Everything you need to know about Junior ISAs
With spiralling university fees and the burgeoning costs of getting on the property ladder, junior ISAs (JISAs) have become an increasingly attractive way for parents to grow their children’s savings.
JISAs were launched in November 2011, replacing Child Trust Funds. As with adult ISAs, they offer a tax-efficient method of saving and investing. You don’t have to pay any income or capital gains tax on any growth in the account value.
Up to £4,080 (for the 2014/15 tax year) can be saved annually, and this limit can be divided in any fashion between cash and stocks & shares. Since launch, 510,000 parents have opened a JISA, according to HMRC.
Any child who is resident in the UK, is under 18 years old and who doesn’t have a CTF can have a JISA.
Fidelity Worldwide Investment calculates that by saving £20 a week into a stocks and shares JISA from the day your child is born until their 18th birthday, you could amass a pot of £27,126.76, based on a growth rate of 5%, and 1.1% in charges. Saving £33 per week could result in a pot of £44,759.15.
The best option?
A JISA is not the only option if you want to save for your kids. You can always set up a savings plan in your own name. That way you’d still have control over your kids’ money when they reached 18.
“With a JISA, the plan legally belongs to the child. Even if the child at 18 has become a total spendthrift who cannot be trusted to use money sensibly, he or she gets the money whether the parent wants it or not,” says Calum Bennie, investment expert at Scottish Friendly.
“In a parent’s investment, the parent has control over the money at all times. But if you have confidence in your own ability to nurture a sense of fiscal responsibility in your child, a junior ISA could well be the right investment for them.”
Maike Currie, associate investment director at Fidelity, believes JISAs are preferable as they offer a way of saving for your children without eating into your own ISA allowance.
There are two types of JISA to choose from: cash or stocks and shares.
While cash JISAs are considered the safer of the two options, with rock bottom interest rates, the general consensus among experts is that stocks and shares JISAs are the better option at the moment as they offer the best opportunity to grow savings above inflation
However, there is disagreement over how asset allocation for a stocks and shares JISA should change over time.
Andrew Hagger, director of Moneycomms.co.uk, believes parents should apply the same set of risk exposure principles to JISAs as they traditionally do to pensions. In other words, the closer you get to needing to access the money, the less risk you should be taking.
“You wouldn’t want the market to crash six months before your child was due to receive their money, so start moving their ISA into safer stocks or cash a year prior to maturation,” he says.
Bennie advises against moving into more secure investments over time unless you know the JISA money is going to be spent on a particular item such as a car.
“In that case, it may be important gains are locked in. Otherwise, you’d expect the investment to roll over into an adult stocks and shares ISA,” he explains.
If you want to use JISA funds for university fees, Currie says that as your child nears 18, “you may want to take some risk off the table”.
Active vs. passive funds
You can choose a passive or an active approach for your child’s JISA savings. Inexperienced investors who wish to lock-in their money for extended periods and review performance infrequently may prefer a passive fund.
More experienced investors may also opt for a passive approach if they think active fund management won’t deliver higher returns.
But if you’re a more experienced investor, or you’re prepared to do some research, you may want to go for an actively managed fund.
Identifying a good managed fund is a key challenge for parents taking the active route.
“There are hundreds of them available and not all can be star performers,” Bennie says.
“If in doubt, seek advice or stick with passive.”
Currie suggests actively managed multi-asset or multi-manager funds, which offer both a balanced mix of growing returns and savings preservation, and an effective combination of passive and active characteristics.
“For parents who are too busy to keep a close eye on the underlying investments held in a JISA, these funds are relatively low maintenance investment options – you don’t need to keep changing the balance between bonds and equities. You leave that to the fund manager to monitor and make use of their expertise,” she says.
Adrian Lowcock, head of investing at AXA Wealth, favours a blended approach of both active and passive funds.
He tips the Threadneedle Global Select fund, which typically invests in 70-110 companies across a broad range of themes. Also recommended is the Vanguard FTSE Developed World ex UK Index, a low-cost passive fund.
“A JISA with five years left should consider moving into more diversified funds which have more in bonds, such as Schroder Managed Balanced – the fund can offer protection from falling equity markets,” he says.
Currie recommends investing in a global equity fund, which will give your child’s savings exposure to stock market investments via a spread of economies.
“With a global equity fund, the manager can cherry-pick the best opportunities across the globe from a bigger universe of shares,” she explains.
“An example is the Rathbone Global Opportunities fund, which invests predominantly in small and mid-cap stocks, selected for their growth prospects. Another to consider is the BNY Mellon Long Term Global Equity fund, which also has a very long-term focus.”