How the Junior ISA could transform your child’s financial future
When it comes to managing our finances, we generally get caught up in our own personal affairs. Our own financial concerns are varied, but they range from how we budget on a day-to-day basis right up to how we can grow our long-term wealth through our pensions and investments.
If you decide to have children, your concerns may change as you undoubtedly want the best start for them, with parents and grandparents alike often thinking about how best to set them up financially in later life. Whether that is helping them through university or getting them on the housing ladder, or even just help with buying their first car, getting a head start can go a long way in seeing them achieve some of these milestones.
Thankfully, there is one really easy way that you can implement a proactive financial plan for your children – setting up a Junior ISA.
What is a Junior ISA?
A Junior Individual Savings Account, usually referred to as a JISA, is a way of saving on behalf of a child. They replaced Child Trust Funds (CTF), which could be opened if your child was born between 2002 and 2011.
The CTF was later succeeded by Junior ISAs, although some CTFs remain open today and perform the exact same function as a Junior ISA. Any child owning a CTF isn’t eligible to hold a JISA unless they first have the CTF funds transferred to a JISA and close their CTF.
A JISA must be opened by the child’s parent or a legal guardian. Money that is held within a JISA belongs to the child and therefore can’t be withdrawn until they turn age 18, apart from in exceptional circumstances. But at age 18, the child will have unfettered access to all of the money – and the parent cannot overrule this.
What makes saving into a Junior ISA so attractive?
JISAs benefit from the same tax advantages as any normal adult ISA. That is, any interest, dividends or capital growth within a JISA grows free from tax. Since tax year 2020/21 you can contribute up to £9,000 per annum into a JISA, increased from £4,368 in the 2019/20 tax year.
Who can contribute to a Junior ISA?
Anyone can contribute into the Junior ISA once opened, including family or friends, provided total contributions don’t exceed the annual subscription limit (currently £9,000).
Should I open a cash or stocks & shares Junior ISA?
There are two types of JISA that you can set up. The first is a Cash JISA. As the name suggests, this is a savings account and therefore will earn the interest rate that the bank or building society is offering at the time. You can find the best rates at Savings Champion.
The second option is a Stocks & Shares JISA which means you can invest into the stock market. As a stock market investment, the value of the investments within a Stocks & Shares JISA can fall as well as rise and are therefore higher risk than holding the money within a Cash version. However, if you are prepared to take a little bit more risk that comes with this approach then you could potentially provide an even larger sum of money for your child by the time they reach age 18.
The value of saving early
Given the generous allowance currently available through a JISA, if you were to maximise the amount that you contribute, you could provide your child with a very generous sum.
Based on current subscription limits, if you were to deposit £9,000 each tax year into a Cash JISA from the moment that they are born up to age 18, plus £20,000 into a standard adult Cash ISA from age 16 you could potentially save a total of £231,000 by age 18, depending on their date of birth, before interest is even added.
The figure is slightly higher than 18 or 19 tax years of £9,000 contributions, because as well as the Junior Cash ISA subscription, a 16 year old can open a standard Cash ISA and 2 or 3 subscriptions of £20,000 each could be added by age 18. Even with smaller sums of money, saving £50 per month, could result in total savings of £10,800 by the age of 18, again before any interest is added.
The value of contributing to a Stocks and Shares JISA could be even more significant. For example: if you were to contribute only £50 into an account when your child is born, and you do so for 18 years, with the funds generating a growth rate of 5% per annum, the estimated future value of your investment would be £17,582 by age 18.
That represents an increase of £6,782 on your initial investment. Another example shows that if you were to contribute the maximum of £9,000 each year for 18 years , at a growth rate of 5%, the estimated future value of the investment would be £255,953. That represents an increase of £93,953 on your initial investment! (source: The Calculator Sure, Compound Interest Calculator).
Reward and responsibility
Whether you choose a Cash Junior ISA or a Stocks & Shares Junior ISA, there can be great reward in saving early for your child’s future. But, with great reward comes great responsibility. The reason I say that is that your child will have access to those funds at age 18, and although you may have earmarked the funds for a specific purpose, they may have other ideas. Either way, it’s massively important to teach children about managing their money, especially if they will come into a large amount of money at age 18.
How can we help?
At The Private Office, we have vast experience in managing wealth across generations. Whether you’re looking to start the ball rolling by helping save for your children’s future or looking to integrate fellow family members into your financial affairs, we can help. If you’d like to find out more, then do not hesitate to get in touch and arrange a free consultation today!