What is a flexible Isa and could you take advantage of it?


Flexible Isas were first launched in April 2016, allowing savers to withdraw and replace money without the replacement cash counting towards the annual Isa allowance.

It means you could withdraw tax-free money, do something else with it, then replace it before the end of the tax year (we explain more below) to shield it from the taxman.

However two years on and still not all providers offer flexible cash Isas. Rules state it is up to individual savings providers to decide. 

For example, some big banks such as HSBC, NatWest/RBS and Santander don’t, while National Savings and Investments and the Post Office also don’t currently offer them. 

Meanwhile, some providers offer it, but only on variable rate Isas and some have changed the rules completely to allow full flexibility, including Halifax, Lloyds, Nationwide Building Society and TSB.

Flexible: Some cash Isa providers offer full flexible Isas - but many don't

Flexible: Some cash Isa providers offer full flexible Isas - but many don't

Flexible: Some cash Isa providers offer full flexible Isas – but many don’t

Flexibility is also not available for Junior Isas or Lifetime Isas. It also works on money in old cash Isas, if your provider offers flexibility – but if in doubt, contact them.

It’s not just cash Isas that can be flexible. Innovative Finance Isas and cash held within a stocks and shares Isa can also be flexible, again depending on the provider.

As a simple example of how the flexibility works. At the start of the new tax year you deposit £5,000 into your Isa, meaning a total balance of £5,000. This leaves you with £15,000 left of your tax-free allowance.

If you withdraw £2,500 your total Isa balance decreases to £2,500 but you are still able to pay £17,500 into the Isa within the tax year.

You repay £2,500. Your Isa balance increases to £5,000 again and you are still able to pay a further £15,000 into the Isa within the tax year.

According to Nationwide Building Society, which offers full flexibility, you can withdraw funds from current and previous years’ subscriptions and pay them back into a cash Isa with Nationwide (within that tax year), without it counting towards your current year’s Isa allowance.

An Isa provider should track all of your payments and withdrawals for your flexible Isa to provide you with a total subscription amount – and this total amount is what it will treat you as having paid into your Isa.

According to the Treasury: ‘This flexibility is available in relation to both current year and earlier year Isa savings where provided for in the terms and conditions of a “flexible Isa”, but will be subject to conditions in certain cases about which Isa provider can accept replacement amounts.’

The new tax-year starts this Friday, where the annual limit remains £20,000.

Any replacement money from a flexible Isa this financial year needs to go in before close of business on 5 April, or it will not count towards your annual allowance.

A working example – answer by Ford Money

I have an Isa pot of £50k built up over the last five years with five different providers. 

Could I transfer the lot to a flexible Isa provider such as Ford Money – and then next year let’s say I don’t put any more money in, but I withdraw £35k.

Could I put the £35k back in over the course of the tax year plus another £20k (2018/19 limit) before next April using a flexible Isa?

Suzanne Lewsley, chief deposits officer at Ford Money, replies: ‘For many savers, it could be beneficial to transfer your Isa savings to a product that offers Isa flexibility.

‘This is a lesser known feature that allows you to make better use of your £20,000 annual Isa allowance during any given tax year.

‘For example, say you have a pre-existing Isa balance of £50,000 and you withdraw £35,000 throughout the tax year.

‘A flexible Isa is useful because it allows you to deposit that £35,000 back into your account in the same tax year if you need to.

‘In addition to this, you would still be able to use your annual £20,000 Isa allowance. 

‘This means that you can make your money work harder by utilising your full tax-free allowance regardless of any withdrawals you make.

‘However, it is important to note that if you withdraw money from a fixed-rate Isa product, a withdrawal fee may apply.

‘The amount charged varies depending on which bank you hold your Isa with, so be sure to check this before withdrawing money. 

‘It’s also worth noting that only some savings providers offer flexible Isas, so it is crucial that savers factor it into their decision when choosing an Isa.’

Could this little trick work for you?

There have been some reports that you can use a flexible Isa to your advantage by withdrawing money from the Isa, putting it elsewhere to obtain higher interest and then put it back in the tax-free wrapper before the end of the tax year.

For example, if you had £25,000 in a flexible Isa and you want to put your money elsewhere to get better interest you can do so. But where you will obtain higher interest is the biggest question.

The best buy easy-access rate on a cash Isa is 1.25 per cent compared to 1.35 on a standard easy-access account, which hardly makes it worthwhile.

Meanwhile, only a few current accounts offer interest on sizable lump sums. 

Savers now also have the personal savings allowance which means basic taxpayers can get £1,000 interest each year without being taxed – and for higher-rate taxpayers, this is a lower £500.

Do you have a flexible Isa and have a nifty trick for getting more interest on your tax-free savings? Let us know in the comments section below… 




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