The majority of parents favour cash junior individual savings accounts (JISAs), as opposed to their stocks and shares counterparts, when setting up a tax-free savings account for their children. But investments typically outperform cash over time. This means that your children may be missing out on substantial returns over the long run.
What are JISAs?
Junior ISAs are tax-free savings accounts for under 18s. The tax treatment on JISAs is the same as for adult ISAs; gains are free from income and capital gains tax, and interest on cash is not subject to tax. Parents (or guardians) can set up a JISA with minimal starting contributions, and family and friends can then pay into it. The maximum that can be paid in annually is £9,000. This annual allowance must be used before the end of each tax year, or it will be permanently lost. Children can access their savings once they turn 18.
Cash vs. stocks and shares
The number of JISA subscriptions was 943,000 in the 2020–2021 tax year, but over two-thirds of these accounts (71%) are in cash. Those with cash accounts are missing out on the opportunity of higher returns that are available through investing. Cash JISAs have better interest rates than adult cash ISAs (the top cash JISA available on the market pays 2.65%), but many accounts will not keep pace with inflation, which erodes the value of cash savings over time. Returns on stocks and shares are typically higher over time, and the power of compounding means that your money can go much further if you see higher annual returns.
Investing for the long term
As the example in the table below shows, if parents were to pay the full £9,000 annual allowance (£750 per month) into a stocks and shares JISA over 18 years, and see 5% annual returns, their child’s JISA would be worth over a quarter of a million – £260,000 – by the time they turned 18. Contributing smaller monthly or annual amounts would still lead to a substantial sum of money building up, although the size of the pot would depend on the size of the returns. If you were to pay in £250 per month, lower returns of 2% – which are more in line with average cash JISA interest rates – would leave you with £64,900 after 18 years. However, 7% returns over the same 18-year period would see the original amount invested almost double from £54,000 to £107,700.
JISAs are designed to cater towards a long-term investment horizon by their very nature, as they are ringfenced until your child turns 18. An 18-year investment horizon means that you may be able to take on more financial risk, as there is plenty of time for strong returns to counterbalance the inevitable leaner years, and for the power of compounding – often known as the ‘snowball effect’ – to work its magic.
Do you want to find out more about how a JISA for your child/children can fit within an overall financial plan? Or would you like advice on how your own ISA can play a key part in your personal financial picture? Call 03300 564 446 to speak to a Lumin expert, or book a free introductory meeting by visiting luminwealth.co.uk/contact.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
