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26 Mar 2018

Exclusive: banks shun flexible Isas and inheritance rules

Just a third offer flexible access, while one in five accept inherited Isas

'Flexible' Isas have supposedly been around for two years, while inheritance rules were introduced a year earlier, yet Which? research reveals that the majority of providers haven't embraced these changes.

We found that less than a third (31%) of cash Isas allow flexible withdrawals, and only one in five (20%) accept transfers from inherited Isas.

With so few providers embracing these new rules, it's no wonder that many savers don't know about these benefits. When we surveyed Which? members in January 2018, only 40% were aware of rules on inheriting Isas and only 60% knew that some Isas are flexible.

Inheriting Isas

Under new rules introduced in 2015, anyone whose spouse or civil partner died on or after 3 December 2014 will inherit an additional Isa allowance known as an additional permitted subscription (APS), equivalent to the deceased's Isa balance at the time of death.

We explain in greater detail here, but as an example, if your husband or wife died leaving £50,000 in an Isa, you would be entitled to an APS allowance of £50,000 (which counts as previous year's subscriptions for all other Isa purposes) on top of your personal Isa allowance of £20,000 in the 2018-19 tax year.

This is regardless of whether you inherited the actual money - this follows the normal estate process - although if you did, the APS allowance would enable you to keep it within an Isa wrapper.

There is no cap on the amount that can be inherited and, from April 2018, a tweak to the rules will mean that any growth between death and administration of the estate can be taken into account.

Theoretically, savers can choose whether to use their APS allowance with the deceased's Isa provider or another Isa provider.

But, firms aren't obliged to accept APS transfers and most don't - in fact, only 61 of the 308 fixed and variable-rate cash Isas on the market will accept cash APS transfers:

Flexible Isa withdrawals

Isas providers can also allow flexible withdrawals, whereby you can withdraw money and replace it within the same tax year without affecting your annual allowance.

For example, if you added £5,000 to a flexible Isa within a single tax year, you would have £15,000 left of your annual Isa allowance to use.

If you then withdrew £5,000, you would be able to put a further £20,000 before the end of that same tax year (the £5,000 withdrawn plus the remaining £15,000 of your annual allowance). In a non-flexible Isa, you would only be able to replace up to £15,000, as the £5,000 withdrawal cannot be replaced without reducing your allowance for that tax year.

However, only 46 of 146 variable-rate cash Isas let you take advantage of this flexibility:

A handful of providers (AA Savings, Aldermore, Ford Money, Kent Reliance, M&S Bank, Nationwide, Post Office Money) also offer 'portfolio' Isas.

A portfolio Isa lets you split your Isa allowance between fixed and variable rates under one account - you can usually only open one cash Isa per tax year, forcing you to choose between an easy-access account, which gives you flexibility, or a fixed-rate account, which typically pays a better interest rate.

Is an Isa worth the bother?

After a year of the worst rates on record, making the most of your Isa allowance before the end of the tax year might feel like a fruitless task.

Isas no longer have the edge over ordinary savings accounts - basic-rate taxpayers can earn up to £1,000 a year from savings income without having to pay any tax, thanks to the personal savings allowance.

Isa rates aren't much of a selling point either. In the fixed-rate market, Isas have been lagging behind ordinary bonds for years

One simple tactic for maximising returns while making use of the annual Isa allowance is to take advantage of the best rate across the whole savings (or current account) market, before transferring that money into an Isa just before the end of the tax year.

This is particularly sensible if you're a higher-rate taxpayer as you can only earn up to £500 in savings interest before you have to start paying tax. You'd exceed this allowance if you had more than £27,000 saved in the best one-year bond that's currently available (1.86%), so would need to use an Isa to avoid paying 40% income tax on the excess.

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