DIY Investors not making the most of ISA advantages

New research from Charles Stanley Direct looks into the ISA landscape among DIY Investors and their understanding of flexible ISAs

• 62% of DIY investors do not understand what a Flexible ISA is:
  • Of this, 14% have heard of a Flexible ISA but don’t understand what it is, while 7% say there is nothing that best describes their understanding of what a Flexible ISA is
  • 13% think it allows you to swap your cash ISA to a stocks & shares ISA
  • 11% think it allows you to increase your ISA contribution
  • 11% think it allows you to swap your stocks & shares ISA to a cash ISA
  • 6% think it allows you to transfer your ISA to someone else
• 10% have never heard of a Flexible ISA
• Only 29% of DIY investors correctly understand that a Flexible ISA allows you to withdraw money from an ISA and pay it back again within the same tax year without affecting your annual

 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “When investing money, it’s vital to make use of tax allowances. Individual Savings Accounts – or ISAs – are often a first port of call owing to their simplicity and flexibility. Importantly, it means any interest earned in an ISA is sheltered from paying capital gains or any further income tax, which can be important for your long-term returns. If you look at the potential compounding effects of long-term savings, the returns can amount to quite a substantial nest egg.

“It’s encouraging to see that more adult ISAs were subscribed to between 2022-2023, and the number of cash ISAs increased, likely owing to higher rates available. And though our research found that many DIY investors are making full use of their allowance, close to a quarter are not; and many have never heard of the benefits of a flexible ISA. For those who may not be able to afford to put away the full £20,000 allowance, or may need the flexibility to access that money again throughout the year – an understanding of flexible ISAs may encourage more to save.”

Rob Morgan, Chief Investment Analyst at Charles Stanley Direct, shares his guide on Flexible ISAs:

Flexible ISA Guide

Saving or investing in an ISA has long been an important way to save tax. Less widely-appreciated are the ‘flexible’ ISA rules that mean you can withdraw money from an ISA and return it in the same tax year, without it counting towards your current ISA allowance, currently £20,000.

What is an ISA?

 
ISAs, or Individual Savings Accounts, are a valuable shield against tax for UK investors. You can currently put away up to £20,000 a year in ISAs, and any income or investment gains are free from income tax or capital gains tax – no matter how much money you make.

ISAs are available either as “Cash”, which is like having a tax-free bank or building society account, or “Stocks & Shares” where your money can be invested in a variety of assets in search of higher returns – albeit you could face losses as well as gains, especially in the short term. Over time you can build up a substantial sum in ISAs and shelter it from tax.

What is a flexible ISA and what are the rules?

 
A ‘flexible ISA’ gives you the freedom to withdraw your money and, crucially, put it back again without affecting your annual allowance, provided you pay it back in the same tax year.

For example, let’s say you currently have £50,000 in your ISA accumulated from previous tax years. If you then withdraw £10,000, you can pay this back into the ISA during this tax year and still use your full £20,000 annual allowance before 5 April 2024.

It is even possible to withdraw the entire balance from your ISA, potentially worth several hundred thousand pounds, and replace it by 5 April. This can be done at no cost with a Charles Stanley Direct ISA.

It is important to note that if you fail to replace it by the end of the tax year, you will lose the ability to return the balance to your ISA without impacting your annual allowance.

Flexible ISA rules also cover any dividend payments withdrawn to a bank account during the tax year. You’ll be able to pay such amounts back into a flexible ISA if you want to by 5 April, without affecting your allowance.

It is possible to have a Cash ISA or Stocks & Shares flexible ISA as long as your provider supports it.Bear in mind you can only repay withdrawals to the same ISA they were taken from.

What is a non flexible ISA?

 
Flexible ISA rules were introduced in April 2016, but relatively few providers support them. So don’t assume your ISA provider allows you to take money out and pay it back: if you withdraw from a provider that doesn’t support them, then that amount of ISA allowance will be lost for good.

Say you wanted some money to tide you over for a couple of months – provided those months don’t straddle the end of the tax year – you might find your ISA provider counting the repayments towards your total allowance for the year.

Are there any disadvantages to using a flexible ISA?

 
Investors also need to bear in mind the potential disadvantages of using this flexibility. Withdrawing cash from a Stocks & Shares ISA may mean selling holdings and investments that should be for the longer term, usually a minimum of five years.

If you dispose of investments to withdraw cash, you may be more likely to incur a loss. Being ‘out of the market’ for a period could mean you miss out on a period of growth, plus you will not benefit from any income earned such as dividends from shares or interest on bonds.
 
Methodology
 
Research was carried out for Charles Stanley by Censuswide. It surveyed 1,007 DIY Investors in the UK (’Self-Directed’), defined as; investors who actively choose their own investments, making their own asset allocation decisions, aged 18+. Survey conducted between 05.07.2024 and 10.07.2024.