Building a nest egg can give your children the perfect boost in adult life.
Junior Isas – also known as Jisas – are a great way to save money for your children or grandchildren as you can save from the day they are born right through to their 18th birthday.
There are two types of Junior Isa – cash and stocks and shares.
Like the adult accounts, everything you earn in a Jisa is tax-free. This means you won’t pay any tax on your interest and you won’t be liable for any tax on capital gains or dividends if you choose to invest.
Jisas can be opened by parents with children aged under 16 and then by children themselves when they are aged 16 and 17.
In the 2017/18 tax year, £4,128 can be deposited in a Junior Isa, rising to £4,260 in the 2018/19 tax year. You can max out your annual allowance as soon as the tax year begins, but many people choose to save or invest on a monthly basis. If you do it this way, you can deposit £355 each month in 2018/19, but you’re under no obligation to keep your deposits the same each month.
For the cash version of the Jisa, the Moneywise Best Buy comes from Coventry Building Society, which was also the winner of the best Jisa category in our children’s savings awards, and pays 3.5% to young savers. Accounts can be opened in branch, online, over the phone or by post. Interest is paid annually on 30 September and the minimum balance is £1.
If you were to deposit £355 a month in this account from birth until age 18, your child would have £106,337 in their account, based on earning 3.5% interest a year. However, there is no guarantee that this interest rate will be available for the full 18 years or that the Jisa allowance will remain the same.
Stocks and Shares Jisas are also a great option for children, although investing carries more risk than saving cash. However, if you start investing when your child is young, you’ll be investing over a longer period and your money will be better able to weather any short-term fluctuations in the stock market.
Over periods of at least five, and preferably 10 years, returns are likely to be higher from investing than cash savings, and the effect of compound growth can leave your child with a much bigger sum when their account matures.
Alliance Trust says if £355 a month was contributed to a Jisa from birth until age 18, it could be worth £110,884. This assumes annual growth of 5% – the average longterm return from the stock market, but also includes typical fund charges and product fees.
But remember higher growth isn’t guaranteed and each Jisa provider will have different fee structures, so make sure you’re comfortable with the charges you’ll be paying.
Platforms that allow you to choose your own investments for Jisas include AJ Bell Youinvest, Charles Stanley Direct, Hargreaves Lansdown, Interactive Investor – Moneywise’s parent company – and The Share Centre.
Finally, before you start investing it is important to remember that, once your child turns 18, they’ll be given direct access to the account and will be able to do what they want with the money. If this is a worry, think about using your own Isa allowance first and earmarking it for the children.