Cash ISA expert explains five year rule all savers should know | Personal Finance | Finance

Brits are being urged to consider alternatives to cash ISAs by one expert who said a simple ‘five-year’ rule could help their money earn a better interest rate.

Many providers are urging savers to lock in their money to take advantage of cash ISA rates before they reduce and before expected reforms are made by the Chancellor Rachel Reeves.

Antonia Medlicott, founder and managing director at financial education specialists, Investing Insiders said savers should consider using their £20,000 allowance to invest in a stocks and shares ISAs as these types of ISA tend to peform much better over the long term.

Medlicott said: “Only 21% of the adult population use investment ISAs compared to 40% who use a cash ISA. Many people avoid investing because they simply don’t feel they have the knowledge and education to approach it.”

She explained that investing is better suited to those who can put their funds away for at least five years, and who can afford to look more long-term. She added: “Historically, those who have put their faith in the markets have enjoyed far greater returns than those who used savings accounts instead.”

Baroness Helena Morrissey, a Conservative peer, who at one point was in charge of over £840bn of people’s savings while head of personal investing at Legal & General, said savers in cash ISAS had missed out on over £6.6bn by putting their money in safer, but less profitable cash ISA accounts.

Medlicott said savers who did not want to invest their cash and were happy with a cash ISA needed to act quickly.

She said: “With cash ISAs currently offering up to nearly 5% in interest on deposits and some offering even more with introductory rates, savers can gain peace of mind over the returns they will receive and some great rates.”

“However, most of the top-paying accounts offer ‘variable’ rates, meaning they can go up and down as the Bank of England rate fluctuates. You will generally get easier access to the cash held in these accounts.”

The Bank of England is expected to cut rates in May, so savers should look at fixed rate accounts and long-term ISAs to secure a higher rate before it is too late.

“Fixed rate savings accounts typically require you to lock your money away for a set period of time, but offer certainty over interest rates, no matter what the Bank of England does.”

She added: “If you have spare cash sitting in a low-interest account, moving it into an ISA protects it from tax on interest, dividends, and capital gains.”

ISA savings are:

• Free of capital gains tax (CGT) – CGT is tax you pay when you sell an investment, such as a property or shares.

• Free of bond interest. Not all stocks and shares Isa invest in bonds but if they do you will not pay any tax.

• No tax on dividends. Any dividend payments you get on shares invested within an Isa are not taxed, as with CGT there is an allowance which is currently £500.

Each person can save up to £20,000 a year into an Isa, a Junior Isa – the version of an Isa for under 18s comes with a different allowance. You can save £9,000 into a JISA and this amount is not included in the adult £20,000 allowance.

The tax year runs from the 6th of April to the 5 April each year. When the new tax year starts, your ISA allowance resets, this means you can’t roll over any unused allowance to the next tax year.

What is a stocks and shares ISA

A stocks and shares ISA, also called an investment Isa, allows you to invest in the stock market tax free.

When you open this type of Isa the provider will buy and sell stock market assets on your behalf.

Most stocks and shares Isas will invest in baskets of shares, known as funds.

If the Isa invests in open ended investment funds, it means you are buying into units rather than shares; the shares are split into units.

You can use your Isa allowance to buy shares in investment companies, these are companies directly listed on the stock market that invest in other companies, so you still get the benefit of diversifying your portfolio.

Two of the best known investment trusts are the Scottish Mortgage Trust run by Baillie Gifford and the JPMorgan Global Growth & Income.

Some Isa providers offer exchange-traded funds, or ETFs, which can invest in different asset classes, regions, and markets, and have a similar structure to open-ended investment funds but have a larger spread of investments.

You can also use your Isa allowance to invest in individual shares, this is an option for more sophisticated investors who are familiar with the ups and downs of the world’s stock markets.

Be aware that the orginial amount of money you save may be at risk if you invest it so always take advice or do your homework first.