This post is all about using a Junior ISA to invest for your children, the different options you have, pros and cons and how Mrs Pretty Penny and I have been investing for our son in a Junior Stocks and Shares ISA.
There isn’t a single person in the world currently investing that doesn’t wish they had started investing sooner. Time and consistency are the two biggest factors in generating long term and generational wealth.
So investing for your children as soon as possible is going to give them the biggest chance of become wealthy, perhaps in a life changing way.
Let’s talk about how we can achieve that.
What is a Junior ISA?
A Junior ISA is a long term investment account for children under 18 living in the UK, completely shielded from any kind of taxation. This is a lifetime of tax free investment, so well worth thinking about.
You can invest in one or both of a Cash ISA where the interest earned on the account is free from tax, or a stocks and shares Junior ISA where the any capital growth and dividends paid are free from tax.
Anyone with parental responsibility for a child can open a Junior ISA, and then the child can take control of the account from the age of 16. However they cannot make any withdrawals until they are 18 years old. Those who opened the account will have no legal right to the money, or any legal right as to how/when it is withdrawn and used – it is entirely the responsibility of the child when the account matures.
It’s a key thing to note that once money is deposited into a Junior ISA it is locked up until the child turns 18. At this point, the Junior ISA will become a full adult ISA.
What are the advantages of a Junior ISA over a regular savings account?
As already mentioned a Junior ISA is a tax free investment. So while you will pay tax on interest gained on funds in a current account or a savings account (however poor that interest rate is!) you will never pay a penny of tax for savings in a Junior ISA.
You can invest up to £9000 per child for the financial year 20/21 in a Junior ISA and that can be spread across a stocks and shares ISA and/or a Cash ISA.
Typically, because it is a longer term investment you could expect to get a higher rate of interest compared to a current account or other savings account. However, at the time of writing these rates are still very low.
What are the disadvantages of a Junior ISA over a regular savings account?
The only real disadvantage is that any deposits are locked until the child becomes 18. So if you were investing on behalf of a child you would need to make sure you won’t need that money for something else in the meantime. Further, that money is then the responsibility of the child when they turn 18, and if you are concerned about how that money would be spent then perhaps this isn’t the best way to invest.
A cash ISA will generally give you a fixed rate of return on your investment, whereas a stocks and shares ISA is tied to the stock market and will generate variable returns on your investment. It is possible to lose money investing in this sort of investment.
What do I do to invest for our child?
Currently we have invested in a stocks and shares ISA with Vanguard for our son. The stock market has historically returned between 6-10% a year since its inception over the long term. In just over one year, we have seen growth of nearly 12%.
There will be ups and downs, but that is a great start for the wee man!
In any given year we could expect that figure to fluctuate and even return losses but over the long term we would expect to hit between 6-10% – which is much better than the cash ISA offerings at the time or writing.
Since he has around 16 years to go before he can withdraw his money he has plenty of time to let the stock market do it’s thing and grow, riding out any fluctuations that the market may throw up. Each year the compounding effect will help his money grow exponentially so that even if we didn’t invest another penny he could expect his deposits to grow into something substantial over time.
As I said, time and consistency are the two greatest things with investing. Currently there is £6987 in his account.
Take a look at the charts below.
Even at a lower than expected 5% annual growth, after 16 years he could expect to have £15,251, tax free. Look how the interest is getting bigger each year as the interest is earned upon interest! Compound interest is great!
At 8% annual growth, after 16 years he could expect to have nearly £24000, tax free. Look how the interest is getting bigger each year as the interest is earned upon interest!
Imagine now the same rate of interest at 8%, except we add £1000 each year for him… throwing in that investing consistency… he could expect to have over £54,000 by the time he is 18, earning close to £4000/year tax free on interest alone by that time. That’s the incredible power of investing consistently.
Summary
None of this is financial advice, but if you are thinking of investing for your child, then if your child is young enough, investing in the stock market might be the way to go. Cash ISAs will offer a guaranteed return but nowhere near the potential of stock market investing.
I’m not a financial advisor so you should consult a professional before making any investment decision.