Banks don't know their ISAs from their elbows!

If you have questions about ISA transfers, don't rely on banks to have the right answers.

The last few weeks have seen ISA season beginning to kick off early, with a succession of great new ISAs launched. However, if you have any questions about transferring over cash from previous ISA subscriptions, then it’s probably best to avoid asking the banks to answer them!

Wrong ISA answers

Which? recently carried out a mystery shopper exercise, calling a number of the UK’s biggest banks to quiz them on four basic ISA transfer questions. And it’s fair to say the banks’ performance was horrendous.

Out of 104 calls to 13 different ISA providers, on just three occasions were all questions answered correctly. That’s pretty embarrassing. The worst performer was HSBC, scoring an average of 32% for the four questions. It was followed by Royal Bank of Scotland (35%), the Co-operative Bank (38%) and First Direct (38%).

So what were these questions that apparently had the great and good of Britain’s savings providers stumped? Here are the things that the mystery shoppers asked.

1. How do I transfer my ISA?

2. How much can I transfer?

3. Can I leave some money with you and transfer the rest to a different ISA?

4. Can I transfer my money to a stocks and shares ISA?

The basics

Before we get into the answers to those specific questions, it’s probably worth reviewing the basics when it comes to ISAs – after all, you never know what a bank may have told that you that’s not quite correct!

ISA stands for Individual Savings Account. This is basically a tax-free wrapper for your savings – what you place in your ISA is out of the reach of the taxman, enabling you to get a better return on your savings than via conventional savings accounts (that’s the theory, anyway).

There is an annual limit of £10,200 for new money into your ISA, though this is due to rise in April in line with the Retail Prices Index to £10,680. However, only half of that limit can be saved in cash (so £5,100 in the current tax year, £5,340 in the next).

The rest can be saved in a stocks and shares ISA. In fact, there’s actually no limit on how much of your annual allowance can be taken up by stocks and shares – you can invest the full £10,200 for this year for example, or put £10,000 in shares and £200 in cash, and so on. Obviously though, this is a more risky place to put your money as your investments can go down as well as up, whereas with an orthodox ISA you know exactly what return you’ll be getting on your cash.

You can find out more about ISAs in our free ISA guides.

So let’s take a look at where the banks failed the Which? test.

1. How do I transfer my ISA?

There’s one important thing to remember when transferring an ISA – you need to get the new ISA provider to sort it out for you, rather than withdrawing the cash yourself. That’s because if you take the cash out yourself, the money will lose its tax-free status.

For example, if I already have £10,000 in an ISA and want to move to a new provider, if I withdrew that money and attempted to open a new cash ISA, I would not be able to place more than £5,100 in the ISA due to the annual limits – it would appear that I was starting all over again with my ISA. However, should I get my new provider to move my existing cash over, I could save a further £5,100 on top of that £10,000 during the tax year.

2. How much can I transfer?

For each tax year, you’re only allowed to pay into one cash ISA. So how much you can transfer really depends on where it is transferring from.

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If you’re transferring the current tax year’s cash ISA to a new provider, then you have to move all of that money in one go. It’s an all or nothing deal – you can’t split it between more than one provider or ISA type (more on that later)

However, if you want to transfer cash from an old cash ISA, you can move all of it or just part of it.

So for example, if I have £10,000 in an old ISA from the 2004/5 tax year, I could move all or part of it to a new ISA if I wished, though I wouldn’t have such flexibility if I was moving this year’s cash ISA.

This was one area the banks particularly struggled with – a whopping 97% of advisers gave conflicting or incorrect advice to the mystery shoppers. Indeed, one HSBC adviser was guilty of suggesting that the transfer takes longer if you have more money in savings to transfer. Whoops.

3. Can I leave some money with you and transfer the rest to a different ISA?

If you were paying attention to question two, then you will know that the answer is of course yes. You are able to transfer all or part of any previous year’s ISA subscription.

4. Can I transfer my money to a stocks and shares ISA?

As has been mentioned, there are two types of ISA. However, stocks and shares ISAs are significantly under-utilised compared to their cash ISA counterparts. According to figures from HM Revenue & Customs, while 11.9 million cash ISAs were opened in the 2009/10 tax year, just over three million stocks and shares ISAs were opened.

Recent question on this topic

• robk@madaboutcable.com asks:

  My 18 year old son has £3000 to invest.No access is required to the cash so waould a pension be preferable to an ISA?

  • 
    MikeGG1 answered "If he puts it in a pension, he will probably not be able to access it until he is 60. Before then..."
  • 
    JoeEasedale answered "I would steer clear of the pension - never mind the tax relif, statistics show that at 1%..."
  • Read more answers

And yet last year, had you gone with a stocks and shares ISA, you could Quadruple the return on your savings!

What’s more, you can indeed transfer money from a cash ISA to a stocks and shares ISA (though not the other way around). Should you transfer your current year’s subscription to the cash ISA over to a stocks and shares ISA, it will be treated as if you never subscribed to the cash ISA. As a result, you can take out a new cash ISA in the current year without breaching any rules!

This is another area that had the advisers stumped, with 43% completely unaware that you could transfer money in this way.

The best accounts

So, if you’re in the market for a new ISA, which accounts should be at the top of your wishlist? I’ve put together the table below on the ten of the best cash ISAs in the market today.

More: Check out our free ISA guides |  Get a great cash ISA | High interest rates will crash property prices | Insurance premiums set to rise