Industry Insider: Make the most of your child’s Junior Isa
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.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.