Entrusting an 18-year-old with a large sum might seem risky, butJunior ISAs (JISAs) can prove vital in instilling sound saving habits.
“Most data from Junior ISA providers suggests that the kids don’t just automatically rip the money out and run off to Thailand,” says Holly Mackay, founder and CEO of Boring Money.
“The practical side of a Junior ISA is that it helps squirrel away money for a child, and is also a great way of teaching children about the markets – particularly with Junior Stocks and Shares ISAs.”
The CEO puts this philosophy into practice herself. “I tell my kids about their JISAs. Actually owning a bit of Coca-Cola or Microsoft is a really engaging way that brings it to life for them, instead of it being some boring <a href="https://www.independent.co.uk/topic/investment” rel=”nofollow noopener” target=”_blank”>investment,” she notes.
If you are thinking of opening a Junior ISA for a child, here is all you need to know.
What is a Junior ISA?
“A Junior ISA or JISA is a tax-free savings account, which parents and guardians can set up for anyone under the age of 18,” explains Mackay.
What are the different types to choose from?
The two types are a Junior Cash ISA or a Junior Stocks and Shares ISA.
“Most people in the UK go for a cash one because stocks and shares sound risky. But if you’re saving for a baby, that money’s locked in for at least 18 years and you’re about 99 per cent more likely to do better in shares,” says Mackay.
“However, if it’s for a shorter period and you plan on withdrawing it at 18, stick with cash.”
What is the difference in the return between the two?
“The average annual returns over the last five years for a high-risk ready-made portfolio have been 9.75 per cent after fees,” says Mackay. “So, if someone paid in £2,000 a year into a stocks and shares JISA for the last 18 years, this would have turned this into £97,600.
“While a cash JISA paying the full Bank of England interest rate so would have turned into £43,100.”
However, she makes the point that the last five years have been very strong in global markets so this rate is on the higher end of typical returns.
Can you choose who to buy shares in?
“Not every provider does, but some let you pick and choose individual shares,” says Mackay.
“You can say to your child, do you want to buy some Samsung or Apple? Investing sounds abstract, but if you tell your children that they own a small piece of Coca-Cola or Samsung, it’s quite cool.”
What is the age limit?
“Once the child turns 18, that money is theirs. They can take the money out, or keep putting money in it, and then that becomes tax effective for them,” explains Mackay.
