Two years of JISAs: how has the toddler of the investment world fared?
Just like its adult equivalent, a Junior ISA can come in a cash or a stocks and shares format and the income and profits earned in a Junior ISA are shielded from the taxman.
However, an important difference is that no withdrawals are permitted from a Junior ISA until the child reaches 18. At the point, they can either cash in their holdings or convert them into an adult ISA.
The limits for Junior ISAs are also different from Adult ISAs. For the 2013/2014 tax year the maximum parents can save into a Junior ISA is £3,720.
Despite a relatively slow start – only 71,000 accounts were opened in the first five months from launch – the popularity of these products has soared with 295,000 more accounts opened between August 2012 and April 2013.
The amounts subscribed have also risen sharply from £115m in 2011-2012 to £392m in 2012-2013. This figure is expected to receive a boost once new rules are introduced allowing old child trust funds to be transferred into them.
According to analysis by Bestinvest, there is a noticeable difference between the popularity of cash Junior ISAs and stocks and shares Junior ISAs, with the latter accounting for around 31% of all accounts opened between 2012 and 2013. This is compared to Adult ISAs where stocks and shares accounts are a much lower 20% of the total.
Jason Hollands, managing director at Bestinvest, said: “The higher percentage of stocks and shares Junior ISAs versus Adult ISAs makes an important point. With ultra-low interest rates, above target inflation and given the long term nature of Junior ISAs, investing in riskier assets such as stock markets is a sensible approach to maximising the returns for your child’s future.”
Hollands highlights one example where the parents had invested £10,920 across three tax years. Due to the performance of the holdings selected by the child’s family, the portfolio has grown 17% and currently stands at £12,794.
Parents who opt for stocks and shares ISA can invest any stocks, funds or ETFs. Investing can be extremely time consuming but there are a whole host of online resource available. Alternatively, parents may choose to outsource the decision making to a third party such as a multi-manager.
If they want to pick their own funds, however, Hollands says given the modest sums involved and the very long term nature of Junior ISAs, a sensible option for parents investing for a new born might be to split the investment in a 75:25 ratio between developed market global equity funds such as Aberdeen World Equity, and a smaller allocation towards an emerging market or frontier market fund such as Lazard Emerging Markets or Templeton Frontier Markets.
“Alternatively, a well-diversified multi-manager fund or investment trust such as the Battle Against Cancer Investment Trust or RIT Capital Partners might also be a good ‘one stop shop’ for a modest or regular investment,” he says.
If parents are not comfortable investing their children’s savings in the stock market, cash Junior ISAs are the best solution.
Anna Bowes of Savings Champion says: “The main advantage of the Junior ISA over a regular child’s savings account is that parents can contribute into this account without falling foul of the tax rules that limit the interest on gifts from parents to less than £100 per year, per parent.”
Cash Junior ISAs tend to offer interest rates of around 3%. However, it is important to shop around for the best deal. Halifax currently offers 6% if the registered adult holds a Halifax Cash ISA.
“As the rates on offer vary from provider to provider, it makes sense to shop around for the best JISA for your needs. But it’s also important to keep an eye on the rate going forward, as it may be prudent to transfer at some stage,” says Bowes.