How to make your child a mint on stock market
ALL parents want their children to have the best start in life — and by saving into a Junior Isa you can give them just that.
Since 2011, when the Junior Isa was launched, families have had the choice of saving tax free into either a cash or stocks and shares Junior Isa.
But with up to 18 years to build up a nest egg for your child’s future tax-free, it may be difficult to work out whether you should keep the savings in cash or invest them in the stock market.
There are pros and cons to both — recent turbulence in markets may be enough to put you off investing in shares, but high inflation can be destructive if you leave all your savings in cash.
The maximum amount you can save into a Junior Isa in the 2022/23 tax year ending on April 5 is £9,000. The allowance can change, but will stay at this level for 2023/24.
You can choose to deposit the full amount in either a cash or investment Isa — or split the £9,000 between the two.
Money saved in the Isa, which must be opened by a parent or guardian, belongs to the child. It cannot be withdrawn until they turn 18, other than in exceptional circumstances. So which is best for a Junior Isa: cash or stocks and shares?
THE CASE FOR CASH
OF The £1 billion invested in Junior Isas in the 2020/21 tax year, 57 pc was in cash.
Many parents who don’t want to take risks with their children’s savings see cash as safer than a stock market-linked account.
And cash deals are becoming more attractive. The top-paying cash Isa is now 4 pc from both Coventry and Skipton building societies.
This means cash savers have a better chance of building wealth over time than they did when the rates were lower.
A cash Isa could also be a more suitable option for parents opening an account for an older child who may need to access the money soon. This is because experts say you should invest for at least five years to have enough time to ride out the ups and downs of stock markets.
Any investment in the stock market can go down as well as up — a risk some parents are uncomfortable taking.
The downside of cash is that returns may not be as high as from the stock market.
And with inflation still sitting above 10 pc, that can have a damaging impact on your savings.
It means the buying power of £100 today will not be the same in 18 years’ time.
For example, a parent who invested £1,000 into a cash Junior Isa at 3 pc a year ago would now have the spending power of £78 less in real terms because inflation is so high.
If you do go for cash, review your rate regularly, and transfer to another provider if it’s not top of the market. Visit thisismoney.co. uk/save for the best deals.
THE CASE FOR STOCKS & SHARES
CHILDREN have time on their side. That gives them the ability to reap the benefits of shares, which tend to return more than cash over the long term.
Laura Suter, of Isa provider AJ Bell, says: ‘Money saved into a Junior Isa is the ultimate long-term investment of up to 18 years — so a stocks and shares account could be a better option than cash.’
Parents who start saving £100 a month when their child is five years old will hand them a nest egg of just over £22,000 when they are 18, assuming investment growth of 5 pc a year, according to AJ Bell.
emma Wall, head of investment analysis and research at fund supermarket hargreaves Lansdown, says: ‘A Junior Isa is a very long-term investment. Over ten years the stock market will do better than cash by some margin, so while the next year will be uncomfortable, if you are looking for the better long-term option, investing will deliver.’
WHERE TO PUT INVESTMENTS
AJ BELL’S Laura Suter says timepoor parents may struggle to regularly monitor how their child’s Isa is performing.
So they may be better off outsourcing the decision-making to fund managers by putting their money into a fund.
She adds: ‘ Or you could buy cheaper tracker funds, which aim to mimic the performance of entire indexes such as the FTSe 100, rather than relying on individual stock picking.’ Ms Suter suggests the Vanguard LifeStrategy range as an all-in- one fund for parents who want a hands- off approach, where money invested is spread across different asset classes, countries and sectors.
If you had put £10,000 in the Vanguard LifeStrategy 60 pc equity fund five years ago it would be worth £12,150 today.
Given the timeframe, parents can afford to take a little more risk with their children’s savings, says Ms Wall of hargreaves Lansdown.
She names the iShares emerging Markets equity Index, a fund tracking the performance of the broader emerging stock markets in China, India, Brazil, South Africa and Taiwan.
‘The fund could be used as a way to diversify a long-term, global investment portfolio focused on growth,’ Ms Wall suggests. A £10,000 investment made five years ago would now be worth £10,819.
She also likes the Troy Trojan fund, which is invested across a mix of investments including shares, bonds, commodities and currencies.
Its aim is to shelter your money when stock markets fall. But for that reason, it’s unlikely to keep up with rapidly rising stock markets. Your £ 10,000 nest egg invested five years ago would be worth £12,780 today.