In praise of the Flexible ISA

Flexibility is a good thing in an ISA. For most of their existence, ISAs and their forerunners PEPs were both use it or lose it tax-free allowances, and one way tickets. You could contribute money to an ISA, but draw it out and you lose the tax-efficiency of that contribution. Put 20k into your ISA in one tax year but draw 10k out, your allowance for that year is 20k-10k

Flexible ISAs make this work right. In the above example your allwoance for that year is still £20k, as long as the net contribution is made within one tax year. Here’s the Building Societies’ Association on flexible ISAs.

Most of the running about flexibility in ISAs is made about Cash ISAs, and the advantages are most obvious in cash ISAs. For most people, however, Cash ISAs are a waste of time, because you can usually get a better return on your cash/lose less of it to inflation with non-ISA accounts, because most people have a £1000 tax-free personal savings allowance on interest. Typical interest rates in the UK are up to 2%, so if you are using this allowance to the full you have about £50k as cash savings. That’s quite a lot – if you have that amount held as cash then you should ask yourself if you are allocating capital in your best long-term interest¹, although of course if you are buying a house or have a highly variable income then maybe that is OK.