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A Closer Look at Junior ISAs
January is the ideal time to review our finances. For those of us with young dependents, putting money away for their future is likely to be a key priority.
Which type of ISA is right for your family?
There are many options available to support your children’s healthy financial future. One of the most popular savings and investment vehicles is the Junior ISA (Jisa), which celebrates its 10th birthday this year.
As an effective savings vehicle for families at all financial levels, it’s important to look closely at the two different options available to ensure you’re making the most of your savings.
With both cash Jisa and investment (stocks and shares) Jisa options, a third of parents say that they regret not choosing the latter and investing for their child’s future.
A child can hold one cash Junior ISA and one stocks and shares Junior ISA at the same time but experts are now suggesting that the investment option could be a better opportunity to build up a bigger savings pot for your child.
A Jisa account can be opened for any child living in the UK under the age of 18. Accounts must be opened by a parent but other adults such as grandparents can then choose to make contributions.
Savings limits have risen steadily over the past decade and parents can now contribute up to £9000 each tax year with the additional benefit of the tax-free wrapper.
With the cash Jisa option, any interest earned will be tax-free. Jisas offer better returns and higher interest rates than many other comparative savings vehicles. While the stocks and shares ISAs does not offer the guaranteed returns of the cash option, the risk may well be worth the reward.
The growth potential of the stock market looks promising and the investment Jisa may well prove more feasible in terms of achieving inflation-beating returns in comparison to relative rates of interest available on the cash ISA.
Depending on the stocks you choose to hold in your ISA, the long-term returns may far exceed the typical rates achieved on standard savings accounts.
Thanks to the power of compounding, the typical 5% annual return you might expect over the long term with an investment ISA is significantly increased by the interest, dividends or capital growth you make on what you invest. If you choose to invest in a Jisa and leave the money untouched until your child turns 18, the growth on top of growth model can significantly pay off.
There are some circumstances where the stocks and shares option may not be effective. This includes if you would rather have easy access to the cash or if you’re saving for the short-term, perhaps because you’re opening the Jisa when your child is older.
How can I set up a Junior ISA?
With technology playing a greater role than ever in financial services, it’s inevitable that more DIY investor platforms are offering savers the opportunity to set up their Jisa themselves. But this is a complex process whereby informed professional advice can make all the difference between establishing an effective, relevant savings plan.
At Vintage, we help our clients to think outside the box. For example, many families may be losing out by opening a Jisa with a high street bank when some smaller ‘challenger’ banks and providers are offering much better deals and returns.
According to a recent report, the average junior cash ISA rate offered by the big three banks is just 1.4%, compared the best-paying account on the market offering up to 2.5%. With the current rate of inflation (5.1%) more than double the best-paying cash JISA, savings held in these accounts are losing value in real terms.
Our expert team will begin with a brief fact-finding chat to determine how old your child/ren are, how much risk you are willing to take and how much you think you will contribute to the Jisa. We will use this as a springboard to then ask more detailed questions including:
- Which platform or provider should I invest through?
- What should I invest in?
Depending on the provider chosen, options include a range of funds and investment trusts as well as individual stocks and shares.
- How many funds/trusts/stocks/shares should I invest in?
This will depend on factors such as the fees associated with fund entry as well as personal preference – if, for example, you prefer to keep your investments in the UK markets or you’re comfortable with investing into overseas/emerging markets.
We will complete all the research on your behalf with an unbiased look at products across the market to identify the most appropriate ones for your circumstances. Together, we will then be able to establish your Jisa for optimal returns in line with your desired risk profile.
Prioritising Financial Education
On maturity, a Jisa will usually automatically become an adult ISA and the ownership transfers to the child. It is then entirely the child’s choice how to use the funds. Many may choose to transfer to a different ISA or savings/investment account that pays better interest rates. Others may choose to spend some or all of the money, and many parents fear their hard-earned savings will be frittered away.
The best way to optimise outcomes is to teach good financial habits early in life. Talk openly with your children from a young age about the value of savings. With the Jisa, you can help children to understand the benefits of long-term investing.
For a child born today, if you put away the full £9,000 a year and assume five percent growth, you could have more than £265,000 by their 18th birthday. To get started with your Jisa savings, contact our expert team today.
Disclaimer: The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or its associated representative shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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