Junior ISAs – an alternative to yet another Frozen dress!?

13th February 2015 by Holly Mackay

A Junior ISA is simply a savings account you can set up for your child. Think of it as a tax efficient savings pot for your kids. The interest on cash or the capital gains on any investments are free from tax.

These savings pots are available to any child born either BEFORE September 2002 or AFTER 3rd January 2011. At the moment, you can save £4,000 each year into a Junior ISA. If your child was born in between these 2 dates, they are probably stuck in a Child Trust Fund and it’s likely that after April this year, you’ll be able to move this to a Junior ISA.

So why would you bother opening up a Junior ISA? Well, to my mind, one of the biggest benefits is certainly the tax-free nature of these savings. The other big plus is that anyone can contribute to these. This can make them a great thing to have in place for your child’s birthday or Christmas presents. Let’s face it, there are only so many Frozen dresses your kids can ask for, and if you are lucky enough to have parents who can afford to make a contribution, well this is a nice alternative idea. Finally, I use these accounts as a way of trying to explain the concept of saving and investing to my kids. It’s an uphill battle. They still think that money comes from banks when you push some buttons in a wall. (I wish!!) But we’re working on it!!

One fact to bear in mind though is that your children can get access to this pot when they turn 18 and there’s not much you can do if they decide to go and live on a beach in Thailand with the proceeds. For this reason, some of my friends who can afford to put aside a bit each month, have decided to keep any savings in their own ISA accounts. Every adult’s ISA allowance is now £15,000 so every couple can save £30,000 each year into ISAs. If you are lucky enough to have any money to save after this amount, you may decide to consider Junior ISAs at that point. And invite me to your next Christmas party please!

The final thing to think about is that there are 2 ways of savings into a Junior ISA. Cash OR the stock market.

Cash is really safe and predictable and – at the moment – really, really unexciting for savers with dismal rates everywhere. If your child is a baby, this money is being set aside for an 18 year period. Experts will tell you that locking your money into cash for this long, with interest rates as low as they are, means that you are incredibly unlikely to do better than you would in stocks and shares. I saw a recent report which said that over an 18 year period you are 99% more likely to do better in stocks and shares than you are in cash.

Nonetheless the stock market is a bumpy old ride. In 2008, £1,000 invested into the UK’s biggest companies would have fallen by about £300 (I looked at an index we call the FTSE100 to get this figure). If you had needed to take your money out in that year, you would have been well and truly burned. But the following year, things bounced back and £1,000 invested would have gone up by about £280. As a very general rule of thumb, if you are investing for at least a 5 year period, I think it’s worth looking at shares but no-one can guarantee you’ll get your money back and you have to be prepared and able to sit it out in tough times. Imagine freaking out and selling your house if you heard a report that the housing price index had fallen by 3%.  In the same way, you have to be able to weather the storms of the stockmarket.

Once you are ready to stick a toe into a stocks & shares ISA, these days it makes sense to go somewhere where you can fill your ISA basket with the best funds and investments available. So-called platforms are like online financial department stores. You can buy all your favourite brands under the one roof and you are no longer captive to one bank or one fund manager which is unlikely to perform really well throughout the life of your investment. The good news is that lots of platforms which provide the Junior ISA ‘wrapper’, also provide guidance with the investment selection so you don’t need to be Gordon Gecko to get started.

This video explains a bit more about Junior ISAs and shares my thoughts on where you might go to find one, especially if you’re not the world’s most confident investor.

Good luck!

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