How you could use ISA transfers to maximise your ISA allowance

By Jo Bentham4th April 2022

Underutilised and often misunderstood, making use of ISA transfers is one of the most powerful methods of maximising your ISA allowance, as they allow you to ensure your past allowances are still working hard to meet your investment objectives.

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This is important now more than ever, as the ISA market – along with the wider investment landscape – has seen some products impacted more than others by the economic fallout caused by the Coronavirus pandemic and current soaring inflation. 

By transferring an ISA, experienced investors are able to rebalance their ISA portfolio as and when required, without contributing towards the current year’s allowance. This also provides the potential to save or invest what could be considerably more than the £20,000 ISA allowance into an ISA each tax year. 

This is all possible because an ISA transfer – when transferring funds subscribed in a previous tax year – has no bearing on the current ISA allowance. Though you are only able to subscribe up to £20,000 of new money to an ISA in 2022/23, you can transfer as much as you have available within your entire ISA portfolio. 

There are some rules to be aware of regarding ISA transfers, including:

  • There is an official ISA transfer process that must be followed in order for your funds to retain their tax-free status. You must not attempt to “transfer” manually by withdrawing and re-subscribing as this will count as a new subscription and will deduct from your current ISA allowance.

  • You can transfer funds subscribed to an ISA in the current tax year, but you must transfer it in its entirety. For example, had you subscribed £10,000 to a Stocks and Shares ISA at the start of the tax year but decided you’d like to transfer this to an Innovative Finance ISA (IFISA) in that same year, you would be required to transfer the full £10,000. 

  • Funds subscribed to an ISA in a previous tax year can either be partially or fully transferred. For example, you could choose to transfer just £5,000 of £10,000 invested into a Stocks and Shares ISA in 2021/22 to an IFISA in 2022/23. 

  • You can transfer an ISA as many times as you wish – there is no limit.

 

Rebalancing your ISA portfolio with an ISA transfer

There are many reasons why an experienced investor may wish to rebalance their ISA portfolio, from changing investment goals or time frames through to a shift in market conditions.

In February 2022, inflation hit a new three-decade high of 6.2%. Meanwhile, Cash ISA interest rates remain around all-time lows and are failing to keep pace. With this in mind, it’s unsurprising that some experienced investors who have subscribed past ISA allowances to the product are looking to alter the weighting of their portfolio away from low-yielding cash. 

For these investors – as long as they are willing and able to take on the higher associated risks – an ISA transfer to a Stocks and Shares ISA or IFISA could be appropriate. 

As an example, investor one has £50,000 sitting in a Cash ISA that was subscribed in previous tax years. They understand that unlike with the Cash ISA, returns can not be guaranteed with the Stocks and Shares ISA and IFISA, but accept these risks in return for the potential of significantly higher capital growth. 

Therefore investor one transfers £20,000 to an IFISA and £20,000 to a Stocks and Shares ISA before also subscribing their full current year’s ISA allowance to their IFISA. They keep £10,000 in the Cash ISA as they want instant access to it.

However, whilst the Stocks and Shares ISA is a go-to for many experienced investors, it too has been substantially impacted by Covid-19 and rising inflation – as well as already being well known for its fluctuations even prior to this. 

Recent research from Peer2Peer Finance News revealed that the IFISA actually outperformed the stock market in the UK, namely the FTSE All Share Index, in the four years from 2018 to 2021, whilst also demonstrating more stable returns. 

As a result, an experienced investor looking to target fixed returns – which are often in excess of an inflation-beating 7% – while lowering their exposure to the volatile equities market could consider transferring funds from a Stocks and Shares ISA to an IFISA.

For example, investor two subscribed their full £20,000 ISA allowance to a Stocks and Shares ISA in 2021/22. But they would now like to diversify their ISA portfolio with alternative investments, and so they transfer £10,000 from their Stocks and Shares ISA to an IFISA with an underlying asset of property bonds, whilst also contributing their full 2022/23 allowance to the same IFISA. They kept £10,000 in their original Stocks and Shares ISA.

In doing this, investor one has technically invested £60,000 into ISAs within one tax year, and investor two £30,000 – both above the £20,000 annual allowance but without breaking any rules, allowing the investors to ensure their ISA portfolios continue to perform to their full potential. 

 

Making the most of ISA transfers

Being able to subscribe your reset ISA allowance for 2022/23 across multiple ISA products can be extremely beneficial for creating a balanced, diversified ISA portfolio. 

And with the addition of ISA transfers allowing the movement of funds from one ISA to another without any further impact on the current year’s allowance, there are ample opportunities for experienced investors to be sure even their past allowances are still working their hardest.