ISA Withdrawal: Taking Money Out of Your ISA - Moneyfarm (2024)

Can you withdraw money from an ISA? Yes, making an ISA withdrawal is not only possible but easy, too. Learn about the process and considerations for making ISA withdrawals from the experts here at Moneyfarm.

Individual savings accounts (commonly known as ISAs) are a popular way of putting away money for the future, thanks in part to the tax benefits. For instance, you don’t pay any capital gains tax on money saved in an ISA under a certain threshold. They are a very tax-efficient way of saving money (hence the name “tax wrappers) and offer a lot of flexibility.

The three most popular types of ISA are the Cash ISA, the Stocks and Shares ISA, and the Lifetime ISA. A Cash ISA is like a tax-free savings account that holds savings in cash, while Stocks and Shares ISAs hold investments in the form of equities.

Stocks and shares ISAs contain company shares, corporate and government bonds, unit trusts, and investment funds, among other things. Lifetime ISAs can be either cash or stocks and shares.

As we’ve mentioned, there is an upper limit on how much you can save in an ISA. The annual allowance is fixed at £20,000 for the 2024-25 tax year. This sum can be put in a single type of ISA or split between the different types. Bear in mind, though, that the maximum contribution limit towards a Lifetime ISA, on the other hand, is £4,000 per tax year.

If you need help deciding which type of ISA to invest in, take a look at our Cash ISA vs Stocks and Shares ISA study, which examines and compares the performance of these two types of ISA and touches on what happens when withdrawing money from them.

Adults can also open an ISA for their kids. It’s called a Junior ISA (JISA). The annual allowance for a JISA is £9,000 per tax year and can be invested in either a Cash ISA, a Stocks and Shares ISA, or shared across both. Withdrawing from a JISA is something only the child can initiate at age 18, and it can be used for anything. ISAs are a great way to plan your family’s financial future.

You can hold as many ISAs as you like across the different types from different providers, but you must adhere strictly to the rules regarding how much you can invest in each one or across all in any one tax year.

Additionally, you can easily transfer ISAs from previous years and older providers into one consolidated ISA. It makes managing and keeping track of investments easier without losing your tax-free benefits. However, some ISA providers may charge a penalty for transferring your ISAs to other providers.

Can you take money out of an ISA?

“Can I take money out of my ISA?” is a question some people may ask, especially during emergencies. Fortunately, there is high flexibility when it comes to withdrawing money from a Stocks and Shares ISA. This type of ISA doesn’t tend to lock money in, and it allows savers to withdraw the funds when needed without forfeiting any tax benefits.

What happens when I make an ISA withdrawal request to take money out of my account? Well, it depends on whether you have a flexible ISA account. ISA flexibility means you can take money out and put it back in during the same financial year without affecting the annual allowance for that year. So, for instance, if a saver adds £20,000 to their account and later goes through withdrawing money from that Stocks and Shares ISA to the tune of £5,000, they can still top up the ISA later within the same financial year without breaching their personal allowance.

Withdrawal instructions: Rules for making an ISA withdrawal request from different types of ISA

Now that you know the answer to “Can I take money out of my ISA?” is a definite yes, there are, however, ISA withdrawal rules to be observed.

Cash ISA: Making a withdrawal request from a Cash ISA varies, and the process itself depends on the type of ISA. The instant access Cash ISA is more suitable for short-term goals as it permits you to withdraw any amount of cash at any time you want without any penalties.

But there is also the fixed-rate Cash ISA, which locks the money in for a certain period, and these often offer a higher interest rate as a result. Then there is the flexible Cash ISA, with withdrawal rules that allow you to make a limited number of withdrawals of up to 10% of the balance without losing any benefits.

Stocks and Shares ISA: An ISA withdrawal transaction from Stocks and Shares ISAs is extremely flexible. You can initiate a Stocks and Shares ISA withdrawal at any time, but the rules stipulate that any withdrawal can only be in the form of cash. If you want to withdraw your money and don’t have cash within the account, you must create it by selling some or all of the shares you have invested in your Stocks and Shares ISA at the current market price. The cash proceeds can then be transferred into your bank account.

However, because the value of securities is volatile, you may end up losing money if the market conditions are not favourable and the value of your shares, bonds, or funds has gone down. At the same time, withdrawing money from a Stocks and Shares ISA means you won’t enjoy full reinvestment flexibility unless it’s a flexible account

When you withdraw money from an ISA and reinvest it within the same financial year, it gets added to the annual allowance for the tax year. Additionally, some wealth managers may charge a fee for withdrawing money from a Stocks and Shares ISA.

Junior ISA: The rules regarding withdrawing money from an ISA, when the type of ISA in question is a JISA, state that withdrawals cannot be made until the child that owns the account reaches the age of 18. The exception to this rule is terminal illness or death. By age 18, the Junior ISA account will be converted into a regular adult ISA account where the same withdrawal rules for Cash ISA and Stocks and Shares ISA will apply.

Lifetime ISA (LISA): The lifetime ISA withdrawal rules are more complex and stringent than withdrawals from cash or stocks and shares ISAs. The lifetime ISA is designed as a tool to help with purchasing your first home as well as saving for retirement. You can find more information about the choice between ISA vs SIPP retirement options).

The LISA withdrawal rules specify a 25% penalty fee on the amount you take out if you contravene the withdrawal age rule, which refers to taking money out before you reach 60 years of age. However, there are two exceptions to this rule when withdrawing from a Lifetime ISA: when the money is used as a deposit on your first home up to £450,000 or if you are terminally ill with less than 12 months to live.

Lifetime ISAs replaced help to buy ISAs when they were cancelled in 2016. But if you have one, you can continue to contribute to it until 2029, and then you have a further 12 months to claim your bonus. The help to buy ISA withdrawal rules are similar to the withdraw lifetime ISA rules, but whereas the LISA rules penalise you 25% for withdrawals before the age of 60 if you do not use the money to buy your first home, with a help to buy ISA, you lose the 25% bonus your solicitor could otherwise have claimed.

Can you withdraw from an ISA if it’s a fixed-rate Cash ISA? Yes, you can, but you will pay a penalty if you withdraw before the fixed term is concluded.

Whatever type of ISA you are considering, it’s advisable to read the terms and conditions carefully.

Minimum and maximum withdrawal limits

The rules regarding withdrawals from ISA accounts are extremely flexible. You can take as much money out of an ISA as you please whenever you like. However, you do need to be familiar with the one exception – a lifetime ISA withdrawal, the rules of which were pointed out above.

If you’re asking yourself, “Do I pay tax on ISA withdrawals?” the answer is no, you do not. They’re tax-free.

The minimum withdrawal amount for an ISA varies according to type and provider. For example, the easy-access cash ISA from the Post Office has a minimum withdrawal sum of £10. With stocks and shares ISAs, there is no minimum withdrawal amount per se. It can, however, depend on the type of assets held in the account and the different providers’ guidelines.

Comparison of withdrawal rules across different ISA providers

Generally speaking, all ISA providers follow the same set of rules. But one may impose different mini/max withdrawal limits as just explained, while others might impose fees. That’s why it’s important to do your research well before embarking on investing and choose a financial adviser that offers transparency and low fees – like Moneyfarm.

Why you should think twice before withdrawing money from your ISA

One of the advantages of an ISA is the fact that it is reasonably easy and quick to make an ISA withdrawal. However, you need to be aware that when withdrawing money from a stocks and shares ISA, or any ISA for that matter, you reduce the amount of funds in the account, which can have a significant effect on how much your investment grows over time. This can be of significant importance if you are saving for retirement.

The impact of timing on ISA withdrawals

The interest that is applied to ISAs is compound interest. In effect, it pays interest on top of interest. So, for example, if your fund is worth £10,000, and the interest rate that is applied is 8% per annum, after one year, your fund will have increased in value to £10,800. This is then carried forward, and the following year, interest is applied to the £10,800. So, if in year two, the interest rate applied is, say, 6%, the new total at the end of the second year will have grown to £11,664 (£10,800 + £864), and so on.

As you can see, compound interest is a powerful tool. Any withdrawal reduces the value of the fund, which means it will grow less year on year than it would have if the withdrawal had not been made.

As already pointed out, making a lifetime ISA withdrawal at the wrong time also has consequences – i.e., a 25% penalty for making withdrawals before you’re 60 unless it’s to help with a first property purchase or you’re terminally ill.

Tax implications of ISA withdrawals – do I pay income tax?

If you’re asking, “Do I pay tax on ISA withdrawals?” the answer is no, you don’t. Taking money out of ISAs, including stocks and shares ISAs, is, in most cases, both flexible and tax-free. Any amount withdrawn from a cash ISA, a stocks and shares ISA, or a lifetime ISA is not taxable, and as such, neither an ISA withdrawal nor an ISA account needs to be reported on income tax returns.

Other tax benefits include no capital gains tax on profits made on share price increases, interest earned on bonds, or dividend income. The annual allowance limits deposits made to ISAs, and the tax-free benefits only apply if you stay within the £20,000 cap each tax year.

While withdrawing money from most ISAs is generally free, some providers may charge a fee for cash withdrawals.

What happens when withdrawing money from ISAs – Stocks and shares ISA?

When withdrawing money from stocks and shares ISA, the ISA withdrawal reduces your annual ISA allowance unless you have a flexible ISA account. Normal ISA products will not allow you to withdraw money, even if you were to reinvest it later during the same tax year, without suffering penalties against your tax-free allowance.

However, flexible ISAs do allow you to withdraw and return the money from and to them, providing both transactions take place within the same tax year without affecting your annual ISA allowance limits.

For example, say you’re currently contributing £10,000 to a £20,000 ISA account. You withdraw £5,000 before the end of the current tax year. The amount you can still contribute within the same tax year for most ISA accounts is £10,000. With a flexible ISA, however, you can put back a £15,000 contribution during the same tax year.

How to reinvest after making a withdrawal

Reinvesting money after making a withdrawal from flexible ISAs follows the same procedure as investing new money into any ISA. However, when reinvesting into flexible ISAs, to ensure your ISA allowance is not affected, you must make sure you put the money back into the exact same account from which it came, Also, as just mentioned, the withdrawal and reinvestment transactions must be made in the same tax year.

Access to ISA information is readily available. Therefore, your financial plan should include all withdrawal options available to you based on your individual circ*mstances. Before you open an ISA account, consider the types of ISAs, the flexibility status offered by the ISA provider, and any possible penalty fees.

How long does it take to withdraw money from an ISA?

When it comes to ISA withdrawals, it’s important to note that withdrawing money from a cash ISA is faster than withdrawing money from its stocks and shares cousin. This is because the money taken from a cash ISA can be in your bank account within one to two working days as opposed to up to the five to seven it takes from an investment ISA.

Withdrawing money from an ISA when the ISA is an investment ISA requires settlement on the sale of shares and other securities, which is why you have to wait longer. This also applies to a Moneybox lifetime ISA withdrawal, which, if the funds are invested in stocks and shares, takes 3 to 5 working days.

These are also important considerations to be taken into account when choosing the best ISA for your needs.

If you intend to close a fixed-rate ISA, you should be aware that closing the account could incur a fee that is equivalent to 90 days’ worth of interest on the balance of said account.

Common mistakes to avoid when withdrawing from an ISA

The “tax wrapping” ability of ISAs is the prime reason for their popularity, and then comes ISA rule flexibility. But the easiness with which you can make an ISA withdrawal can lead to mistakes. The most common ones include:

• Panicking when stock markets are in decline. Investing long-term is key. Devalued stock markets invariably recover, and the longer you leave your money in an ISA, the better the chances of it weathering any downturns and eventually returning to fund growth.
• Not fully appreciating the fact the more you leave in your ISA, the more growth it can make, thanks to compound interest. However, never forget that the value of stocks and shares can go down as well as up.
• Unwittingly suffering a 25% penalty when withdrawing money from a lifetime ISA if it’s not going towards a first house purchase.

The bottom line is that ISAs, in general – and stocks and shares ISAs in particular – are excellent ways to save for the future. They offer several tax benefits and are highly flexible. Withdrawing money from ISAs, including investment ISAs, is free of tax in terms of profits, interest, or dividend income. A stocks and shares ISA withdrawal made from a flexible ISA that is subsequently put back into the account within the same tax year will retain all its tax benefits.

We recommend consulting a financial advisor or a firm authorised and regulated by the Financial Conduct Authority to take full advantage of the benefits of ISAs and fully understand the withdrawal process.

FAQ

Can I withdraw from ISA accounts (stocks and shares ISA)?

Yes, you can withdraw funds from your stocks and shares ISA. An investment ISA withdrawal is an option you can take at any time.

How much can you take out of an ISA tax-free?

All ISAs are tax wrappers, so when you withdraw from stocks and shares ISAs, you can take out as much money as you like tax-free.

What happens if I take money out of my ISA?

There is no penalty for withdrawing money from an ISA (unless, in certain circ*mstances, with a lifetime ISA), but as the remaining funds in the ISA will be smaller, any growth will be reduced accordingly.

Do you pay tax on ISA withdrawals?

No, all ISAs are tax wrappers, so you do not have to pay tax on withdrawals.

Can I transfer my ISA to my daughter?

No, you cannot transfer your ISA to your daughter. ISAs can only be held in the account holder’s name, and the funds within an ISA cannot be transferred to someone else’s account or gifted to someone else. However, you can make a cash gift to your daughter, and she can use that money to open her own ISA account.

Can parents withdraw money from a Junior ISA?

Not ordinarily. The only exception to this rule is if the child dies or has a terminal illness.

*Capital at risk. Tax treatment depends on your individual circ*mstances and may be subject to change in the future.