The run-up to the end of the tax year is when most people decide to get their finances in order. Whether it’s using up as much of your yearly ISA allowance as possible, consolidating your pensions or filling out your tax returns, the start of the year is a time to look ahead and think about your financial future.
So, why not include your child’s financial future in that thought process? When it comes to saving for kids, a Junior ISA can be one of the most effective ways to grow a healthy savings pot for your child before they turn 18 and can fend for themselves financially.
In this article, we’ll cover the basics of what a Junior ISA is – that’s JISA for short – and what the rules are. We’ll also explain why you might want one.
At Moneyfarm, we will launch our very own Junior ISA in February. It’s just like our regular ISAs, with active portfolio management and dedicated investment consultants. For all the details and to see what a JISA could do for your child’s financial future, book an appointment with our consultants.
What is a JISA?
As the name suggests, a Junior ISA is an investment portfolio for children. They operate much the same as regular ISAs but are designed to cater for people under the age of 18, with a focus on long-term investing and compound interest to drive returns.
There are two key types of JISA to choose from: the cash JISA and the stocks and shares JISA. The former allows the holder to earn interest on the cash they save, without paying tax on it. The latter, the stocks and shares JISA, means the holder pays no tax on any of the capital growth or dividends they receive.
Put simply, a JISA is a tax-efficient, straightforward way to put money aside for your child to access once they turn 18. Now, let’s take a look at the rules.
The rules of a JISA
Here are the key rules to be aware of if you’re thinking about opening a JISA for your child:
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- The child must be under 18 and living in the UK. This one goes without saying and, generally, the younger the child is when the JISA is opened, the better chance the wealth has of growing over time.
- The yearly limit on JISA contributions is £9,000. In early 2020, the limit for contributions in each tax year was doubled from £4,500 to £9,000.
- The JISA must be set up by a parent or legal guardian. Again, this is fairly obvious, but it’s something to bear in mind if you’re thinking about setting some money aside for a relative that isn’t your child.
- A child can take control of the JISA at 16, but cannot access the funds until they turn 18. This is an important one – for those two years, the child is legally able to make decisions related to the JISA but will be unable to spend a penny until they turn 18.
At Moneyfarm, we recently introduced a JISA to give our clients more options when they’re planning their family finances. Our JISAs are managed the same way as our ISAs, with all the transparency and support our clients are used to. All of our JISAs are built with the same focus on diversification, active management and long-term financial goals.
Why you should consider a JISA
So, why should you consider opening a Junior ISA for your child? The primary reason, aside from sound financial planning and the future of your child, is compound interest. This is the JISA’s secret weapon. We recently made a video about compound interest which you can watch here, but we’ll explain what it is in short now.
Compound interest can be summarised as “interest on interest”. This means that, as your investments generate returns, those returns start to generate interest of their own. You can think of it as a snowball effect, growing savings exponentially over time.
This is why it pays to get started early. The longer you have to invest, the more of an impact compound interest can have. For children, a JISA can grow through the top-ups from the parents, the returns of the portfolio and the compound interest over time, creating a potentially significant pot over the course of their first 18 years.
Secondly, a JISA is a good way to increase your annual allowance of tax-free investments (up to £29,000 a year when you factor in your regular ISA) and to pass your children some of your wealth without incurring charges.
Finally, a JISA can become an opportunity to teach a young adult about the importance of saving. The two-year period in which the child can control the account but not access the money can be instructive. It can teach them the importance of sticking with their guns and growing wealth over time, rather than giving in to short-term spending.
If you want to explore your options or see how a Junior ISA could benefit your child’s long-term financial future, take a look at our JISA page. Alternatively, get in touch with a member of the investment consultancy team if you want to discuss the product or your financial situation in more detail.