LOCKDOWN accelerated many existing trends such as shopping online, working remotely and joining live-streamed fitness classes, to name but a few. The newest addition is saving for children.
AJ Bell has reported a surge in the number of people putting money into their children’s ISAs during the past three months. From April to June there has been a 113% increase in the number of people paying into a Junior ISA when compared to the same period last year. There has also been a rise in the total amount people are contributing, which is up 127% over the past three months against the same time last year. Average subscriptions per account have risen by 26%, from £1,853 to £2,326.
In March Rishi Sunak, the chancellor, more than doubled the annual amount of money that parents can put away for their children tax-free, from £4,368 to £9,000. AJ Bell admits that some parents may be making full use of the tax advantage and that ‘could skew the figures’. Junior ISAs, launched in 2011, were designed to encourage families to put more aside to help children through university or buy their first homes. The money is locked away until the child reaches 18. Parents can choose from a cash or investment version of the account.
Even though the average cash version now pays interest of just 1.9%, HMRC data shows that 70% of parents are still choosing cash over a stocks-and-shares account. If interest rates are low and inflation is higher, then the value will be eroded over time. Stocks and shares Junior ISAs provide a smart and tax-efficient way to invest money for under-18s, as there’s no UK income or capital gains tax to pay.
How to invest
Putting away £50 a month can really boost your child’s savings pot, as with 5% growth a year after charges this would add up to almost £8,000 over 10 years. If you could afford £100 a month it would be worth an extra £15,850, assuming the same 5% return.
A recent study by Nutmeg showed that Junior ISAs could receive a further boost with a growing trend of people wanting to gift cash to kids for birthdays and Christmas. A third of parents said that they would be more open to giving money instead of physical gifts in the future.
Once a Junior ISA has been set up by the parent or legal guardian, anyone can contribute including friends and family. You need the sort code and account number for the Junior ISA, using the child’s reference number. This might be handy for anyone who wants to reward a youngster for a good set of GCSE results next week.
It’s worth knowing that 16 and 17-year-olds currently get two ISA allowances: £9,000 for a Junior ISA and £20,000 for an adult cash ISA. At 18 they can move into stocks and shares.
Where to invest
Choosing the right funds to place in a Junior Isa is the key to potential returns. At Interactive Investor the most popular investments are the Scottish Mortgage Investment Trust, Fundsmith Equity, Vanguard LifeStrategy funds and iShare Core FSTE 100 ETF.
Top stock picks are Lloyds Banking Group, BP, Royal Dutch Shell and Barclays. Parents seem to favour a small number of holdings in their children’s portfolios. The average number of holdings in a Junior Isa is three, though the most is 44.
If you’re choosing your own funds, one of the most influential guidance services from platforms is their ‘select’ or ‘favourite’ fund lists. They usually feature 50 funds favoured for strong management, performance and low cost. However, there is no guarantee they will perform better than funds that are not on the lists. It’s up to you to do your own homework and assess what matches your investment objectives.
Funds have a set objective which will be set out on the fund fact sheet – a must-read before investing. A growth fund manager, for example, will typically choose to invest in companies they believe will be able to significantly grow their earnings over time. Meanwhile, an income fund manager will back companies with strong balance sheets that pay dividends.
If you would prefer help choosing, there are options. Many platforms offer ready-made Isa portfolios. And at AJ Bell they are the most popular funds chosen by parents for Junior ISAs. They are a mix of actively managed funds and trackers. Alternatively, you can get a financial adviser to tailor-make a portfolio. Find one in your area at unbiased.co.uk.