Junior ISAs have come a long way since they were first launched in November 2011. In ten years, and thanks to the thought and care of their parents, 954,000 children are set to start their adult life with the kind of nest egg that can make an enormous difference.
A decade of Junior ISA savings and investment has also revealed the secrets of success for building a meaningful pot of money for your children.
It’s not always easy to free cash up for your child’s future when you’re locked in the most expensive years of your life, but the best part of a million people paid into a JISA in 2018/19, so a huge number of parents, and their wider families, are finding a way to give their children a great head start in life.
Some of our clients have put together really impressive JISA portfolios of tens of thousands of pounds says Sarah Coles, personal finance analyst, Hargreaves Lansdown. But you don’t need to set aside a fortune to make a real difference to your children’s future. If you invest as little as £25 a month and talk to your children about their investments as they grow, you can also help build their interest and understanding of investments. It means they won’t just start their adult life with a nest egg, they’ll also have become investors, which can make a profound difference throughout their lives.
There are seven keys to success with a Junior ISA, which parents should consider getting to grips with.
#1. Tax matters
You may think it’s not an issue, because most children don’t pay tax. However, there are two reasons why it’s important. Outside a Junior ISA, if parents invest for their children and those investments produce an income of £100 or more a year, it’s treated as being earned by the parents and taxed at the parent’s marginal rate. Within a Junior ISA, it doesn’t matter how much their investments grow, or how much income they produce, they’ll never have to pay any tax on it. The second reason is that when they get to 18, their Junior ISA rolls over into an adult ISA, so whatever is in the ISA remains sheltered from tax. Outside an ISA it would become subject to tax, and if they wanted to shelter it in an ISA it would come out of each year’s ISA allowance.
#2. You don’t need to put a fortune aside
The average regular saver into an Hargreaves Lansdown Junior ISA is £87 a month. If you kept up the payments for ten years, and your investments returned long-term growth of 5% a year, you could build up £13,510. If you kept it up for 18 years, you could have £30,381.
#3. Regular saving makes it easy
If you pay your child first each month, you’ll never forget, and you’ll build up a nest egg before really noticing the money going into your account. Set up a direct debit to come out of the account on pay day and go directly into the Junior ISA.
#4. Don’t go it alone
You don’t have to do it alone. Among our current Junior ISA holders, a third are paid into by more than one adult. Grandparents are often keen to do something for their grandchildren, so they might be happy to pitch in with regular payments. If they’re not up for making monthly payments, family members might be very happy to pay money in for things like birthday and Christmas presents.
#5. Consider investment
954 million Junior ISAs were paid into during 2018-19, and 70% of them were cash accounts. There are some cases where cash makes sense, such as when the child is an older teenager, or where the money is needed for something very specific at a specific time, and this is the only money that will ever be available for it. If you don’t fit into this category, you might still be worried about taking a risk when it comes to putting aside money for your children, but for a long-term investment of up to 18 years, you really should consider investments. It offers far more potential growth than cash over this kind of time frame.
#6. Take the right amount of risk
This is different for everyone, and depends on many things, including the time horizon. However, if you know you are investing for the full 18 years, then, it may make sense to include some more adventurous investments in the mix. When they get closer to withdrawing the money, you might gradually move over into less risky assets, but consider the balance of risk and potential reward carefully.
#7. Trust your child
One common concern is that once kids turn 18, they’ll blow the money, and there’s nothing you can do about it. The reassuring fact is that 94% of Hl Junior ISA clients still have money invested a year later, so the vast majority of 18-year-olds are perfectly sensible with this money. It can help to talk to the child about their JISA as they go along, so they have an idea of how it is invested and how it is growing. This will give them more of a sense of responsibility and ownership than just getting the opportunity to receive a lump sum at 18.