Smart saving for savvy parents
Going to university, buying a first car, putting a deposit down for a house – these are just some of the expenses your children could be facing once they turn 18. All cost considerable sums of money, so investing now could give them a real boost in the future - and the Junior Isa is a popular way of doing so.
Junior Isas – or Jisas as they are sometimes known – are savings vehicles for everyone aged under 18. Like adult Isas, they are available through most major banks and building societies with both cash and stocks and shares variants available.
These accounts can be opened by parents with children aged under 16 or by the children themselves once they reach 16 or 17 years old.
Junior Isas have the same tax-free status as regular Isas, but there are also some important differences between Isas for adults and children.
How much can you make?
The good news is that the interest rates offered by Jisa providers are much higher than the adult equivalent. The current best buy Jisa is available from Coventry Building Society and offers savers a rate of 3.25% – more than three times the top paying easy-access Isa.
The Jisa allowance for the 2017/18 tax year is £4,128, up from £4,080 in 2016/17. While you’re free to max out the year’s allowance at any time, it is more common to pay in a little each month. Parents paying £344 a month into their child’s account from birth until 16 will have invested £66,048 in cash. Using the best buy 3.25% rate as an example, a child would have earned £20,696 in interest, meaning a cash payout of £86,744.
For those looking to save a smaller sum each month, saving £100 a month would result in a pot of £25,216 after 16 years and those putting away £50 each month would have £12,608 saved.
Remember that this is a rough calculation based on today’s rates; interest rates are very likely to vary during any prolonged period and the amount you can pay into the Jisa can alter too.
Are there any restrictions?
There are a number of key facts to consider before opening a Jisa. The first is that everything you invest is locked up until your child turns 18 and cannot be accessed before that date, barring death or terminal illness.
Once your child turns 18, they will be given direct access to the account and will be able to do whatever they want with it. So if you’re worried about your child receiving such a large sum and you haven’t maxed out your own Isa allowance, then consider putting the cash in your name but reserving it for your child.
Only parents and guardians are able to open a Jisa, but anyone, including grandparents and other relatives, can pay in once the account is active.
There are some other benefits to having a Jisa. Once your child turns 16, they are able to open up both a Jisa and an adult cash Isa, so they could save £24,128 a year based on 2017/18 allowances. They may also transfer their Jisa to an adult product when they turn 16.
Can I invest in stocks and shares?
As with adult Isas, there is the option of opening a stocks and shares Jisa. These operate in much the same way as their adult counterparts and typically offer greater returns, albeit with a greater risk.
Investments tend to outperform cash over a longer period, so it is important to consider the age of your child before opening this account. If you’re investing when your child is very young, you are likely to be able to withstand any short term market fluctuations.
If your child is already a teenager, then there is the chance that a market slump could significantly hit your savings pot.
Alliance Trust says, based on a contribution of £344 a month, a Jisa investment – after charges and fees – could be worth £91,320 after 16 years (assumes an investment charge of 1% and annual growth rate of 5%). This is much higher than the £66,048 expected cash return.
Who you invest your money with is another question. Providers offer a wide range of investment opportunities, with differing costs for trading depending on which you take the account out with. Jisa providers include AJ Bell YouInvest, Alliance Trust Savings, BestInvest, Charles Stanley Direct, Fidelity, Hargreaves Lansdown, Interactive Investor (Moneywise’s parent company) and The Share Centre.
Unless you have a good knowledge of the stock market, it may be better to use a fund that tracks a varied range of companies and sectors, both in the UK and abroad. This spreads your risk further and means you are less likely to suffer if a particular company or sector gets into trouble.
And if you are still unwilling to risk all your cash in a stocks and shares Jisa, you can split the yearly allowance between it and the cash version.
Click on the table below to enlarge:
Make the most of the tax benefits
Jisas, like their adult counterparts, offer some distinct tax advantages over regular savings accounts or investments:
For cash Jisas, there is no tax deducted from the interest you earn.
For stocks and shares Jisas, there is no tax payable on any capital growth or dividends.
But the biggest tax benefits are for grandparents as Jisas are a useful way to minimise inheritance tax liabilities. Individuals can pass on a cash gift of £3,000 each tax year, which will be exempt from inheritance tax on death.
While this may seem a small amount, it can add up to a large tax saving when spread over a period of up to 18 years.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
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.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.