SAVE £290K FOR A TINY TREASURE
WITH university fees and the cost of getting on the property ladder making it ever harder for young people to make their way in the world, parents are increasingly keen to provide a nest egg for their children.
One way is to use a Junior Isa, or Jisa, which last week was given a major boost in the Budget when the annual allowance was increased from £4,368 to £9,000.
Jisas, which can hold cash or stocks and shares, replaced the old Child Trust Funds in 2011.
Although they do not come with a government bonus, the tax advantages can be considerable, especially if you save for your children over time. It is also possible to transfer an old Child Trust Fund into a Junior Isa which may give you a better choice of cash savings accounts and investment funds.
The Jisa annual allowance is £4,368 for the current tax year, or £364 a month – and will be £9,000 from April 6. Once a child turns 18, the Jisa becomes theirs – and can be transferred into an adult Isa or accessed by the child.
‘Giving your son or daughter access to a tidy Isa when they reach the age of 18 may seem fraught with potential risks,’ says Rebecca O’Keefe, head of investment at Interactive Investor. ‘But if you have engaged with your kids about investing, you may find this is the start of a lifelong interest in managing their own money.’
The first choice a parent has to make when opening a Junior Isa is whether to put it into cash or shares.
Many experts believe that because Junior Isas, by their nature, have a long timeline, shares are a better bet. However, 70 per cent of Junior Isas are in cash – and many are likely to remain there despite last week’s cut in Bank Base Rate.
Jason Hollands, a director of wealth manager Tilney, says this is a missed opportunity. ‘Cash is simply not an appropriate home for a long-term investment, especially one which might be aimed at getting your child through a degree course or a foot on the property ladder,’ he says.
The advantage of a cash Isa is that the sum deposited accrues interest. There is none of the volatility associated with investments that rise and fall.
Although some interest rates on Jisas are generous – Coventry Building Society leads the way with a rate of 3.6 per cent – studies show that, recent turmoil notwithstanding, the stock market usually outperforms cash savings over the long term.
Hollands calculates that if you achieved a 6 per cent annual return – which he describes as ‘quite modest’ – a Jisa that had £9,000 invested in it each year would be worth more than £290,000 after 18 years.
Parents investing more modest sums of £50 or £100 a month on the same assumptions of returns and time, would accumulate pots of £19,367 and £38,735. In contrast, a cash-based Isa earning 3.6 per cent over the same period would be worth £227,500 if the full Isa allowance was used – £15,164 or £30,328 if £50 or £100 a month were invested respectively.
If you choose an investment Jisa, you can hold either funds or stocks and shares. Hollands suggests investing a regular amount monthly, rather than trying to put in lump sums at specific times. He says: ‘Many parents choose to invest on a monthly basis. This is a great investment discipline and it helps get over the emotional block of worrying about whether it is the right time to invest. You just keep on investing through the good times when shares are soaring and during periods of turbulence like now when markets are sliding but shares can be picked up at lower prices.’
It is possible for other people, not just parents, to contribute to a child’s Jisa as long as the total amount remains within the annual limit. O’Keefe, at Interactive Investor, suggests asking grandparents to chip in, especially if they are thinking of inheritance tax planning. ‘Contributing to an Isa rather than buying your grandchildren garish toys may make you a firm favourite over time and is a great way of using up your annual gift allowances of £3,000,’ she says. It’s also possible to put birthday gifts and other money into a Junior Isa.