Please explain cash ISAs to me as if I'm a child!

[Ilovefluffysheep]

More specifically, what happens at the end of the year?

I understand you can put up to £20k in each tax year, and that the interest is tax free.

I don't entirely understand what happens at the end of that year with that particular ISA, especially if I've opened up a new one. Does that ISA stay open, and does the rate stay the same for ever more? Or do you get dumped back down onto a really rubbish rate?

And I've seen that you can transfer your ISA - does that mean you can transfer an ISA from a different tax year into a new ISA in the next tax year, and also open a brand new £20k ISA too?

I think I'm just puzzled with all the adverts saying that if you'd taken out the full amount of ISA for however many years, you could have loads of money after so many years due to the compounded interest and the interest being tax free. But does that mean, as an example, that if you've opened up a different ISA for the last 10 years, that you have 10 different ISA accounts open? Or can you consolidate them?

If someone could break it down for me, I'd be really grateful!

Once in an ISA your money will remain tax free forever, or at least until the government changes the rules! As for what happens to the interest rate after a year, well that depends on the terms of the particular ISA. It may change, it may not.

You can transfer from one ISA to another, but you don't have to. See info on gov.uk about this.

So I think if you had a cash ISA with Provider A and they offered a good rate but only for balances up to 20K, say, you could leave that 20K there and then in the next tax year you could open a new cash ISA with Provider B. Let's say mid-way through that tax year Provider A changes its rates and they're rubbish, you could transfer the ISA balance from Provider A to Provider B. This would not count as paying in and wouldn't affect the limit that you can pay in to Provider B during that tax year.

An ISA year runs 6th April to 5th April. Behind the scenes, at end of 5th April, your ISA year is closed and another is opened. You still have the same ISA account details.

Think of it like a packet of sweets. Each sweet (ISA year) is wrapped, and they are in a bag (the ISA account).

> does the rate stay the same for ever more?

You would need to check the account rules, but I would expect that the provider can change the interest rate.

If it is a fixed rate account, it is only fixed for the period of time specified. After that it will go to a variable rate.

>And I've seen that you can transfer your ISA - does that mean you can transfer an ISA from a different tax year into a new ISA in the next tax year,

Yes. You can move old ISA years to a new provider and they do not count towards the £20k annual limit.

>and also open a brand new £20k ISA too?

Yes, though more common would be to open a new ISA, pay new money in to that and Transfer In old ISA years into it.

>But does that mean, as an example, that if you've opened up a different ISA for the last 10 years, that you have 10 different ISA accounts open? Or can you consolidate them?

You could have many but it is easier to consolidate them. Especially if the new ISA is paying a higher rate than the old years.

ISAs stay as ISAs until you withdraw the money.

The definition of 'open' is perhaps different to what you think it means. In banking terminology, an ISA is still 'open' if it will accept you putting more money into it. With fixed-rate ISAs, they are offered at a certain interest rate for a limited period of time. Customers can open an account and deposit money during that phase. The building society will eventually withdraw that product and no more money can be deposited - the account becomes 'closed' but that means closed to more money being added. Existing customers' accounts continue until the maturity date. It can be a little alarming when you receive your annual statement and the account has 'closed' next to it!

An instant access ISA, which doesn't have a fixed rate or end date, is just 'open' all the time and you can add money in subsequent years, if you wish.

With fixed rate ISAs, providers often give an option of what will automatically happen to the money when the account matures, unless you choose a different option. It will be set out in the terms and conditions. For example, they might transfer the money to an easy access ISA, or they might transfer it into another fixed rate ISA for the same duration as the original. They contact you in advance of account maturity to tell you the options and what the new interest rates are. Rates won't necessarily be lower: at the moment the rates on fixed rate ISAs taken out a few years ago are lower than what's being offered on new FRISAs. So if you have an FRISA maturing this year, you can easily get a higher rate of interest with a new one.

Yes, you can consolidate ISAs. But (and this is important) you must do it by 'transferring' from one ISA account to another. Do not close an account and withdraw the money, because it will lose it's tax-free ISA status. The provider you're transferring into will provide a transfer form. You fill it out and return it to them. They then liaise with the other provider to transfer the money - you don't need to give instructions to the original provider.

Thank you all. I think I get it now. I did try and find simple links before asking here, but didn't find anything that was really clear about what happened in the next tax year.

So what I've gathered from this is that actually, your £20k per tax year only relates to 'new' money you put in? So you can actually have way more than £20k in an ISA account if you also transfer in anything from last years ISA?

Just double checking I've understood that correctly?

I opened an ISA this year (first time ever). So next tax year, I could open up a brand new ISA account with anything up to £20k in it (I don't have that much, but just trying to make sure I totally get everything), and I could also transfer into that (assuming the rate was better) my £20k plus the interest I made from the ISA from this year?

Yes that is right.

Cash ISA will lose to inflation, so once you have a reasonable amount in there for your short term purpose, then look at using an investment Stocks & Shares ISA, and pension.

Do remember at the end of the tax year that you must use the transfer function of the new provider to bring in the 'old year' money into the new ISA.

You can't withdraw it yourself and pay it back in or it will count as this year's money.

Bear in mind too that not all ISAs allow transfers in.

Thanks all, you've been very helpful. I understand fully now.