Junior ISAS: Why you shouldn’t put your kid’s savings in a cash account
When I had a baby in 2013, my life changed. But while some of these changes were expected as I transitioned into motherhood, I never imagined that it would be the thing that made me invest in the stock market for the first time.
Even writing that sentence seems odd, especially given my career as a personal finance journalist. But in the years before becoming a parent, other than my pension, I never really wanted to lock away chunks of money for five or ten years. There always seemed to be a shorter-term goal to focus on – whether it was savings for a house deposit, paying for our wedding or renovations.
But then suddenly, my outlook on the future changed. I wanted to build a nest egg for my daughter Audrey, something that would help her when she was older whether it was for university, getting a foot on the property ladder or to invest in her own business.
I chose to save with a Junior ISA (JISA), which is a permanently tax-free savings or investment account where any money you put in will be locked away until your child’s 18th birthday. At that age it becomes their cash, a standard ISA – which they can spend as they like.
Currently, you can put up to £4,260 into a Junior ISA in the 2018/19 tax year which can be split whichever way you like between the two types of junior ISAs – cash or stocks and shares.
With a cash account, the money is completely safe (provided it’s in a UK-regulated provider and you’ve no more than £85,000 with that financial institution) and you get a defined amount of interest. With a stocks and shares JISA, how much you earn depends on the performance of the stocks or shares you’ve invested in.
I realised that thanks to pitiful cash-savings rates and the corrosive effects of inflation, Audrey’s nest egg could hardly be expected to grow at all if it was kept in a cash savings account. So I opted to invest through Hargreaves Lansdown and for the last few years I have been investing monthly on Audrey’s behalf via a standing order.
The money goes into two funds; Artemis Global Income and Merian UK Smaller Companies, due to their exposure to long-term growth assets and proven track record over a market cycle.
I liked the fact that the Artemis fund paid an income which I chose to automatically accumulate, buying more units and harnessing the power of compound interest.
I am happy to report that the funds have grown in value by about 11% – not bad going for a beginner if you ask me. Especially considering that, at the time of writing this, the best rate available on a cash savings Junior ISAs average is just 3.6% from Coventry Building Society.
Yes, I know what you are thinking – what if I lose the money? But I’m realistic: I know that one can lose money on the markets and as every disclaimer points out, share prices can go down as well as up and past performance is no guarantee of future returns.
But, when I set up Audrey’s investment JISA, I knew that the money I put in wouldn’t be spent until she was at least 18 (later if I have anything to do about it) and I’m comforted by the fact that, over the long term, you are unlikely to lose money in the stock market.
The probability that shares will outperform cash savings is 75% over five years, increasing to 90% over 10 years and 99% over 18 years, according to an authoritative study by Barclays that uses data going back to 1899.
What’s more, one thing that is certain is that thanks to that pesky thing called inflation, the balance would have shrunk in real terms – and over time, this would deal a devastating blow to the overall amount. According to the above-mentioned Barclays Equity-Gilt Study, UK shares returned an average 5.1% a year since 1899, with inflation factored in; cash returned 0.8% a year. Boom.
Another way to look at it? Parents who put £5,000 in a lump sum into a child’s cash savings cash account between January 2004 and December 2016 would have ended up with £6,571, according to Investec. However, they will have lost their child purchasing power by 2.3%. In other words, their £5000 was worth £4,885, when adjusted for inflation.
Now what was that about losing money?
How to get started
Don’t assume that you must be rolling in the dough to put aside money each month to invest, although many parents think the opposite. Most women believe that they need thousands of pounds a month to dip their toe into the stock market, according to a poll by Boring Money, an investment website.
In fact, online investment firms such as Hargreaves Lansdown will let you start with a £25-a-month direct debit.
The good news? Setting up a stocks and shares JISA is easier than you might think.
First, choose an investment firm to suit your needs. For beginners with smaller sums to invest, Hargreaves Lansdown is worth a look. Admittedly, it is one of the more expensive firms its own charge is 0.45% a year, on top of the fees charged by the investment funds you choose – but its website is easy to use and provides practical information to help you get started. And it is well known for top-notch customer service.
Scottish Friendly is also well suited to first-time investors as it offers comprehensive guidance.
You don’t need a ton of spare cash either, as this provider allows you to open an account with deposits of £10 a month or more, a lump sum from £50 or transfer in from another Junior ISA provider. Currently, Scottish Friendly offers a £50 welcome bonus which will be paid into the Junior ISA for your child.
With this account, you get a of choice of eight funds from low to high risk — so you can invest to suit your circumstances. What’s more, the website has a helpful explainer on the risks associated with each fund and a tool to help you calculate your potential returns.
But bear in mind that there is an Annual Management Charge of 1.5% of the value of the fund and should the child withdraw money before the end of 5 years, there will be a £50 deduction from the withdrawal value.
Another option is One Family’s Junior ISA where you can invest your cash in one of two funds. Similarly, there is there is an Annual Management Charge of 1.5% of the value of the fund.
Alternatively, check out Shepherd’s Friendly and open an account with regular monthly payments of £10 at a time. To open a plan with a lump sum, you simply need to deposit an initial minimum of £100, followed by further investments of at least £10 at a time.
This provider adopts a medium to low-risk investment strategy, and aims to pay annual bonuses into your child’s plan. Charges currently stand at 2.5% as an annual management fee, and this is deducted prior to the bonus being announced
Once you register, sign up for a Junior ISA, a tax-free vehicle in which to hold your investments. Then, after that, anyone can contribute £4,260 in 2018/19.
To make saving a habit, sometimes all it takes is changing when you save.
Forget using the money left over at the end of the month to allocate to savings because, as a parent, you rarely have any left. Instead, make saving a priority and set up a direct debit that leaves your account immediately after you get paid, making saving for your children one of your fixed expenses.
A word of warning
As with most things financial, there is always an element of risk involved.
With a Junior ISA, once cash is invested, it belongs to the child: which means that you can’t get it back it, no matter how much your need the money.
What’s more, once your little darling turns 18, you will have no say how the funds set aside are spent. While you might want it to go towards university fees, your child could well have other ideas. After all, ask yourself what your teenage self would have done with a nice little lump sum? My plan is to start laying the groundwork on this one early – or just keep quiet about it when the time comes.