Flexible ISAs are incredibly powerful savings products, but they are often overlooked by investors and savers because they are not widely marketed.
These products build on the advantages of ISAs, by introducing a level of flexibility (as the name suggests) giving savers more control over their money.
The benefits of using an ISA
There are a handful of different types of products on the market, but the two most popular are stocks and shares ISAs and cash ISAs.
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Savers and investors can deposit as much as £20,000 a year into an ISA wrapper, with any interest or dividend income as well as capital gains on investments becoming tax-free.
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Savers do not even have to declare money within ISAs on their tax returns.
This is why ISAs are one of the most powerful tools investors and savers have when it comes to putting money away for the future.
With the government set to reduce the tax-free allowance for dividends and capital gains in April, stocks and shares ISAs are only going to become more attractive.
Further, higher interest rates on savings accounts, as well as fiscal drag, means savers should be looking to open cash ISAs if they can, and avoid having to pay any tax on savings interest.
ISAs are incredibly powerful savings tools, but they do have their drawbacks. The biggest drawback is the fact that the £20,000 allowance is an annual allowance that only lasts for the tax year. It's a use it or lose It allowance, meaning it cannot be carried over into the new tax year.
Also, if you decide to withdraw money from your ISA, there are limits on what you can put back into the wrapper.
However, Flexible ISAs get round part of this problem.
How savers can make the most of Flexible ISAs
First introduced in 2016, Flexible ISAs allow savers and investors to reinvest any money withdrawn from an ISA wrapper as long as they do so in the same tax year.
Albert Soleiman, Head of CMC Invest UK says, “If you want to use your ISA to fund a big purchase - a car or for a house deposit for example - a Flexible ISA will allow you to reinvest the amount you withdraw, so long as you do it in the same tax year.”
Traditional ISAs do not allow these transactions, which is why Flexible ISAs can be so attractive. “You can deposit, withdraw and redeposit money into your Flexible ISA in the same tax year without impacting your annual £20,000 allowance,” says Soleiman.
This flexibility can be especially attractive when making large purchases using funds from an ISA.
“Let’s look at the numbers. Say you’d deposited £10,000 in a Stocks & Shares Flexible ISA at the beginning of the tax year and then later wanted to withdraw £5,000 to buy a car. You’re now left with £5,000 of your original investment in your ISA, and you can still contribute £15,000 that tax year, because your allowance is calculated on a net basis. Whereas, with a typical ISA, you can only contribute £10,000 more during the same tax year because only deposits are counted towards your allowance,” explains Soleiman.
It is the freedom to withdraw and redeposit funds in a Flexible ISA that sets these products apart from the other offerings on the market.
Savers and investors do not have to commit to locking up their money for extended periods or worry about losing the tax relief if they have to meet a large, unforeseen bill.
As such, it might be better to seek out Flexible ISAs, both Stocks and Shares ISAs and Cash ISAs over the traditional, non-Flexible version.
“With flexibility, people can access their money when they need it and return it when they don’t, all while saving in a tax-efficient account; because life happens, and you shouldn’t be penalised for that,” explains Soleiman.
The providers that offer Flexible ISAs
Unfortunately, not all providers offer Flexible ISAs. Flexible Stocks and Shares ISAs are particularly rare. That’s why it’s worth doing some research before opening a new product.
Some providers that currently offer Flexible Cash ISAs include Barclays, Lloyds, Nationwide, Newcastle BS, TSB and Virgin Money, although it's always worth double-checking before opening an account because providers can change their terms overnight.
Providers that currently offer Flexible Stocks and Shares ISAs include CMC Invest, IG, Charles Stanley Direct, Barclays Smart Investor and Vanguard.
However, two of the country's biggest online stock brokers, Hargreaves Lansdown and interactive investor, do not currently offer Flexible ISAs. Once again, this list could change so it's worthwhile keeping an eye out to see if any new providers enter the market or some leave.
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