20 Mar New Junior ISA opportunities to give children a head start
The benefits of investing into a Junior ISA on behalf of your children or grandchildren are to become even more attractive.
As a father of two himself, Chancellor Rishi Sunak may well have thought hard about how to help his children financially. Although his first Budget concentrated more on the government’s spending plans than personal financial planning and investment, one of the changes he did make was to increase the annual investment limit on a Junior ISA from £4,368 to £9,000 from 6 April 2020.
This is welcome news for anyone thinking about how they could help a child to save and invest for the future. The tax-efficiency and simplicity of Junior ISAs have contributed to them becoming an increasingly popular way to save for young people over the last few years. In the 2017/18 tax year, the latest for which figures are available, 907,000 new Junior ISA accounts were opened.1
Anyone can contribute to a Junior ISA, although the account must be opened and managed by a parent or guardian. All the funds within a Junior ISA belong to the child and are locked away until the child is 18. At 16, however, the child can take over control of the account, which can be a good way to learn more about savings and investment.
For grandparents or family friends with estate planning needs, using lifetime gifting exemptions to contribute to a Junior ISA is a great way of passing wealth on to younger generations. Another advantage is that you may well live to see how your contributions have made a difference, when the child comes of age.
You can either pay a lump sum into a Junior ISA or set up regular contributions, which allows the flexibility to fit in with any other gifting arrangements you may have made.
Saving for a child is not just a kind and generous thing to do: it can provide invaluable practical help for both the child and the parents, such as when a child goes to university. Annual tuition fees, not including the cost of maintenance, are about £9,000 a year in the UK2 – while the average deposit needed by first-time homebuyers is over £46,0003.
Why cash may not make sense
The money in a Junior ISA can be invested in cash, shares or both. Making an early start to saving means that a Junior ISA could run for up to 18 years, making it a real long-term opportunity to accumulate tax-efficient capital. Yet, in 2017/18, around 57% of the £902 million subscribed to Junior ISAs went into cash.4
This is arguably a wasted opportunity. Although stocks and shares can go down in value, as we’ve certainly seen in recent weeks, over the long term returns have the potential to be considerably higher than those from cash. With interest rates at historical lows, returns from cash may even be negative once inflation is taken into account. Furthermore, the potentially long lifetime of a Junior ISA creates a real opportunity for compound growth, as investment returns themselves generate further gain.
“For those who choose to invest in a Stocks & Shares Junior ISA, there should be plenty of time to ride out market fluctuations and benefit from the compounding effect of tax-efficient income and growth,” says Phil Woodcock, Head of Investment Communications at St. James’s Place.
Transferring from a Child Trust Fund
In 2005, the government introduced Child Trust Funds (CTFs), giving every baby born in the UK from 1 September 2002 to 2 January 2011 at least £250 in the form of a voucher to encourage saving for children. The introduction of Junior ISAs in 2011 replaced this scheme. This year, some 800,000 CTFs are expected to mature, starting in September. Over the next decade, £7.5 billion held in CTFs will mature.5
New rules introduced in January this year mean that, from April, maturing CTFs will automatically be transferred into an adult ISA, ensuring that the tax benefits are preserved; whilst not counting towards the annual £20,000 savings limit for ISAs. Previously, the only option was to cash in the CTF on maturity.
This follows changes back in 2015, when the government allowed CTFs to be transferred into a Junior ISA. CTFs had been criticised for having a relatively high cost, with limited investment options and low interest rates on cash. The option to get savings working harder and sooner makes the idea of transferring CTFs into a Junior ISA wrapper a potentially appealing one.
With the end of the tax year approaching on 5 April, there is just two weeks to make the most of the current Junior ISA allowance of £4,368.
Look to their future
With the end of the tax year approaching on 5 April, there is just two weeks to make the most of the current Junior ISA allowance of £4,368. In challenging times, long-term financial planning might seem less of an obvious immediate priority. However, it is worthwhile looking beyond the next few weeks and months to the future and considering that what you do now may make a significant difference to the life of someone important to you. Junior ISAs provide a real opportunity to do this.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
Investment in a Junior Stocks & Shares ISA will not provide the security of capital associated with a Junior Cash ISA.
The favourable tax treatment of Junior ISAs may not be maintained in the future and is subject to changes in legislation.
1,4 HMRC, Individual Savings Account (ISA) statistics, April 2019
2 www.studying-in-uk.org, January 2020
3 Halifax First-Time Buyer Review, January 2020
5 Quilter, January 2020