Junior ISA limit doubled: drip-feeding small amounts can generate big returns
Buried in the March Budget documents was the surprise move to double the Junior ISA allowance and Child Trust Fund annual subscription from £4,368 to £9,000 for the new 2020/21 tax year starting 6 April.
While a welcome step from the government, the timing is less than perfect as Brits face job insecurity, pay cuts and look to minimise their outgoings during the coronavirus pandemic.
However, analysis reveals that investing the full JISA allowance every year for 18 years could generate a pot of £258,495 (based on 5% growth, no inflation and 0.75% platform fees).
Drip-feeding even small amounts over a long period can also potentially mean big returns.
Investing the full £9,000 a year is likely to feel like a big stretch after the expenses of everyday life for most families. But starting early and establishing a regular savings habit of smaller contributions can prove an effective way of saving for a child’s future, according to Fidelity International.
The investment firm says investing £150 a month over an 18-year period could create a JISA pot worth more than £50,000 – enough to cover the current average housing deposit for a first-time buyer (£46,187).
Doubling this and contributing £300 a month could lead to a JISA worth more than £100,000 over the same period, which would provide for both a deposit and university costs.
Emma-Lou Montgomery, associate director for personal investing at Fidelity International said recent events mean families will be focused upon the immediate future – the next few months – and how to adjust to home schooling and spending significantly more time together.
But the long-term aspirations for children haven’t changed, whether that’s paying for their education, hobbies or university costs, or helping them get a foot on the property ladder.
She said: “While it’s often true that the more you put in, the more you get out, it’s also important to remember that you don’t have to maximise your full allowance every tax year to produce a decent savings pot for your child. Especially now that the allowance increase to £9,000 is a significant sum of money to put aside every year for 18 years – even more so if you have more than one child to save for.
“Fortunately, drip-feeding a smaller amount into a Junior ISA on a monthly basis is a very effective way of investing, without the pressure of setting aside such a large lump sum. For example, our data shows that even investing £50 a month into a JISA could generate £16,588 after 18 years – still a significant return that’s of course, tax-free.”