The last year has seen everyone’s lives and plans turned upside down. Younger adults have had university education reduced to online learning, house purchases delayed, and perhaps weddings postponed, as the pandemic closed down society and the economy.
But normality will return, and those financial milestones will continue to be the life goals of many of today’s and tomorrow’s children. What will also remain is the need for families to save and invest to help their children achieve those goals.
For what was once a ‘nice to do’ is increasingly a financial necessity. The average house deposit put down by a first-time buyer in 2020 was over £57,000.1 The total cost of going to university is typically £56,000 for a three-year course.2
Anyone looking for ways to help a child save for the future should consider a Junior ISA first. The tax-efficiency and simplicity of Junior ISAs have contributed to them becoming an increasingly popular way to save for young people since their introduction in 2011.
In recognition of this popularity, and perhaps the importance of saving for children, the annual investment limit on a Junior ISA was more than doubled to £9,000 from April last year.
Anyone can contribute to a Junior ISA, although they must be opened and managed by a parent or guardian. All the funds within a Junior ISA belong to the child and are locked away until the child is 18. At 16, however, the child can take over control of the account, which can be a good way to learn more about savings and investment.
“For grandparents or family friends with estate planning needs, using lifetime gifting exemptions to contribute to a Junior ISA is a great way of passing wealth on to younger generations,” suggests Joe Kavanagh, Investment Communications Consultant at St. James's Place. “Another advantage is that you may well live to see how your contributions have made a difference, when the child comes of age.” You can either pay a lump sum into a Junior ISA or set up regular contributions, which allows the flexibility to fit in with any other gifting arrangements you may have made. The money in a Junior ISA can be invested in cash, shares or both.
In the 2018/19 tax year, a healthy £974 million was saved into Junior ISAs; yet, nearly three out of four accounts subscribed to were Cash Junior ISAs.3 Of course, it’s encouraging that parents and other donors are recognising the need to save for their children; but they are at risk of not maximising a potential to give them a much bigger financial head start.
Over £3.2 billion of Junior ISA funds are sitting in cash – that’s 61% of the total.4 With interest rates at new lows, these savings are almost certainly generating negative real returns after taking into account the corrosive effect of inflation. Unfortunately for cash savers, that’s a situation which is unlikely to change significantly for some years to come.
Making an early start with a Junior ISA means that money could be invested tax-efficiently for 18 years; and for much longer given the high proportion of funds rolling over into a standard ISA on maturity. That makes it a real long-term opportunity to accumulate wealth.
“Such an extended time period makes a Stocks & Shares Junior ISA a very sensible option,” adds Kavanagh. “There is plenty of time to help ride out the inevitable ups and downs in markets, and benefit from the potential compounding effect of tax-efficient income and growth.”
The graph below illustrates what you could achieve by starting to save early and giving your money time to compound returns. It compares the returns that could be achieved by the age of 30 if you start a regular investment from birth, with those for a child who starts saving into a standard ISA, when allowed, from the age of 16.
Yet it is not just money held in Junior ISAs that could potentially be working harder. September last year saw the first Child Trust Funds (CTFs) mature. Introduced in 2005, this government scheme offered vouchers of at least £250 to encourage saving for children born between 2002 and 2011.
The combined estimated maturity value this tax year is £2.4 billion, with around 55,000 teenagers each month becoming entitled to the funds when they reach 18.5 However, recent figures show that only four in ten Child Trust Funds have been claimed since the schemes began maturing last September, as providers have struggled to track down owners.6
Maturing CTFs will automatically be transferred into an adult ISA, retaining the tax benefits, whilst not counting towards the annual £20,000 allowance for ISAs.
However, it is also possible to transfer CTFs into a Junior ISA before maturity, following government changes back in 2015. CTFs had been criticised for being of relatively high cost, with limited investment options and low interest rates on cash. With CTFs continuing to mature through until January 2029, there is plenty of scope for some parents to get those savings working harder and sooner.
In these challenging times, the long-term financial future of our children might not feel like an immediate priority. But what the pandemic has illustrated starkly are the consequences of failing to plan, either collectively or as individuals and families. Investing some time now could be worth a lot more to our children in the decades to come. Making the most of their Junior ISA opportunity is one way to do it.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The favourable tax treatment of Junior ISAs may be subject to changes in legislation in the future.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
1 Halifax, January 2021
2 Save the Student, National Student Money Survey 2020, September 2020
3, 4 HMRC, Individual Savings Account (ISA) Statistics, June 2020
5 Foresters Financial, August 2020
6 Association of Financial Mutuals, February 2021