Whether it’s a little bit of money in a birthday card or something more substantial, grandparents often want to help with their grandchildren’s financial futures. Our guide weighs up the differences between traditional ISAs and Junior ISAs, so grandparents can decide which may better suit their grandchild’s needs.
Grandparents often want to put aside money for their grandchildren. But knowing which investment account to choose can be bewildering. For many, a tax-efficient stocks and shares ISA is the right choice, but there are a number of options, including a Junior ISA (JISA).
To help grandparents assess their options we’ve put together this guide to outline the different benefits of investing in ISAs and JISAs, helping grandparents make the most of their money to give the next generation a financial head start in life.
How can grandparents contribute to a Junior ISA?
Junior ISAs are a popular option for children. Children resident in the UK and under the age of 18 are usually able to have a JISA opened for them. While parents or guardians must open the account, parents, grandparents, godparents or family friends can, between them, contribute £9,000 a year to these tax-efficient accounts.
Junior ISAs come in two varieties – cash or stocks and shares. A child can have one of each type in their lifetime, but parents or guardians cannot, for example, open a new stocks and shares account each tax year. If a child already has a stocks and shares Junior ISA, it will need to be transferred to a new provider before additional contributions are made. It’s also worth noting that if your child has a Child Trust Fund, you will need to transfer this to a Junior ISA too.
While grandparents can contribute to a JISA, only parents or legal guardians can open one on behalf of a child. If a child is 16 or 17 and doesn’t already have a JISA, they can open a cash Junior ISA for themselves.
At Nutmeg, we only offer a stocks and shares JISA and it can only be opened for a child who is under 16 years old. But it makes sense to start investing early. If JISAs are opened from the date they are born, the money will be invested for longer and can potentially benefit from compounding returns, possibly boosting overall returns.
Once the account is opened by a parent or guardian, grandparents will need the account details to start contributing. In most cases, this will be the account number and the grandchild’s ‘custodian number’ as a reference. With these details, grandparents can either make one-off bank transfer into the account or set up a standing order for regular contributions. Note, only the registered contact can set up Direct Debit payments into a JISA.
When should I contribute to a Junior ISA?
Stocks and shares JISAs are offered by various investment and wealth providers. Nutmeg’s JISA offers a discretionary management service across our range of different investment styles, allocating across equities and bonds at a risk level that suits you.
While investments by nature can be volatile, long-term investing has historically delivered greater returns than cash savings. However, note that returns are not guaranteed, and you may get back less than you invested.
JISAs by nature tend to be a long-term investment. Provided you start investing when your grandchildren are young, you are looking at least a 10-year plus time horizon as these funds can’t be accessed until the child’s 18th birthday.
Do I have a say in how my grandchild spends their Junior ISA funds?
When your grandchild reaches the age of 18, the account converts to an adult ISA in the child’s name. This means they are free to access the money.
They have the option of keeping the money invested and making further contributions into this account. This may be useful if they want to use the JISA funds to help, say, pay tuition fees for higher education or invest towards their first home.
However, grandparents should bear in mind that they won’t have a say in how this money is used. That is not to say that their wishes may not be discussed with the grandchild and others that have contributed.
What are the benefits of a regular ISA?
Grandparents may also want to use their own ISA allowance for their grandchildren. All adults in the UK can save or invest up to £20,000 a year in an ISA, not paying income, dividend, or capital gains tax on interest or returns. This £20,000 allowance would be on top of any money put into a Junior ISA.
One key benefit of a regular ISA is the account is held in the grandparent’s name. They choose how much to invest (within the overall limits), where this money is invested, and when their grandchild has access to this money.
They might, for example, keep this nest egg until their grandchild is in their 20s and perhaps starting out in their first job, or use the funds themselves to contribute directly to higher education costs.
Of course, many grandparents may want to use their ISA allowance to build their own long-term investments. But it is possible to do both.
Can you spread your ISA allowance into different investments?
Providers like Nutmeg allow you to split the £20,000 annual allowance into different pots, each of which can have a different investment goal. So, you may, for example, have one pot that is earmarked for a grandchild, which might be at a different risk level – perhaps a higher risk level for them (reflecting a longer time frame) and a more cautious portfolio for your slice of the ISA.
The Nutmeg website and app allows inventors to select their own timeframe, risk level and investment style for multiple ISA pots.
This isn’t necessarily an either/or choice. Many grandparents may want to contribute to a JISA while also putting aside money into a regular stocks and shares ISA. This may be used to help grandchildren at a later stage, but it gives grandparents flexibility to use the money for other purposes if their circumstances change at a later date.
If you want to discuss your financial goals or want more information on balancing your own goals with building a nest egg for your grandchildren, you can book a free call with Nutmeg’s investment experts.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. Past performance is not a reliable indicator of future performance.