 0.1 | 0.6 |
| GBPUSD spread | 1.3 | 0.2 | 0.9 | 0.3 | 1.3 |
| AUDUSD spread | 0.8 | 0.0 | 0.7 | 0.1 | 0.6 |
| EURCHF spread | 1.4 | 0.6 | 2.5 | 0.4 | 2.2 |
| EURGBP spread | 1.4 | 0.3 | 1.1 | 0.2 | 1.5 |
Types of ISAs: Cash, Stocks and Shares, Innovative Finance, and Lifetime ISAs
* A 25% withdrawal charge applies unless the funds are used to purchase your first home with a mortgage or you withdraw them after turning 60.
** A Junior ISA can be opened for children under the age of 18.
Cash ISA
Aside from its tax advantages, a cash ISA works much like a traditional savings account. Deposited funds earn interest while remaining insulated from the fluctuations of financial markets. Although the money itself is secure, its real value can decline over time if the interest earned is lower than the rate of inflation.
In the best cases, interest rates offered by cash ISAs tend to be a few percentage points above the Bank of England’s benchmark rate, and they generally move in line with changes to that rate.
Some providers attract new customers with temporary bonus interest rates that last for a limited period before dropping to a lower standard rate. Savers who regularly switch providers—once these promotional periods expire—may be able to improve their returns by benefiting from new introductory offers.
Certain cash ISAs allow instant access to savings, meaning you can deposit or withdraw funds whenever needed, provided you stay within the annual ISA allowance. With flexible ISAs, money withdrawn can be replaced during the same tax year without reducing your allowance.
Money held in a cash ISA is protected up to £85,000 by the Financial Services Compensation Scheme (FSCS) if the provider is regulated and covered by the scheme. Most banks, building societies, and major financial institutions fall under this protection.
Stocks and Shares ISA
Despite the name, a stocks and shares ISA allows investment in far more than just company shares. Investors can access a wide range of assets, including investment funds, exchange-traded funds (ETFs), investment trusts, government bonds (gilts), and corporate bonds. In some cases, less liquid investments such as shares listed on smaller company exchanges can also be included.
Compared with cash ISAs, these investment accounts typically carry a higher level of risk, since market fluctuations can affect the value of the assets held. However, they also offer the potential for significantly greater long-term returns.
One way investors attempt to reduce risk is by maintaining a long-term investment horizon, which can help smooth out market volatility and allow investments to benefit from the compounding effect of reinvested returns.
Like cash ISAs, funds can usually be withdrawn at any time, depending on the provider’s conditions.
Innovative Finance ISA
An Innovative Finance ISA is a relatively new form of investment that allows individuals to lend money directly to borrowers—both individuals and businesses—through regulated peer-to-peer lending platforms. In exchange, investors receive interest payments, which remain tax-free within the ISA structure.
Because banks are not involved as intermediaries, this type of investment can offer higher potential returns. However, it also comes with greater risks. Borrowers may default on their loans, and since these investments are not protected by the FSCS, investors cannot claim compensation if losses occur.
One strategy for reducing exposure is to spread funds across multiple loans, thereby diversifying risk. Before choosing an Innovative Finance ISA, investors should carefully assess their risk tolerance.
Lifetime ISA (LISA)
The Lifetime ISA (LISA) is designed to help individuals save for their first home or retirement. Contributions are limited to £4,000 per year, but the government adds a 25% bonus on top of the amount saved.
For example, if you contribute £1,000, the government will add £250. These bonuses are paid monthly until the saver reaches age 50, and the bonus itself also earns interest or investment returns. Over time, the maximum government bonus an individual can receive is £33,000, which would require contributing the maximum amount every year from age 18 until 50.
Within a Lifetime ISA, savers can hold cash, investments, or a combination of both, depending on their preference.
To use the funds for purchasing a property, the buyer must be a first-time homeowner, and the property price must not exceed £450,000. The purchase must also involve a mortgage.
Funds can normally only be withdrawn when purchasing a first home or after reaching age 60. If money is withdrawn earlier or for other reasons, a 25% penalty will be applied to the withdrawn amount.
What is an ISA
How to open an ISA
There are few restrictions on who can open an ISA. If you meet the following basic requirements, you are eligible to hold one or more ISAs:
- You must be a resident in the UK, or a Crown servant (i.e. diplomatic or overseas civil service) or their spouse or civil partner
- You must be 16 or older for a cash ISA
- You must be 18 or older for a stocks and shares ISA
- You must be 18 or over but under 40 for a Lifetime ISA
The ISA account has to be in your name but you can set up a Junior ISA for children under 18.
Under current regulations, you can open an ISA with the following institutions:
- banks
- building societies
- credit unions
- friendly societies
- stock brokers
- peer-to-peer lending services
- crowdfunding companies
- other financial institutions
You can open a new ISA with a different provider each tax year as there’s no rule that says you have to stay with the same provider.
You don’t need thousands of pounds in the bank to open an ISA. Many cash ISAs can be opened with a starting amount of just £1. If you want to open a stocks and shares ISA, most funds will accept monthly contributions starting from either £25 or £50.
What is an ISA
How to withdraw money from an ISA
Generally speaking, you can take your money out from cash ISAs any time without losing any tax benefits. Nevertheless some restrictions and charges may still apply for making withdrawals. If you have an instant access cash ISA, you can withdraw money any time without restrictions. This is the best ISA vehicle for holding funds that you may need on short notice. If you choose a fixed-rate cash ISA (opened for a specific period, with an interest rate that depends on the length of your term), you will usually have to pay a penalty for any withdrawal before the end of the term.
If you hold a ‘flexible’ cash ISA, you can take out cash and provided that you replace the amount during the same tax year, the withdrawal will not reduce your current year’s allowance. As an example, if you deposit the full £20,000 in your ISA and then take out £5,000 to cover some unexpected costs, you can replace the £5,000 at a later date in the same tax year without breaching your allowance. Note that not all providers offer flexible ISAs, so check first before withdrawing cash.
Similarly, you can withdraw your money from an investment ISA at any time but the value of your investments may be lower if you sell your assets when the market is down. Investment ISAs can also be flexible and non-flexible, but most providers shy away from offering flexible investment ISAs.
Withdrawals from Lifetime ISAs are governed by stricter withdrawal rules. You won’t be permitted to take money out of the account until you are 60 without paying a penalty unless it is put towards a deposit on a first property worth up to £450,000. You can also withdraw your money if you are terminally ill. In all other cases, the withdrawal penalty will be 25% of the amount you take out.
Note that all Lifetime ISAs are non-flexible.
What is an ISA
How to transfer an ISA
You can transfer your ISA from one provider to another at any time just as you can transfer your savings to a different type of ISA or to the same type of ISA. There are various reasons why you might want to make an ISA transfer. You might want to transfer to a provider that offers a wider range of funds or to reduce your investment costs.
Contact the ISA provider you want to move to and have them fill out an ISA transfer form to move your account.
Some of the most important restrictions that apply to transferring ISAs are as follows:
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If you transfer funds from a Lifetime ISA to a different ISA before the age of 60, you’ll have to pay a withdrawal fee of 25%
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You can transfer cash from your Innovative finance ISA to another provider but you may not be able to transfer other investments (i.e. peer-to-peer loans) from it
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Check with your provider for any restrictions/charges they may have on transferring ISAs.
What is an ISA
FAQ – the bottomline on ISAs
Should I open an ISA?
If you would like to save money and reduce your tax bill at the same time, opening an ISA is the best option. The biggest advantage of an ISA is that the returns you earn from putting money into an ISA are tax-free. For example, if you invest in a stocks and shares ISA, any profits you make will be free of Capital Gains Tax (CGT) and dividend tax, which would be payable if you invested outside an ISA. Another factor that increases the appeal of ISAs is that most are easy access accounts so you can make withdrawals whenever you need to. If you hold a flexible ISA, you can replace any cash you have withdrawn (up to the ISA limit) within the same tax year without breaching the annual contribution limit. Depending on your risk appetite and financial goals, you can choose between different types of ISAs.
How much can I contribute to my ISA?
In the 2021/2022 tax year, the ISA allowance is £20,000. You can decide whether you want to split this between stocks and shares ISAs, cash ISAs, innovative finance ISAs and Lifetime ISAs. Keep in mind that contributions to a Lifetime ISA are limited at £4,000 per year. The ISA allowance cannot be rolled over to next year – if you fail to use up your allowance for a given tax year, you will lose it forever.
When can I withdraw money from my ISA?
You can take your money out of an ISA – except for Lifetime ISAs – at any time without having to pay a withdrawal or penalty fee. Nevertheless, the ability to withdraw from an ISA is dependent on the specific type of assets you choose. For example, if the account is tied to a particular term, withdrawing funds before the term is over may result in penalties. Although withdrawals from ISAs can be made at any time, the money cannot be replaced at a later date if it exceeds the overall contribution for any given year. If you hold a flexible ISA, you can withdraw money and then top up your account and keep the tax advantages, provided both are done in the same tax year.
Can I transfer my ISA?
You can transfer your ISA from one provider to another at any time just as you can transfer your savings to a different type of ISA or to the same type of ISA. When moving your account from one provider to another, have the provider you want to move your account to fill in an ISA transfer form on your behalf. If you want to transfer funds you’ve invested in an ISA during the current year, you must transfer all of it. For money you invested in previous years, you can choose to transfer all or part of your savings.