What is a flexible ISA?

Flexibility isn’t all yoga poses and synchronised swimmers at the Olympics. When we talk about financial flexibility, we mean the ability to bend our goals depending on our immediate needs and circumstances.

Since ISAs have been established, they’ve seemed quite rigid in their rules. But as the popularity of ‘flexible ISAs’ is on the rise, we thought it a good moment to explain exactly what a flexible ISA is, the pros, cons, and everything in between.

Jump straight to it here:

• How do flexible ISAs work?
• Are all ISAs flexible?
• Flexible ISA withdrawal rules
• Benefits of a flexible ISA
• The Drawbacks
• Flexible ISA transfers
• Wealthify’s Flexible ISAs

How do flexible ISAs work?

Flexible ISAs work almost exactly the same way as a non-flexible ISA, in the sense that you can:

• Enjoy tax-free benefits.
• Deposit up to £20,000 each tax year.
• Earn interest on your savings, or profits on your investments.

However, the clue is in the name, with the additional benefit of flexibility.

With non-flexible ISAs, a portion of your annual ISA allowance is used up as you deposit into the account.

You can’t take this money out again without effectively ‘spending’ your allowance for that year. With a flexible ISA, on the other hand, you can withdraw at any time in the tax year without losing any of your tax-free allowance. All you need to do is deposit that amount back into the account by 11:59 on April 5th (although you may not want to wait until the very last minute).

For example, say you have an emergency and need to access money in your flexible Cash ISA. You can take the money out and pay it back before the end of the tax year without disrupting your ISA allowance, keeping you on track with your financial goals — but still allowing you that extra leeway.

Are all ISAs flexible?

No, not all are flexible. ISAs are divided into two types: ‘flexible’ or ‘non-flexible’.

And a further pointer is that Lifetime ISAs and Junior ISAs (if you’re saving/investing for your child) are always non-flexible.

So, if you’re looking for flexibility, only a Stocks and Shares ISA, Cash ISA, or Innovative Finance ISA could offer you this — and even then, it depends on the provider.

Wealthify, for example, offers a flexible Cash ISA and flexible Stocks and Shares ISA, but another provider may only offer non-flexible types.

Check with your provider directly to confirm if your existing ISA is flexible or not.

And remember you can move to a better-suited provider if you’re seeking more flexibility, but always use the official ISA transfer process if you want to keep your remaining ISA allowance for the year (a manual withdrawal will ‘use up’ your allowance, otherwise).

Flexible ISA withdrawal rules

The core rule of flexible ISAs is pretty simple:

If you plan to temporarily withdraw money from your flexible ISA, you just need to deposit it again before the end of the tax year (April 5th) to keep your ISA allowance amount.

On April 6th, your allowance resets and the next tax year begins. So, if you haven’t redeposited it by then, you’d miss out on your tax-free allowance benefits.

Other considerations would be:

• You aren’t limited to withdrawing £20,000 (your annual allowance amount) if you’ve built your pot up to a larger amount over the years. Say you’ve already built your flexible Stocks and Shares ISA up to £125,000, and you want to take £50,000 out to put towards a property purchase. If the purchase of the property falls through, you can redeposit your £50,000 back into your flexible ISA by the end of the tax year.
• As the rules stand, you need to put the money back into the same ISA you withdrew from by the end of the tax year.
• There may be an issue if you move your withdrawn money into a different provider’s ISA. If you just mean to move it over to another provider, using the new provider’s official transfer process could be more helpful to you.
• Don’t forget, the individual is now responsible for not going over their £20,000 allowance in the tax year! No matter how many ISA types you have with various providers, you still only get £20,000 per tax year to spread between them all. (Lifetime ISAs are limited to £4,000 per tax year, but you can use the remaining £16,000 of your allowance in different ISA types.)

Don’t forget that each provider will have their own T&Cs for their flexible ISAs, so it’s worth checking with them directly. If you need to chat to us about this, get in touch with Wealthify’s Customer Care Team here.

What happens if I don’t replace the money in my flexible ISA?

Thankfully, it’s not the end of the world; money will be deducted from your £20,000 ISA allowance for that tax year as if you’d pulled it out of a non-flexible ISA.

By not repaying it in time, you won’t be penalised, as such. It’s more the case of you missing out on the opportunity to keep building your interest/gains in a tax-efficient way.

The tax-free allowance is considered a big benefit for most people.

It’s your opportunity to save or invest up to the allowance amount every tax year, without needing to pay capital gains tax or income tax on your money (no matter how big the pot gets).

So, say you’re in a position to deposit the full £20,000 every tax year for the next five years. You could have £100,000 saved or invested – plus all the interest or gains that have built up in that time – without needing to pay those taxes (minus any fees from your provider).

Flexible ISA benefits

Flexible by name, flexible by nature. The main benefit of these ISAs is they give you room to breathe when it comes to your money, allowing you to withdraw and redeposit into the same ISA during the financial year.

The flexible Cash ISA, for example, could be a good choice for an emergency fund versus a fixed-rate savings account, depending on your needs.

With the Cash ISA option, you could build your savings in case there’s ever an emergency, in the hope that you will not need to withdraw it (and as it accumulates, you can benefit from the compounding interest it offers).

You’d then have the peace of mind of knowing if you do face an urgent financial issue, you could withdraw and redeposit it that year without disrupting your remaining ISA allowance.

Drawbacks of a flexible ISA

So, what are the cons of flexible ISAs? Well, firstly, there aren’t as many providers offering this more relaxed ISA; the more common versions are non-flexible. Which is why they aren’t as well-known or as well-understood by the public yet.

Secondly, the money has to be redeposited back into the same account by the end of the tax year in order to keep the interest, gains, and ISA allowance benefits for that tax period. If you couldn’t get the money back in the account by then, you would effectively lose these tax benefits.

Thirdly, you may be more tempted to withdraw from a flexible account more frequently than you would a non-flexible one.

If you’re investing in a flexible Stocks and Shares ISA, there are some additional drawbacks to consider if you take your money out with the intention of putting it back in later.

1. Investing is usually considered a long-term wealth-building strategy, typically for a minimum of 5-10 years. So, the opportunity to withdraw may be tempting in the short term — but could disrupt your long-term financial goals.
2. Once you initiate a withdrawal of the money, your investments would be sold, and you’d be ‘out of the market’ until you redeposit the money. That means if your investments are sold during a downturn in the market, you could be taking out your money at a lower value (or, just generally, missing out on potential growth).

Flexible ISA transfers

If you already have a non-flexible ISA but now feel aflexible ISA is right for you, it’s easier than ever to do an ISA transfer.

Here are some things to think about while you’re comparing providers:

• The interest rate if you’re considering a Cash ISA.
• Their fees and charges, particularly if you’re going for an Investment ISA (aka Stocks and Shares ISA).
• Similarly, if you’re investing, whether it’s a DIY style investment ISA (where you decide on the investments yourself), or a team of experts managing it for you (Wealthify offers the latter).
• Any exit fees your current provider may charge.

Note: As mentioned, it’s better to follow the new chosen provider’s official transfer process and let them handle the heavy lifting for you. You usually just need to fill in a transfer form to initiate this.

Wealthify Flexible ISAs

If you’re interested in what the benefits of a flexible ISA could do for you and your financial goals, it’s easy to get started with Wealthify.

Our flexible Stocks and Shares ISA and flexible Cash ISA are available to you.

So, whatever your goal – be that long-term investing or short-term savings – you have options on your side if you ever want to withdraw your money during the tax year. Just remember to pop the money back into your same ISA before April 6th to keep your ISA allowance as you’d like it to be.

Our award-winning platform can offer you Ethical Investing Plans, a range of approaches to investing (from Cautious to Adventurous), and low, transparent fees.

If you already have an existing ISA that you’d like to transfer over to us, check out our ISA transfer page to learn more.

Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.