Kick-start your children’s savings

Published by Rachel Lacey on 08 March 2019.
Last updated on 08 March 2019

Help younger members of the family build a nest egg for their future with a Junior Isa

Individual savings accounts aren’t just for adults. A Junior Isa (Jisa) can also be a great way to save for children or grandchildren without the worry of tax eating away at their returns.

In the current tax year (2019/20), you can pay a maximum of £4,368 into a Jisa (up from £4,260 last year) without paying any tax on its growth.

Another plus for parents is that the money cannot be accessed until their 18th birthday. Of course, you won’t be able to guarantee how they will spend it once they do get their hands on it, but the fact they haven’t been able to dip into it does at least mean it has had the chance to grow into a meaningful sum.

The Isa itself is just a ‘wrapper’ that protects your savings from tax and, as with the adult equivalent, you will still need to decide whether to go for a Cash or Stocks and Shares account.

In 2017/18, 70% of all Jisas taken out were cash. Unlike most savings accounts, rates on cash Jisas are pretty impressive. At the top of the table, Coventry Building Society pays 3.6%. However, Sarah Coles, personal finance analyst at Hargreaves Lansdown says parents shouldn’t rule out a Stocks and Shares Jisa.“Parents can struggle to take a risk when it comes to their children’s savings. However, the biggest risk for a long-term investment isn’t the short-term ups and downs of the stock market, over an 18-year period there is a decent chance of riding those out. The biggest risk is actually inflation.

“Take a Cash Jisa paying 2.5%. If we look at the seven calendar years since Jisas were launched, it would only have beaten inflation in three of them, so for most of the time the money you had put away would have lost value once inflation was taken into account.”

She adds: “A Stocks and Shares Jisa actually involves less risk than parents think because over 18 years it has far more potential to outstrip inflation. 

“If you were to invest £50 a month from birth in a Stocks and Shares Jisa, and get a typical return of 5%, you could end up with a lump sum of £17,460. If you put it in a cash Jisa paying 2.5%, you could get £13,622 – £3,838 less. Even if you saved into the Cash Jisa currently offering the highest rate of 3.6%, you would still end up with £15,164 –or £2,296 less.”

Moira O’Neill head of personal finance at interactive investor (Moneywise’s parent company), says parents must consider fees and charges when selecting a platform but says that some – including ii - offer free Jisas if their parents already have an account.

She adds: “Our investors are generally investing in the same funds and trusts for their children as they do for themselves, with the perennially popular Fundsmith Equity and Scottish Mortgage IT making up the top two investments for junior Isas – both of which top the respective most bought funds and trusts tables for our adult accounts.”

Once the account is opened, Ms O’Neill says it’s also worth letting other family members know.

“Can grandparents contribute too? If you all agree to put a small amount of money into a child’s Junior Isa every Christmas and birthday, this could amount to thousands of pounds over their childhood,” she adds.

Moneywise Childrens Savings Awards 2019

Best Junior Isa (Cash):
Coventry Building Society, pays 3.6%, minimum investment £1. Accepts transfers in.

Best Junior Isa (Stocks and Shares):
Hargreaves Lansdown. Invest from £25 a month into a choice of 2,500-plus funds, shares, investment trusts and ETFs (exchange-traded funds). Platform fee: 0.45%.

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