Can I drip-feed money from a Cash ISA to a Stocks and Shares ISA?
19 July 2021
Question by Helen
I am 52 with money languishing in a low savings account (£20,000), as I had intended to buy a property but it never happened. Now I'm neurotic about entering into Stocks and Shares, due to seeing how many investors have exited the stock market thanks to Brexit, and with companies going bust etc. But I need to make my money work for me as my pension pot is low. My instinct is to put the money into an Instant Access ISA and drip feed this into a Stocks and Shares ISA. Would this be possible within the same allowance? I know you can take money in and out of a Cash ISA. Or if I held the whole amount in a Stocks and Shares ISA and had a direct debit of £100 per month into shares, would there be an interest rate on the amount waiting to buy? Helen
Answered by Boring Money
The first thing I should ask you, before answering your question, is, what other money do you have available in the event of an emergency?
It would be difficult to suggest investing all this money unless you have additional funds you can call on in a hurry. Otherwise you are left with the potential of having to either access investments when their value has fallen (consolidating any losses) or going into debt. No investment will ever perform better, than the interest you would pay on a credit card.
Assuming that is all fine though, (and at a £100 direct debit per month, drip-feeding the full amount will take quite a number of years anyway) - your hesitation over the current market is a very understandable dilemma.
However, you don’t have to look back far to see that this is the ongoing nature of investment.
Today is Brexit and US/China relations. 10 years ago it was banks. In 2000 we had the fallout from dot-com over-excitement. And I’ve missed at least four smaller panics that have happened in between.
In markets, there is a constant cycle between everyone feeling great (and markets going up) and everyone feeling afraid (and markets going down). No one can ever tell you in advance which way markets will move next week, or next month. All we do know is that, historically, the long-term market trend has been upwards.
The key to being successful, therefore, is in being prepared.
To know that downturns will happen. And to be confident that, when they do, you will ignore them and do absolutely nothing until they are over.
Having said all that, there are also ways to mitigate the impact.
First, choose a risk-appropriate, multi asset fund, with some bonds, perhaps even some property as well.
This could reduce the scales of your ups and downs compared with a 100% holding in shares. And, exactly as you suggest, drip feed your money in, so that it buys at a range of different prices.
Finally, though, the rules.
When you withdraw money from an ISA and wish to replenish it using the same allowance, the money must go back into the same ISA account as the withdrawal and in the same tax year. If you had a ‘current tax year’ Cash ISA and wanted to transfer it to Stocks and Shares, you would have to transfer the whole lot.
So no, drip feeding money from a Cash ISA to a Stocks and Shares ISA wouldn’t be possible under that scenario. Not this year anyway.
You could, however, drip feed it from a normal savings account.
You have an annual Personal Savings Allowance which means interest on deposit accounts can be free of tax anyway, up to £1,000 a year for basic rate taxpayers or £500 a year for higher rate. I don’t know your situation, but, at current rates, you (probably) won’t need a Cash ISA. This set up is also likely to offer the best interest rates on the amount remaining in Cash.
Or you could split your Cash across ISA and deposit savings, using the latter for the drip feed into Stocks and Shares.
(note: Highest/additional rate taxpayers do not benefit from a Personal Savings Allowance.)
To complete the picture, though, yes, you can also invest in a Stocks and Shares ISA and hold money in Cash, which can then be drip fed into the market. This is becoming a standard feature for many Stocks and Shares ISA providers.
Whether that Cash account would pay interest – and whether they will charge you fees for the privilege of holding your Cash - will be down the individual provider.
That’s a reason to shop around - and the Best Buys on this site is a decent place to start.