Junior Isas: build up a nest egg for your children

Since their introduction in November 2011, some £1.7 billion has been invested in Junior Isas (Jisas), and about three-quarters of the money has been put into cash accounts, according to figures from HM Revenue & Customs.

These accounts have proven popular due to their tax benefits. Unlike their adult equivalents, which usually offer poor rates compared to standard savings accounts, it’s possible to get 3% interest with the best cash Jisa deals.

In most respects, Jisas work in exactly the same way as Isas. The main differences are the lower annual allowance (£4,080 in both 2015/16 and 2016/17), and children can’t access the money until they turn 18, unless they transfer their savings to an adult cash Isa when they’re 16 or older.

Incidentally, 16- and 17-year-olds are allowed to subscribe to both a Jisa and a cash Isa, so they’re able to squirrel away £19,320 a year from the taxman. Unless the child is 16 or over, Jisas need to be opened by a parent or a legal guardian, so grandparents won’t be able to open accounts for their grandchildren directly in most cases. Once the account is set up, there are no restrictions on who can pay in.

While the forthcoming savings allowance will let lower-rate taxpayers earn £1,000 a year on savings tax free (on top of the £10,800 anyone can earn before paying income tax), Jisas should still be the first point of call for savings that can be locked away as anything within an Isa will grow tax free until it’s withdrawn.

Putting £340 a month into a Jisa from when a child is born until they turn 16 would cost £65,260 overall. In Coventry Building Society's best-buy account, which pays 3.25%, this would earn £20,212 in interest, giving a total of £85,472*.

Though you could get similar, if not slightly better, rates in standard children’s accounts, this pot of cash would only need to earn about 1.1% interest a year to breach the savings allowance, so it pays to wrap up savings as early as possible.

Even with a more modest £50 monthly deposit (£600 a year), the power of compound interest can still be impressive. After 16 years at 3.25% interest, this would grow into a £12,569 nest egg, and the interest would be worth 60 months’ deposits.

Investment options

Like adult Isas, there is also a stocks and shares option for the Junior Isa. If you’re investing for a younger child, this is definitely an option to consider.

In fact, because the money is locked away until the child is 18, many experts recommend that investing is a better option than cash. Your child’s money has time to weather the ups and downs of the stock market, and history shows that stocks and shares have performed better than cash over longer periods.

Investing over the long term – five years or more – for your children can seem like a daunting task for young families who might be more preoccupied with paying the mortgage and energy bills. Yet those who can squirrel away money early will see their children benefit from – hopefully – strong returns from the stock market over time.

Fidelity International calculates that by saving just £31 a week into a Junior Isa as soon as your child is born can give them £41,886 over 18 years.

This significant sum would pay for driving lessons, their first car and insuring it, funding a gap year and university tuition fees.

If you are able to increase your contributions to £78.46 a week, thereby maximising your child’s Junior Isa allowance, you could provide your child with an even larger sum of £106,208 on their 18th birthday. This would not only cover the cost of getting them on the road, a gap year and their university fees but also provide the average deposit required of £33,000 for their first property.


Grandparents’ help

It’s worth asking your child’s grandparents if they would like to contribute, too, as financial advisers say that many grandparents want to give financial help but are often reluctant to broach the subject.

They might want to give money away in order to reduce their potential inheritance tax liability, for example. Remember, you are not investing for yourself, but for your child who will be able to access the money age 18. This means you might view the money in a different way.

No withdrawals are allowed until the child’s 18th birthday, except in cases of death or terminal illness. Upon reaching 18, only the child (and no one else) can withdraw the money. So parents and grandparents who are contributing need to be sure that the money will be spent wisely, and not on a lavish party or spending spree.

If you haven’t used your own £15,240 annual Isa allowance, then perhaps use that first – but just earmark it for the child.

The most important question is where to invest the money. Some Junior Isa providers offer a limited choice of investments. For greater flexibility, choose one of the DIY Junior Isas offered by an investment platform. These include Hargreaves Lansdown, Alliance Trust Savings, Interactive Investor, AJ Bell YouInvest, BestInvest, Charles Stanley Direct, Fidelity and The Share Centre.

Most beginner investors choose to pool their cash with other investors and invest in a fund that will itself invest across a wide range of companies, sectors, countries and, often, other funds.  By doing so, they do not put all their eggs in one basket and thus reduce the risk of their investment falling in value.

* This article was updated in October 2016 to reflect lower savings interest rates.