The Junior ISA (or JISA) has captured plenty of attention in the eight years since its introduction. Understandably so, given many young people are either struggling to get a foot on the property ladder or shouldering thousands of pounds in student debt – or both.
A Junior ISA is not a solution for every financial woe facing our children. It is, however, a tax efficient, long-term savings vehicle with many advantages. We look at who it is (and isn’t) for, and address some of the areas – from financial education to housing – where a Junior ISA can make a genuine difference to your child’s life.
Getting on the housing ladder
We spoke recently about how a Lifetime ISA can help first-time buyers with their deposit. Those taking full advantage of their allowance can expect to wait for 4.8 years on average before they have a 10% deposit. Still, our own research shows that 73%¹ of people feel it’s “almost impossible” to get onto the property ladder without financial help from family. A Junior ISA can give your child a head start.
You can open an account from the day they’re born. Doing so makes sound financial sense. Not only could they benefit from compounding, the full 18 years means you can afford to take more investment risk than if investing for a shorter period. And with no tax on interest or returns, the money you invest can grow even faster. Remember, as with all investing your portfolio can go down as well as up.
One potential downside is that your child, on turning 18, can spend the money however they please. That may or may not be the house deposit you had intended. But then a Junior ISA is an opportunity for parents to educate their children on the virtues of long-term saving and investing, and perhaps instil the financial wisdom that will lead to sensible choices when the money becomes available.
Financial education for under-18s
A Junior ISA doesn’t have to be a rainy-day fund the child knows nothing about. At the very least, it’s a good idea to sit them down and discuss how the money could be spent.
Why not give them regular updates on how their Junior ISA is performing? You could use our regular Nutmeg investment updates if you want to look at the reasons influencing performance. Teach them the investment basics and maybe then they’ll feel more inclined to start an adult stocks and shares ISA at age 18.
Only 12% of people we asked in a recent poll, would trust an 18-year-old receiving a lump sum of cash to spend it wisely². A Junior ISA is an opportunity to change that.
At Nutmeg, our app means you have a clear view of exactly how your Junior ISA is performing. That way, when they get their hands on the money, they’ll be more inclined to invest it in their future rather than fritter it away. Well, we hope so anyway.
Paying off student debts
It’s now routine in the UK for students to leave university with debts numbering in the tens of thousands. As of 2019, the average student debt in England was just shy of £36,000, more than three times what it was 10 years ago. With the average graduate salary under £23,000, it’s unlikely they’ll pay it off anytime soon.
Making a contribution to a Junior ISA can help them emerge from university somewhat debt-free. At the least, it’ll give them a leg up on the repayments.
For example: If you were to invest the old allowance of £4,368 every tax year into our Junior ISA, after 18 years, with an assumed annual net return of 5.5%³, your loved one could take over £130,000 tax free into adult life. The maximum tax-free contribution has now risen significantly to £9,000. If you were to make the maximum annual contribution of £9,000 per year, with the same rate of compounding return, your child would receive £303,517 by the time they had turned 18 – maybe enough to cover their student fees and afford their first property.
It might be that the child decides against further education. But this exercise shows how even a relatively modest contribution can leave enough to fund a full three-year degree – and then some.
You can make your own estimate calculations with our compound returns calculator.
Replacing the bank of mum and dad
Almost three quarters of people we asked told us they’d wouldn’t get on the property ladder without financial assistance from their parents⁴. These contributions – affectionately known as the Bank of Mum and Dad (or BoMaD) – will have supported nearly 260,000 property purchases in 2019. Total contributions, at £6.26bn, were greater even than the government’s Help-to-Buy scheme. Yet few of these donations are made in a tax efficient way.
According to Legal & General, 53% of BoMaD providers drew on cash savings, with 21% taking money from an ISA. 4% said they had remortgaged, and 6% had taken out a loan.
We understand that the first few years of a child’s life are expensive. Between childcare and holidays, it’s tough to find any extra. However, it may be a good option for parents to put what little they can part with in an investment vehicle that works for both adult and child.
If you’re unsure how much to put away, we recommend speaking to a financial advisor for a better overview of your finances.
At Nutmeg, you can get started with just £100. Any contributions to a Junior ISA do not count towards your £20,000 annual ISA allowance and you’ll pay no tax on interest, capital growth or dividends on contributions below the £9,000 limit per tax year.
A word of warning: Although investing money on your child’s behalf is generally a good idea, only do so if you have the money to spare in the first place. There’s no point putting money aside for your child’s future if you haven’t first put away enough for your retirement.
- The survey was conducted by Populus on an online sample of 2,083 GB/UK adults between 19th November to 1st of December 2019. Data is weighted to be representative of the population of Great Britain. Targets for quotas and weights are taken from the National Readership Survey, a random probability F2F survey conducted annually with 34,000 adults. Populus is a founder member of the British Polling Council and abides by it rules. For further information see: http://www.britishpollingcouncil.org
- We commissioned Populus to conduct an online survey between 29 November and 1 December 2019.
- Predicted net returns based on all–time performance of fully managed Nutmeg Portfolio 7. Calculations don’t take inflation into account but include Nutmeg fees.
- We commissioned Populus to conduct an online survey between 29 November and 1 December 2019
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.
To open a Nutmeg JISA, your child must be under the age of 16 and funds cannot be withdrawn until your child turns 18. Tax treatment depends on your individual circumstances and may be subject to change in the future.
If you are unsure if a Junior ISA is the right choice for you and your child, please seek financial advice.