There are so many factors for a parent to consider when doing their best to make sure their children are prepared for the world when they reach adulthood. A lot of those things will be out of your control, but one thing you can consider that could make a real difference is investing into a Junior ISA. A Junior ISA is a tax-free savings or investment wrapper aimed at encouraging families to save for their children’s futures. Any money you put into a Junior ISA will be locked away until your child’s 18th birthday*, when it becomes their money and will become a standard ISA. *(the only exceptions to this are that funds may be withdrawn if the child is diagnosed with a terminal illness (life expectancy of no more than six months) or dies prematurely).
Entering adulthood with that level of finances comes with life changing opportunities and great freedom of choice. Depending on their priorities, your child could put down a deposit on a property, start a business, pay for training or tuition fees, or even travel the world to their heart’s content.
During the 2021/2022 tax year, the amount that can be saved annually into a Junior ISA is £9,000. Just like an adult ISA, your contributions are free from both income and capital gains tax and often come with relatively high interest rates. For example, Coventry Building Society offer an adult (ISA Reward) ISA with an interest rate of 0.45% per annum, whereas their equivalent Junior Cash ISA comes with a 2.92% per annum interest rate. (Rates correct as at 05/05/2021). Junior ISAs are easy to set up and easy to manage: as long as the child lives in the UK and is under the age of 18 (and either doesn’t have a Child Trust Fund (CTF) or who first transfers their CTF to a JISA), their parent or legal guardian can open the ISA on their behalf. On their 18th birthday, the account will become an adult ISA and the child will gain access to the funds.
Both Junior Cash ISAs and Junior Stocks and Shares ISAs are available, and you can even opt for both, but your annual limit will remain the same across both ISAs. When making that decision there are a few considerations to make; cash investments over a long period of time are unlikely to overtake the cost of inflation but come at a lower risk than their stocks and shares equivalent. With a Junior ISA, however, you can benefit from a long term investment horizon. (Depending on the child’s age) Although the stock market comes with a level of volatility, you can ride out some of the dips and peaks over a long period. Combined with good diversification, it’s possible to mitigate a fair amount of risk.
Taking a look at potential gains, had you invested £100 a month into the stock market for the last 18 years, figures from investment platform Charles Stanley suggests that a basic UK tracker fund would have built you a pot worth £34,666. (assuming growth of 5% per year after charges). In comparison, had you saved the same amount into cash accounts, you’d be closer to £24,000, a considerable difference of nearly £16,000.
Now is the time to make the most of Junior ISAs and prepare to swap bedtime reading from Peter Rabbit and Hungry Caterpillar to stories of how a stocks and shares portfolio can secure your child’s future.
*The value of investments call fall as well as rise. You may not get back what you invest.’