Industry Insider: Make the most of your child’s Junior Isa

Published by Darius McDermott on 16 November 2016.
Last updated on 16 November 2016

These accounts have been terrific, tax-efficient savings vehicles for children across the country since they launched, but a couple of recent statistics have alerted me to the fact that many people may not be making the most of them.

First, only around 740,000 Jisa accounts received a contribution in the past tax year, according to HM Revenue and Customs (HMRC). That isn’t a small number, but obviously millions of children are missing out. Second, HMRC data shows that nearly 70% of all Jisa savings are held in cash, as opposed to being invested, which means kids are missing out on potentially much higher returns.

 

Factor in the time frame

If you are thinking of investing in a Jisa, first consider your time frame, as this can make a big difference to your strategy. For example, if your child is a newborn or at least 10 years away from their 18th birthday, you may want to go for aggressive growth-focused investments. These are riskier but offer potential for greater gains.

If a child is within two or three years of wanting to use their Isa money, however, you may want to take a more cautious or balanced approach, which entails choosing lower-risk investments.

Consider risks versus returns

Given that the maximum amount you can currently put into a Jisa each year is £4,080, you probably won’t want to divide this sum between too many funds. I usually suggest starting with a maximum of three. If you don’t want to invest a lump sum, most Jisa providers will let you set up an automated monthly payment, split evenly across your fund choices.

So how do you decide what to invest in? Among the asset classes available, shares are generally considered higher risk, because you can lose money investing in them. However, over the long term stock markets have delivered much better returns than cash (see the chart, which shows the performance of cash versus global, UK and US stock markets over the past 15 years). Bonds are lower down the risk scale, but your capital is still at risk.

 

Choose your investments

Investors with a very long-term time frame might consider holding an emerging market equity fund in their Jisa. Emerging market economies have tended to post far stronger returns than developed markets, although

returns are far more volatile. A fund I like that has outperformed its peers since launch, yet with lower volatility, is Charlemagne Magna Emerging Markets Dividend.You could also go for a specialist country fund, such as the Goldman Sachs India Equity Portfolio.

For those who want a ‘core growth’ fund, AXA Framlington UK Select Opportunities offers an appealing mix of larger and medium-sized more growth focused businesses. I also like Investec UK Alpha, which is a slightly less adventurous but extremely consistent proposition and probably a more traditional ‘core’ fund. For a bit of global diversification, Sanlam FOUR Stable Global Equity will give you exposure to some of the world’s best-performing companies.

If you have a shorter time frame and/or want to take a bit less risk while still staying invested, funds that invest in a mix of asset classes might be the way to go. Schroder Multi-Manager Diversity has a default position of around a third in equities, a third in bonds or cash and a third in alternative investments such as property or commodities. For a straight-up bond fund, Fidelity Strategic Bond is a diversified choice that invests internationally across government and company bonds.

  • Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott's views are his own and do not constitute financial advice.

 

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre.

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