Although handing over a lump sum to an 18-year-old with exotic travel plans might sound risky, Junior ISAs (JISAs) could actually play a pivotal role in teaching them how to save.
“Most data from Junior ISA providers suggests that the kids don’t just automatically rip the money out and run off to Thailand,” says Holly Mackay, founder and CEO of Boring Money.
“The practical side of a Junior ISA is that it helps squirrel away money for a child, and is also a great way of teaching children about the markets – particularly with Junior Stocks and Shares ISAs.”
Mackay leads by example. “I tell my kids about their JISAs. Actually owning a bit of Coca-Cola or Microsoft is a really engaging way that brings it to life for them, instead of it being some boring investment,” shares the CEO.
If you are considering setting up a Junior ISA for your child, here is everything you need to know…
What is a Junior ISA?
“A Junior ISA or JISA is a tax-free savings account, which parents and guardians can set up for anyone under the age of 18,” explains Mackay.
What are the different types to choose from?
The two types are a Junior Cash ISA or a Junior Stocks and Shares ISA.
“Most people in the UK go for a cash one because stocks and shares sound risky. But if you’re saving for a baby, that money’s locked in for at least 18 years and you’re about 99% more likely to do better in shares,” says Mackay.
“However, if it’s for a shorter period and you plan on withdrawing it at 18, stick with cash.”
What is the difference in the return between the two?
“The average annual returns over the last five years for a high-risk ready-made portfolio have been 9.75% after fees,” says Mackay. “So, if someone paid in £2,000 a year into a stocks and shares JISA for the last 18 years, this would have turned this into £97,600.
“While a cash JISA paying the full Bank of England interest rate so would have turned into £43,100.”
However, she makes the point that the last five years have been very strong in global markets so this rate is on the higher end of typical returns.
Can you choose who to buy shares in?
“Not every provider does, but some let you pick and choose individual shares,” says Mackay. “You can say to your child, do you want to buy some Samsung or Apple? Investing sounds abstract, but if you tell your children that they own a small piece of Coca-Cola or Samsung, it’s quite cool.”
What is the age limit?
“Once the child turns 18, that money is theirs. They can take the money out, or keep putting money in it, and then that becomes tax effective for them,” explains Mackay.
“If they have stocks and shares JISA, it automatically rolls into an adult ISA with the same provider, so you’re giving a child the gift of knowledge as well as the money.”
How much money can you put in per year?
“You can save or invest up to £9,000 a year,” says Mackay.
What are the benefits?
“It’s a good way to get children saving and to make them some money, but it can also be rolled into an adult one, which sets up good saving habits,” says Mackay.
It’s also handy for Christmas and birthday gifts. “Once a parent or guardian has to set it up, anyone can pay into it,” she adds.
Are there any drawbacks?
“That money is locked in until the child turns 18,” says Mackay. “So, if you’ve been paying into it and you suddenly were really strapped for cash, you wouldn’t be able to take that money out.”
What about fees?
Mackay says fees for JISAs are generally quite good value.
“Hargreaves Lansdown and Fidelity don’t charge fees, but as a rule of thumb, if you’re putting in £9,000, a fee for that would be about 1%, but check with individual providers,” she recommends.
How do I set one up?
“Firstly, you have to pick your provider,” explains Mackay. “The winners of our best buys are Fidelity, Hargreaves Lansdown, JP Morgan Personal Investing, and Vanguard.”
Parents just need to fill in a questionnaire online which suggests a good collection of investments.
“You can just pick one of the ready-made options,” says Mackay. “You’ll need a debit card to transfer about £50-100 to set up a shares account, or as little as £1 for a cash account. You will need their NI number if they have one.”
Can my child have a Child Trust Fund (CTF) and JISA?
Children who were born between 2002 and 2011 who have a CTF cannot have a separate JISA, but the fund can be transferred into one.
“Unlike a lot of paper-based CTFs, JISAs are on apps and give people more choice,” says Mackay.
“As a general rule you can transfer, but some providers don’t accept them, and you need to check there are no exit fees for moving the CTF.”
