Withdrawing cash from an ISA

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I always thought that once an ISA had matured, all of the money could be withdrawn and it wasn’t liable for tax. Not sure if this is the case as i’ve recently read that once you withdraw from an ISA, it loses its tax free status?

My plan was to max out a Cash ISA for the next 5 years, stop paying into it and withdraw cash every month as an income for a few years – if I decide to take early retirement. Or open a new one each year, depending on interest rates.

Not sure about Stocks and Shares ISAs as I was paying into a S&P Share Account for a few years which I lost money on - so I’ll stick to Cash ISA’s.

I know the ISA should be in easy access or instant access accounts for this to work (or a matured fixed rate one) but I feel as if i’ve missed something?

Interest on money in cash ISAs remains tax free for as long as the ISA is held. The warning about withdrawing money and losing tax free status probably refers to moving money from one ISA to another. To maintain tax free status, you need to 'transfer' the money using a form provided by the new provider and NOT withdraw the money from the old ISA and use it to open a new one. If you do that, it counts against the £20k annual limit.

If you are withdrawing ISA cash for an income then you are not saving it so no tax to pay, but any saved from the ISA after withdrawing would come under the usual savings tax rules so would have lost its original ISA benefits so you would pay any tax on the interest after the tax free amount or you could start a new ISA out of your £20k ISA allowance

It sounds like you won't start withdrawing money for at least 5 years? If so, you could focus on fixed rate ISAs for now, as they have higher interest rates than easy or limited access. Might be worth having the first year's money in a limited access account, in case something crops up and you need to access some money during your 5 year plan. Although on the other hand, ISAs let you access or close the account early, subject to them withholding an amount equal to interest you would have received for a defined period, eg 6 months' worth. But check the small print on that.

If you start with fixed term ISAs now, when they mature you can gradually transfer them to easy or limited access ISAs.

Once it is broken free of the ISA wrapper, it is just like normal money.
Therefore if you paid it into a savings account, where it got interest, that interest would be taxable (if over your personal savings allowance and any other allowances that apply).

Transfer money from one ISA to another to keep the money inside the ISA wrapper.

My plan was to max out a Cash ISA for the next 5 years, stop paying into it and withdraw cash every month as an income for a few years – if I decide to take early retirement.

Cash ISA may pay some interest now but that was not the case a few years back and may not be the case in future. Having a couple of years of expenses money in cash may be appropriate in retirement, to save you from withdrawing from pension/other investments if market conditions are poor.

In terms of taxation, leaving money inside an ISA, and taking some out every now and then, sounds fine. It's tax free on withdrawal and if you then spend it, then it's not going to be sitting in an account for long gaining interest (now that current accounts pay some interest... they may not keep doing that).

Assuming you have an earned income at the moment, such as from employment, then you can put money into a Pension and keep it in the pension as cash. Some pension providers are paying interest on cash within the pension wrapper. So you may want to look at something like that which can be tax efficient, as when you withdraw the money from pension, some may be tax-free and some may be taxable at 0% because it is within your personal tax allowance.
Pension wrappers are of course age restricted, currently minimum age 55 and is increasing in 2028. So various factors to consider. Use tax allowances when you can, but you don't know what future tax allowances will be, so can make planning tricky.

Thank you for your replies 😀

@Plexie I’ll look into fixed rate ISA rates as I also have available cash if anything crops up

@User2856948 Thanks, that’s made it clearer

@nannynick I’ve got workplace pensions from my current and old employment, but i’ll look into maybe starting another private pension

Hmm … it seems to be that once you have a cash ISA you have to have it forever if you don’t want to pay tax 😝

I’m considering an ISA as I recently got a letter from HMRC saying that I owe tax from savings which i’ve never had before. I think my current overtime on my job has pushed up my allowance, but they are adjusting my tax code to recoup the money

Just out of interest – what are peoples end goals with their ISAs?. Pay into them long term and withdraw some funds for additional cash as and when?

Mine are long term savings. Might need to buy a property. Otherwise use it to fund retiring before state pension age.

I plan for my ISA to bridge the gap between when I decide to reduce/stop work and when I can take my pension. So for me, it is a long term thing.

"Hmm … it seems to be that once you have a cash ISA you have to have it forever if you don’t want to pay tax 😝"

Can you explain what you mean by this? If you take the money out of your ISA it doesn't count as part of your taxable income - is that what you are concerned about?

This might be useful? www.shawbrook.co.uk/direct/savings/cash-isas/article/withdrawing-money-from-isas/

My ISAs are from savings when I was working and a couple of small inheritances, I'm retired now and the ISAs will gradually get spent as they supplement my pension.

Hmm … it seems to be that once you have a cash ISA you have to have it forever if you don’t want to pay tax

An ISA is just a normal savings account where you don't pay tax on the interest accrued. You can move money between different ISAs though - but you need to follow the ISA transfer process to do that. If you just take all the money out of your ISA then pop it into a normal savings account then yes you will then pay tax on the interest.

Thanks again for all of the replies, i’ve got my head around ISAs now and am going to open a new one during the week

@WobblyLondoner Can you believe I made a note of that article a few days ago and meant to look at. I understand now that as long as I spend any money I’ve withdrawn from an ISA, there is no tax to pay. Seems like others will use it to supplement their pension which is also my intention