The Junior ISA is such a powerful tool for setting children up financially. Are you making the most of this tool? Read on to find out how to optimise this tax wrapper
Why Save for Children?
Children are absolutely amazing aren’t they? Yes, they can be hard work sometimes, but they open our hearts and allow us to experience a love like no other. I think most parents like the idea of saving for their precious ones. After all, there are a myriad of things that kids may need at some point in their lives: a musical instrument, a car, deposit for a house, university fees, wedding e.tc.
Saving is a good start, but it is just the first rung of the ladder. The next rung is investing the money saved and this is where parents tend to kick the can down the road due to their perception of the stock market as being too risky. So, for now, it’ll be a case of saving the money in a savings account that is barely matching inflation or perhaps a Junior Cash ISA paying in the region of 2.5%. The UK inflation rate in October 2020 was 0.7% but note that the UK Government’s inflation target is 2%. This means that if the interest earned from the savings account is less than 0.7% (in October 2020), you are actually losing money in real terms. You might feel happier if you are one of the parents receiving 2.5%, but then again, maybe not if you consider that every £1,000 deposited into such an account will be worth £1,025 at the end of 12 months. In other words, your child’s £1,000 only managed to make just over £2 a month…. Ouch.
I think there’s another way to consider. I say consider because it depends on your risk appetite and what you are saving for. I have two children and have been paying into their Junior ISA and investing since they were babies. For my youngest, her account was open within 3 months of birth. I’ve also supported friends in setting up accounts for their kids, including giving cash gifts just to get them started.
I want to whet your appetite a little bit by giving some headline figures on my daughter’s portfolio. She’s six years old now, which means that I’ve been investing in her Junior ISA for just under 6 years. The table below shows the cumulative performance of her portfolio over the last 5 years to December 2020. I must stress that this is for illustration only and NOT a recommendation for you to invest in those trackers/funds. Investments can rise or fall in value and past performance is not an indication of future performance. Some key points to note are as follows:
I have NOT invested in individual stocks
These are mostly low-cost trackers
I’ve followed a ‘couch potato’ strategy and barely monitor the portfolio. I simply put the money in and forget about it.
What is a Junior ISA?
A Junior Individual Savings Account (JISA) is a tax-free savings account for children under 18. You can save/invest up to £9,000 in this (2020/21) tax year and can split the amount between a Junior cash ISA or Junior stocks and shares ISA. For example, £4,500 in a Cash JISA and £4,500 in a Stocks & Shares JISA. You can only open one Cash JISA and/or one Stocks & Shares JISA per tax year, but you can switch providers if you like.
What’s the difference between a Cash JISA and Stocks & Shares JISA? Well, with the Cash JISA, you put your money into what is effectively a simple tax-free savings account, which typically attracts low interest rates that may not grow as quickly as inflation. On the positive side, your cash is ‘safe’ so long as the bank is UK regulated and you have no more than £85,000 invested. With a Stocks & Shares JISA, you put your money in the stock market. This can be managed for you, or you can manage it yourself.
Once you put money in a JISA, that is it: the money is no longer yours. It now belongs to your child. The money is locked away until your child is 18. Your child can do WHATEVER he/she wants to do with the money from the age of 18. I don’t see this as a problem and I’ll explain why later. I personally think that a Cash JISA is a waste of time (see box in green below for my reasons) and so I won’t discuss it further.
Now that we’ve covered the basics, I’ll delve into 6 steps to using JISAs to set your kids up financially
1. Start Early
Congratulations on the arrival of your bundle of joy. I completely understand that it’s quite a busy period during the first 6 months. What with the sleepless nights and all the other stresses of life. Notwithstanding, I’d encourage you to try to start saving as soon as possible. It really doesn’t take that long to set things up. Simply find a platform you are happy with and open a JISA. This isn’t anything to do with intelligence, but more to do with your willingness to take ACTION. I come across super smart people, who for whatever reason would sooner dedicate an extra 2 hours after work to prepare a killer presentation just to impress their boss than spend 15 minutes setting up a JISA for their child.
Slowly and surely, 6 months turn into 1 year, then 2 years, then 5 years, then 10 years and before you know it your child is 12 and you still haven’t set up the JISA you wanted to. Don’t forget that the TIME your child’s money stays invested in the stock market can heavily influence the total returns. Imagine what COMPOUNDING https://www.hl.co.uk/learn/compounding can do over 18 solid years.
2. Make the most of Gifts
Aww - thank you friends and family for such generous gifts at my baby shower; after the birth of my child; at my child’s 1st birthday, at Christmas etc. When you receive cash from that uncle who couldn’t be bothered to shop for a present and so gave £20 instead, do you know what to do? Yes you do. Pay it into your child’s JISA right away. I am so militant about this that I won’t go to bed until it’s done. It’s not happening tomorrow. It’s happening TODAY.
The platform I use is Hargreaves Lansdowne and this has the facility to invite the likes of aunties and grandparents to sow a seed into their grandkid’s future by paying directly into the kid’s JISA. Does your child need all those toys and clothes? After separating out what you want to give to charity, could you sell the toys/clothes/shoes e.tc via ebay or any of the newer apps (e.g. Vinted https://www.vinted.co.uk )? Then pay the proceeds straight into your child’s JISA.
3. Reflect on your JISA goals
I first researched JISAs after the arrival of my first child and truthfully, I was more than a little concerned about the fact that the money would belong to my child to do as he sees fit at the age of 18. A few articles I read on the subject put the thought in my head that what if my little angel decides to do something stupid at 18? like blow all of that money on a car, or have a huge crush and try to impress the girl by buying the most expensive diamond necklace possible.
I discussed with friends and realised that I needed to be clear about my JISA goals. What do I want out of it? Am I hoping that he uses the money to pay for university fees or as a deposit for his first house or something else? In the end I decided that my main goal is to increase his financial literacy by gradually (as he gets older) getting him involved in managing his portfolio. The money can then hopefully be used to start a business, buy a property or can stay invested. I really really really do hope that this doesn’t happen, but if he decides to do something stupid with the money, then that will not be a bad thing if he LEARNS from it. It is better to learn these financial mistakes and recover from them while still young.
The great thing about reflecting on my JISA goals is that it helped me to decide how much to contribute per month. I decided that it had to be an amount significant enough to do something in his portfolio, but small enough that I don’t even notice it leaving my account. I also decided to go a step further and split the money into a monthly amount for his JISA and a much much smaller monthly amount for his Junior Self Invested Personal Pension (JSIPP), which he won’t be able to access till the minimum pension age (currently 55)
I’d encourage you to reflect on your JISA goals as well. Don’t do this alone though – discuss with your partner and close friends. While reflecting, I’d like to add two other points for consideration. The first is that you could decide to invest only gifts as described above. I say this because it might give you the confidence to invest as it’s not coming from your earnings – so what does it matter? The second is that if you are new to investing, you could use this as a learning tool to build confidence. As your confidence increases, you could then begin to do more with your own ISA.
4. Automate your savings
Do you receive child benefit https://www.gov.uk/child-benefit ? Do you really need this for your day to day living expenses or could you forgo this money and pay it into your child’s JISA? OK – perhaps you don’t qualify for child benefit. Could you spare £10 a month comfortably? Or maybe it’s £50 a month? Whatever the amount, it’s a good idea to set up a standing order paying the amount straight into your child’s JISA account every month. Depending on the set-up of the JISA, the monthly amount can be invested straight into the stock market and benefit from something called Pound Cost Averaging https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/what-is-pound-cost-averaging Alternatively, it could go in to the JISA and sit as cash till you invest the money
5. Choose a platform that is intuitive and easy to use
Here is a well written article covering ISA platforms. This is for adult ISAs but the same platforms apply to JISAs https://www.moneysavingexpert.com/savings/stocks-shares-isas/ By all means, do a good review of the options available, but please don’t spend forever fussing over the cheapest platform. I use Hargreaves Lansdowne https://www.hl.co.uk/ because I find their platform really intuitive and easy to use. They have articles that explain everything in simple terms. I can manage all wrappers (ISA, JISA, SIPP) for the household in one place and there is a broad range of funds to choose from.
The ease of use of the platform should ideally be like taking money from a cash machine … lol. Remember what I said earlier – that I deposit even the smallest £5 gift into my child’s JISA that same day. It really needs to be easy if you are to do this consistently for 18 years.
6. Don’t Fiddle too much
The benefit of not being able to withdraw the money invested in a JISA till the child is 18 is that you have EIGHTEEEN long years to benefit from compounding and to ride the ups and downs of the market. I beg you my brothers and sisters, please DO NOT INVEST in individual stocks. There’s always going to be a friend or two talking about how they made 200% return from Tesla or another hot stock. The thing to understand about an 18-year time horizon is that A LOT can change in that time and no one knows how things are going to pan out. Don’t put your eggs in one basket.
Earlier, I shared my daughter’s JISA portfolio performance (noting the warnings at the bottom of the illustration) just to show that you don’t have to take huge risks as you would be doing with individual stocks to see positive results. Once you’ve decided which low-cost passive trackers to invest in, you can just leave it and perhaps have a look once a year.
That’s it for this post. I’d encourage you to take action straight after reading this post by talking to your friend/partner about it at the very least. Please also leave a comment below if this article has helped you.
Best wishes
Bemi
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