BLOG: How much risk should you take with a Junior ISA
The annual Junior ISA allowance for the 2021/22 tax year is £9,000 per year, meaning children could go into adulthood with a significant sum of money.
The pros and cons of a Junior ISA
Whether or not a Junior ISA is right for you or your children will depend on number of factors. So, it’s important to understand the benefits and any potential limitations.
Let’s start with some of the advantages.
Tax efficient: Just like an adult ISA, any money that is held in a Junior ISA, as well as any interest earned on a cash JISA or investment returns generated from a stocks and shares JISA, is protected from capital gains and income tax.
Contributions from others: While the parent or guardian of the child needs to open the Junior ISA, contributions can be made to the account by anyone. And it’s important to note that – subject to any limits implemented by your provider – contributions can be small or large, as long as the total amount contributed in a tax year doesn’t exceed £9,000.
The money belongs to the child: It’s helpful to think of the money contributed to a JISA as a gift, much like other gifts, the money then belongs to the child and can’t be accessed or used by the parent (unless the child becomes terminally ill). When the child turns 16 they can take control of the Junior ISA, and on turning 18 the JISA will convert to an adult ISA, which the child can keep invested or in savings or withdraw.
Long-term thinking: By their very nature, Junior ISAs are a long-term savings and investment vehicle. They can be opened as soon as the child is born and they will remain invested, or in savings, until the child turns 18. So, whether you’re planning on the JISA being a nest egg that can be used for university fees, a deposit for a first-home or something else, time is on your side to build a pot.
As with all things, there are of course some limitations that it is also important to understand:
The money is locked-in: One of the potential downsides of a Junior ISA is the money is locked away, in most circumstances, until the child turns 18. This means that if you’re thinking of using the money for shorter term goals – perhaps private school fees as an example – then using some of your ISA allowance might be a better option as the money will be accessible before the child turns 18.
The money belongs to the child: The flip side to the money in the Junior ISA belonging to the child, is that on turning 18 the child can spend the money however they please. That may or may not be on the goal you had in mind for them.
Choosing cash or stocks and shares for a Junior ISA
Junior ISAs are available as either a cash option or stocks and shares. Your child can have both a cash JISA and a stocks and shares JISA, however, they can only have one of each type throughout their life. So, if you open a stocks and shares JISA with one provider and in the following tax year want to contribute to a stocks and shares Junior ISA with a different provider, you will need to transfer your existing JISA to the new provider. If you hold both a cash and stocks and shares JISA for your child, the total contributed to both cannot exceed the annual allowance, currently £9,000.
As I discovered last year, how much risk to take with a Junior ISA is an interesting thing to consider (and discuss!). On the one hand, a cash Junior ISA probably feels like a safe option. However, the Bank of England base rate is at historically low levels and looks set to stay there for the foreseeable future, and as a result, the interest paid on cash savings is also low – the best cash Junior ISA rate at the time of writing was 2.5%.
By comparison, a stocks and shares JISA offers the potential for greater returns. Although there is a risk that investments will go down as well as up in value, given the long-term nature of a Junior ISA – potentially 18 years – investing in stocks and shares could be a more effective way to invest for the future.
Investing the current annual allowance of £9,000 a year into a Junior ISA equates to a sum of £279,924 after 18 years, assuming an annual return of 5.5%1. By comparison, the same amount saved into the current top paying cash JISA would be worth over £73,000 less at £206,5142.
So, what did we decide to do for my nephew? Well, with the full 18-year timeframe – and for me, 18 years to instil in him as much of my long-term financial thinking as possible – we opted for Nutmeg’s socially responsible portfolio risk level 10, so as he gets older he’ll be able to see how his investments are performing for him, as well as what they’re doing for the world.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. Past performance is not a reliable indicator of future performance.
If you are unsure if a Junior ISA is the right choice for you and your child, please seek financial advice.
- Predicted net returns based on all-time performance of fully managed Nutmeg Portfolio 7. Calculations don’t take inflation into account.
- 5% interest rate best available as of 18 May. Source: MoneySavingExpert: https://www.moneysavingexpert.com/savings/junior-isa/ . Calculations don’t take inflation into account.
Kat Mann is savings and investment specialist at Nutmeg