Junior ISAs: Everything you need to know about saving for children
Chris Broome – Chartered Financial Planner
Building a nest egg for a child can help set them on the path to a financially secure future and highlight why saving is important. One of the most popular ways to save for a child or grandchild is using a Junior Individual Savings Account (JISA). During 2017/18, money was added to over 900,000 JISAs.
Money held in a JISA isn’t accessible until the child turns 18, making it an excellent way to save for the milestones they’ll reach in early adulthood. You may choose to save with the hope that it will be used to fund further education, learn to drive or get on the property ladder.
Having a lump sum to use can make it easier for children to achieve goals and create a secure foundation as they become independent.
JISAs: The basics
JISAs operate in much the same way as adult ISAs do.
You can use a JISAs to save in cash, earning interest on deposits, or to invest and hopefully deliver returns over the long term. JISAs are also a tax-efficient way to save, interest or returns earned are tax-free.
One area where the JISA does differ is the subscription limit, the amount you can deposit each tax year. In this year’s budget, Chancellor Rishi Sunak significantly increased the JISA subscription limit from £4,368 in 2019/20 to £9,000 in 2020/21. The new limit means parents and grandparents can build a substantial nest egg for children.
The JISA annual allowance can’t be carried forward and if it’s not used during the tax year, it’s lost.
A parent or legal guardian must open a JISA on the child’s behalf, however, other family and friends can then contribute as long as the annual limit isn’t exceeded.
The money placed within a JISA belongs to the child and can’t be withdrawn until they’re 18, apart from in exceptional circumstances. However, when the child reaches 16, they will be able to manage the account, for example, transferring to a different provider to achieve a better interest rate.
If you’re considering open a JISA on behalf of a child, one of the first things to do is decide between a cash account and a stocks and shares account.
Cash JISA vs Stocks and Shares JISA
As with adult ISAs, you have two key options when saving through a JISA: cash or invest.
Both options have pros and cons, which one is right for you will depend on goals and time frame.
The money deposited within a Cash JISA is secure and operates in a similar way to a traditional savings account. Assuming you stay within the limits of the Financial Services Compensation Scheme (FSCS), the money would be protected even if the bank or building society failed.
The deposits within a JISA will then benefit from interest, helping savings grow. While JISA interest rates are typically more competitive than the adult counterparts, you still need to consider inflation.
When interest rates don’t keep pace with inflation, savings lose value in real terms, reducing spending power. Over several years the impact can be significant.
Stocks and Shares JISA
Rather than earning interest, the money deposited within a Stocks and Shares JISA is invested with the aim of delivering returns. The key benefit is that it offers an opportunity to create higher returns than interest would offer.
However, all investments involve some level of risk and in the short-term, it’s likely volatility will be experienced at some points. This means the value of savings can fall based on the performance of investments. However, historically, investments have delivered returns over a long-term time frame.
So, which option should you pick?
How you feel about investment risk should play a role in choosing between a Cash JISA and a Stocks and Shares JISA. However, the time frame is also important.
Typically, you shouldn’t invest with a short time frame (less than five years) as this places you at a higher risk of being affected by short-term volatility. In contrast, longer time frames give you a chance to smooth out the peaks and troughs of investment markets.
If you’re unsure whether building a nest egg through cash or investing is right for you, please get in touch.
You don’t have to choose between a Cash JISA and a Stocks and Shares JISA either. If your goals mean you want a mix of cash savings and investments when building a nest egg, it is possible to open both types of JISA in your child’s name. The total contributions to JISAs must not exceed the annual subscription limit.
If you’d like to start saving for your child or grandchild, please contact us. Whether you want to invest through a JISA or discuss alternative options, we’re here to help you create a plan that meets your goals.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.