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Start saving early with a Junior Isa for a tax-free pot to help send children to university or get a house deposit
- Money saved or invested in a Junior Isa is locked away until the child reaches 18
- Giving money through a Junior Isa reduces your estate for inheritance tax
- You can give away up to £3,000 each year which is exempt from the tax
Tax-efficient saving is not just for grown-ups. Parents and grandparents can pay into a Junior Isa account that could provide a bumper cash payout when children reach adulthood.
And with the average student debt at an eye-watering £50,000 and house prices soaring, a healthy savings pot could prove a real boost.
Money saved or invested in a Junior Isa is locked away until the child reaches 18, and earnings are tax-free.
Helping hand: With the average student debt at an eye-watering £50,000 and house prices soaring, a healthy savings pot could prove a real boost for children heading to university
You can open a standard cash Junior Isa, or an investment account. While money has the greatest chance of growing when invested, most parents are choosing cash savings.
Rob Burgeman, of Brewin Dolphin, says: ‘It makes little sense to pick cash for a Junior Isa. The interest rates on cash savings accounts tend to be below the rate of inflation. Over time, the ‘real’ value of your child’s savings will decline.’
According to AJ Bell, if you had invested the full Junior Isa allowance each year from launch in 2011 at the start of each new tax year, the fund would now be worth £75,779.
That’s based on contributions of £53,836 and investing in the FTSE All Share index. The maximum annual investment was raised recently to £9,000.
If that had been saved into a cash Junior Isa from launch earning 1 per cent interest a year, you would have £56,641 now – £19,138 less.
For parents investing £100 a month into the FTSE All Share, starting at the same time, the Isa would have grown to about £17,350 in ten years. A cash version earning 1 per cent interest a year would be worth just £13,238 — £4,112 less.
Mr Burgeman adds: ‘Equities have consistently delivered returns greater than inflation.
‘The earlier you start, the better your chances are of boosting your child’s future financial security by benefiting from investment growth and compound returns.’
A Junior Isa can be opened online with any fund supermarket such as AJ Bell, Hargreaves Lansdown, Interactive Investor or even at John Lewis. Some offer funds picked by experts, which saves you from having to.
Money saved or invested in a Junior Isa is locked away until the child reaches 18, and earnings are tax-free
Family and friends can contribute, too. As it’s for the long term – up to 18 years at most – you can choose a higher level of risk.
That’s because there’s time for your investments to ride out the ups and downs of the stock market and for any losses to recover. Mr Burgeman likes Fundsmith Equity fund for a Junior Isa.
He says: ‘It invests in a broad selection of global, blue-chip equities.’ A £10,000 investment five years ago would be worth £18,100 now.
Nutmeg found most (78 per cent) parents were likely to pick socially responsible investments, due to children’s interest in climate change.
Hannah Edwards, of Eva Capital Management, suggests Royal London Sustainable Leaders fund. A £10,000 sum invested five years ago would be worth £16,100 now.
Moneyfacts says the average rate paid on a Junior cash Isa today is 1.64 per cent.
The top-paying Junior Isa is from Family Building Society at 2.4 per cent. Among the worst rates, Nottingham Building Society offers just 0.6 per cent.
Giving money to children through a Junior Isa is a simple way to reduce your estate for inheritance tax. You can give away up to £3,000 each year which is exempt from the tax.
Ms Edwards says: ‘A set of grandparents would move £108,000 out of their estate by each giving £3,000 a year, for 18 years, saving a potential £43,200 in inheritance tax.’
Broker AJ Bell says grandparents investing £3,000 a year from launch in 2011 in the FTSE All Share index, would have built a Junior Isa of about £54,000.
Fund has 18 years to grow
Planning ahead: Karl, Joanne and Ella
Karl and Joanne Broom opened a Junior Isa for daughter Ella when she was two weeks old.
Karl, 34 a software sales manager from Essex, says: ‘We wanted to start saving for her as soon as we could so she can pay towards university, a deposit on a home or just have options.’
Karl and Joanne, 35, a PA, have invested ad hoc lump sums into Ella’s Isa but will pay monthly into the Nutmeg account soon.
Ella’s money will be invested in higher-risk funds.
Karl adds: ‘Since this is an at least 18-year investment, we can take risks.’