If you want to give your child a head start in life, you can start investing in a junior ISA.
Launched in November last year, the Junior ISA replaces Child Trust Funds (CTFs)and allows parents, friends and relatives to save up to £3,600 a year for their children without having to pay tax on the returns. Moneysupermarket.com is one place you can search for these products.
But why should you invest in this relatively new savings vehicle, and what will your child get in return for your investment? Here’s a look at why you should invest in a junior ISA.
Saving for the future
Asset management company JP Morgan Fleming estimates that if a parent invested the full £3,600 allowance each year in stocks and shares, they could accumulate savings in excess of £100,000 by the time the child is 18, assuming yearly growth of 5%.
Of course this figure is only an estimate. The true figure would be subject to a number of other factors such as inflation, investment returns and, of course, how much you are able to invest.
The junior ISA is, as its name implies, an ISA for junior savers. As it is a form of ISA, the returns can’t be taxed because the account acts as a tax-free wrapper.
ISAs enjoy tax-free status because the government wants to encourage people to make more investments so that they might be less reliant on the state in the future. If you have money to invest in savings, your first port of call should always be an ISA.
Only after you’ve fulfilled your annual ISA allowance should you invest in other, taxable, types of savings accounts.
CTFs are being phased out and are no longer available to new savers. Children with CTFs are not eligible for Junior ISAs and no transfers can be made from a CTF to a Junior ISA.
The money in a junior ISA is locked away from the child until they reach the age of 18. The account is managed a parent or guardian until the child is 16, when they are able to take over account management if they want to.
Once the child turns 18, the junior ISA becomes a fully-fledged adult ISA and the annual allowance will increase.
Currently the annual ISA allowance for adults is £11,280 – but the allowance increases each year in line with inflation. The entire allowance can be invested in stocks and shares or you can split the allowance, investing up to half in a cash ISA.
As with adult ISAs, the junior ISA allowance can be split between cash and stocks and shares.
However and if you choose to split your allowance, the money invested is completely safe as long as it is invested with a UK provider. Up to £85,000 is guaranteed per financial institution.
Of course if you do choose to invest your allowance in a stocks and shares ISA, the value of your investment can go down as well as up according to stock prices. This is why stocks and shares investments are made over longer periods so that the cash can ride out periods of depreciation.