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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Taken together, the ISA allowances have never been as generous as they are this year, thanks to the Junior ISA allowance more than doubling to £9,000. This means that in the next month, a family of four could put £116,000 out of the clutches of the taxman, using the allowances for this year and next. Each parent has a £20,000 allowance to use by 5th April, then another £20,000 allowance from 6th April, and the kids likewise have a £9,000 allowance each.
Even fairly modest savings, made regularly, could help to give your child a head start in life. A £50 monthly saving from birth could give a child £19,656 when they reach 18, assuming 6% investment growth. That money can be used to fund further education, or to go towards a house deposit, or help your child broaden their horizons through travel, for example.
Few families will have £116,000 stuck down the back of the sofa, but some may have some cash built up as a result of the pandemic hugely curtailing spending options. The higher £9,000 allowance, combined with some lockdown cash, could allow parents to turbo boost their child’s nest egg, or play catch up on savings for older children. A one-off £9,000 lump sum invested in a Junior ISA for a newborn baby could add an extra £24,325 to their pot at age 18, assuming 6% investment growth. Alternatively, for parents of a 10 year old with no savings, it could have the same effect as getting in a time machine, and starting a £50 regular saving plan at birth.
Children have a long time to ride out the ups and downs of riskier assets, which could make the stock market a natural home for their Junior ISA money. Despite that, twice as many parents have plumped for cash as they have for shares with their child’s Junior ISA since these accounts were introduced in 2011.* For younger children, this means they may be missing out on potential higher returns associated with investing in the market over the long term. A Junior Cash ISA might come in handy for older teenagers, where the money is being saved for a particular purpose in the very near future, within five years. Otherwise an approach which harnesses the long term growth of the stock market could yield better results.
Lockdown cash could be used to turbo boost Junior ISAs
The Junior ISA allowance is now a very generous £9,000 a year, which allows parents and other relatives to build up a potentially large sum of money for children, accessible when they reach age 18. To use all of the allowance requires a whopping £750 monthly savings though, a sum only the very wealthiest families will be able to afford. However even modest savings in a Junior ISA can stack up over time, especially when you factor in the growth that the stock market should provide over such a long time frame.
Clearly the earlier you start, the bigger the nest egg you could give your child when they reach adulthood, but even starting when they’re a bit older could deliver a large sum of money for your child on their eighteenth birthday. The great thing about the Junior ISA allowance being lifted to £9,000 is that parents who have started saving for their child a bit later on could consider playing catch up by topping up their regular savings with lump sums, as and when they become available. These might be afforded by a pay rise or bonus, or perhaps a grandparent who wants to pass some money down. Of course, right now there’s another unique reason why parents might have spare cash to top up a Junior ISA, thanks to lockdown creating a bulge in bank accounts for some, as spending options have been shuttered.
Parents of a child aged ten with no savings, who put £9,000 in a Junior ISA and start a £50 monthly saving plan, could see their child end up with a lump sum of £19,827 at age 18, assuming 6% investment growth. £9,000 invested as a lump sum in this tax year could allow parents to make up for the 10 years of missed £50 monthly subscriptions. That’s about the same pot that could be achieved by a family who save £50 in a Junior ISA from the birth of their child, without an initial £9,000 lump sum subscription. However if this latter family were to start off with a £9,000 ‘lockdown bonus’ at birth, their child could end up with £43,891 at age 18, rather than £19,656 - that’s £24,235 more (assuming 6% investment growth).
| Age today | Monthly saving | Value at 18 | Plus £9,000 lump sum boost |
|---|---|---|---|
| 0 | £50 | £19,656 | £43,891 |
| £200 | £78,624 | £102,859 | |
| £750 (Full allowance) | £294,840 | £319,075 | |
| 5 | £50 | £12,009 | £30,119 |
| £200 | £48,036 | £66,146 | |
| £750 (Full allowance) | £180,136 | £198,245 | |
| 10 | £50 | £6,295 | £19,827 |
| £200 | £25,179 | £38,712 | |
| £750 (Full allowance) | £94,422 | £107,955 |
Examples based on 6% investment growth after charges
All of the figures in the table are net of fees
Investment ideas for Junior ISAs
Junior ISA savers are typically investing for the long term, which could put them in the ideal situation to ride out the ups and downs of the stock market. Parents can opt for cash if they want no risk to capital, but this could increase the risk of savings falling behind inflation, and delivering potentially less than the stock market in the long term.
iShares UK Equity Index fund is a simple passive fund that tracks the UK stock market, and it’s available at an annual charge of just 0.05% per annum.
Scottish Mortgage Investment Trust isn’t shy of taking a few risks, in particular trying to identify tomorrow’s winners in the technology space. Performance has dipped in the last few months thanks to a sell-off in some tech stocks, but long term performance is strong.
Personal Assets Trust is an investment which may appeal to parents who want to invest more conservatively, as it holds a mix of high quality shares, bonds, gold and cash to provide some exposure to growth assets, while offering some protection in falling markets.
*Source: HMRC
Important information: These articles are for information purposes only and are not a personal recommendation or advice. You can't pay into a Junior ISA with us if your child owns a stocks and shares Junior ISA with a different provider. How you're taxed will depend on your circumstances, and tax rules can change. ISA rules apply. Remember that the value of investments can change, and you could lose money as well as make it.
Written by:
Laith Khalaf
Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.