As the end of the financial year appears on the horizon, now is the time for many to get their financial ducks in a row. Whether it’s filing your taxes for the year, using what’s left of your ISA allowance or opening an account for a child, this is the time of year to do it.
November marked the 10 year anniversary of the Junior ISA. As an effective alternative to cash savings, the JISA lets parents save up to £9,000 a year for their kids tax-free, with any earnings exempt from income tax or capital gains tax. It’s popular too, too; in the 2019/20 tax year, around 1 million JISAs were opened.
In this article, we’ll take a look at just how much you could actually save by investing in a JISA. We’ll also explore the difference between cash JISAs and stocks and shares JISAs to help you decide what’s right for you.
How much can I save with a Junior ISA?
As we’ve already mentioned, the maximum you can save each tax year in a JISA is £9,000. So, if you contributed the maximum amount across the 18 years, you’d have put in £162,000. This would be a healthy pot for any teenager, but we also have to take into account returns.
Depending on what you invest in and how good the returns are, you could expect to have a pot worth somewhere between £200,000 and £280,000. Of course, with investing, you could always get back less than you put in and past performance no indicator of future returns. These are simply the figures if we assume a rate of returns between 2.5% and 5.5% (we’ll go into where these come from in the next section).
Obviously, not everyone can afford to put away £9,000 a year for their child. These figures are just to illustrate how much a JISA can grow over time and how big a difference that can make.
Should I invest in a cash JISA or a stocks and shares JISA
When anyone opens a JISA for their child, the biggest decision to make is whether to opt for a cash JISA or a stocks and shares JISA. Both have their merits and each saver will have their own reasons for choosing one over the other.
Of the 1 million JISAs opened in the 2019/20 tax year, 70% were cash JISAs and the rest were stocks and shares. This isn’t particularly surprising; cash has long been viewed as a safe haven for savings. When it comes to a child’s future, people do tend to be conservative with their money.
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At present, according to MoneySavingExpert, the best rate out there for a cash JISA is 2.4%. While this is a decent return and would see the pot grow considerably over 18 years, it may not be enough to significantly outpace high levels of inflation.
For the 30% that went with a stocks and shares JISA, the rate of returns of more difficult to predict. With a JISA being locked until the child turns 18, the scope tends to be long term. This means people can take on a little more risk in their JISA portfolios, as daunting a prospect as that might be.
We’ve estimated an annual average return of 5.5% – less than most of our ISA portfolios, historically. Again, past performance is no indicator of future returns, but stocks and shares portfolios can net higher returns than their cash equivalents.
At 2.5% – the top end of current cash JISA rates – the pot after 18 years would be worth £206,514. That’s over £40,000 in interest alone. At 5.5%, however, the pot would grow to £279,924 over the 18-year period. Of course, the holder is taking on more risk, but the potential for returns is far greater.
So, when it comes to picking between a cash JISA and a stocks and shares JISA, we’d always recommend the latter. When investing for the long term, cash accounts just don’t offer compelling returns. Of course, everyone’s financial situation is different and a low-risk portfolio suits certain goals, but generally we’d recommend stocks and shares for all the reasons we’ve discussed.
If you’d like to find out more about how a JISA could help you save for your child’s future, follow the link below. Alternatively, get in touch with a member of our investment consultancy team if you have any questions or want to discuss your options.