It is never too late – or too early – to start saving seriously for your child’s future and Junior ISAs are an extremely beneficial, if often neglected, tool. Here is what all parents need to know to give their children a financial head start.
Having children is a great joy, but also a weighty financial responsibility. Private education and university for just one child could conservatively cost £500,000 alone, and many parents will also want to give their offspring a further helping hand with a deposit on a property. Savvy financial planning and investing for your child’s future as early as possible should therefore be a priority – although it is never too late to make a start.
There are many routes parents could pursue. Trusts can be particularly useful if grandparents wish to pass money down the generations tax-efficiently, while starting a pension for your child can convey huge advantages too, both in terms of tax savings and compounding returns over many years. However, too many parents are neglecting the simplest route of all: Junior ISAs.
Making full use of all tax allowances should be the foundation of any family’s wealth management strategy, ensuring that the allocations for children and both parents are intelligently deployed each year (whether both work or not). Each parent can shelter £20,000 in savings/investments from the taxman in an ISA every year and they can also set up JISAs for children enabling them to save a further £4,128 per child.
Risk and reward
Any funds you save for your child’s future will clearly be very important and so you may well feel very reluctant to take any risks with this money. Interest rates on cash deposits are generally still pitiful on the High Street, yet there are some more attractive products on the market for the risk averse. For example, National Savings & Investments has just launched a JISA paying 2% which parents can contribute to in a lump sum or monthly.
However, parents keen to see their children’s savings grow as strongly as possible should probably take on a considered amount of risk and put their JISA funds into an investment account. Not only can investors with a longer time horizon afford to take on more risk as they have longer to recover from any losses, they are also highly likely to see very much greater rewards from putting money to work in the markets.
Stocks and shares can be subject to volatility, but you are extremely unlikely to end up having lost money in the fullness of time. A renowned study by Barclays using data going all the way back to 1899 shows that the probability of shares outperforming cash savings is 75% over five years, 90% over 10 years and 99% over 18 years.
It is also vital for parents to bear the erosive effect of inflation in mind: the growth rate of any savings must at least keep pace with inflation (and preferably far out outstrip it) for the spending power their child’s money to be preserved over time.
Consumer Price Index inflation was 2.6% in July amid generally very low interest rates on cash accounts. In contrast, a professional wealth management firm would likely aim to deliver very much more attractive returns of perhaps 6% per annum – all of which would be free of tax if sheltered in a JISA.
The power of compounding
By harnessing the power of compounding over a number of years, parents can build up very significant savings indeed – even in a quite conservative return scenario. For example, if you contributed £340 a month to a JISA from your child’s birth until they turned 16, garnering a relatively modest return of 4%, you could generate a total savings pot of £91,235 – enough to make a significant dent in further education costs or a house deposit.
So, while JISAs are only one weapon in parents’ savings armoury, they should certainly not be neglected, and particularly not if their own ISA allowances are already earmarked for other purposes. One possible downside is that JISA funds transfer to the child’s control upon their eighteenth birthday, but encouraging children to also contribute money they are given over the years too should foster the required sense of responsibility for this not to be a concern.
Your next steps
All in all, JISAs represent another generous tax relief all families should be putting to work as part of a holistic wealth strategy, even if their children are no longer little. There are JISA products and investment strategies available to suit all kinds of needs, from the most conservative to the most aggressive investment objectives and covering a range of time horizons.
The first step towards making your family’s money work harder as a whole is to take advice from a professional who can see the bigger picture and take you through all the options. To talk to our team about finding the right adviser for your needs, click here.