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The rising cost of living is cutting into the ability of parents to save for the future. Fewer than half of all parents raising a child think they will be able to save in the next 12 months, according to a January survey by the Office for National Statistics.
When Junior Isas (Jisas) were launched in 2011 as a replacement for Child Trust Funds, they were designed to offer parents a chance of building a sizeable nest egg for their offspring. Jisa tax allowances remain generous, even if putting the money aside is a bigger struggle than before.
How do Jisas work?
Jisas enable children to save up to £9,000 during a tax year in the form of either a cash deposit or a stocks and shares investment. Accounts can be opened only by a parent or legal guardian, though friends and family can contribute.
According to investment platform Hargreaves Lansdown, about one-fifth of Jisas are opened by parents for a newborn.
Contributions are locked away until a child turns 18, when accounts are converted into adult Isas. Savings are exempt from interest, dividends and capital gains tax. Later withdrawals are also free from income tax. A child can only hold one cash and one stocks and shares product at a given time.
“The cost of living is squeezing people’s ability to save, but what’s important is intergenerational wealth transfer,” says Malcolm Peacock, lead proposition manager at Hargreaves Lansdown. More than a third of HL Jisas are paid into by more than one person.
What goes into building a nest egg?
Parents are advised to have a savings goal in mind, as this will shape the type of Jisa which is most suitable. “If you take a newborn with an 18-year time horizon, that’s a really good long timescale and you can afford to take a lot of investment risk over that period,” says James Norton, head of financial planners at Vanguard UK.
Assuming 5 per cent growth and a parent maximising the tax-free allowance each year, this could well mean a pot of £275,000 is built up for the child by the time they become an adult. Platform Interactive Investor reports that it holds 1,211 pots worth between £50,000 and £100,000.
“Provided your investment horizon is more than a minimum of three years, it is always worth investing,” says Norton. “Now that doesn’t mean it should be 100 per cent equities. You need to balance the risk and reward by having the right amount in equities and bonds.”
As for costs, platform Hargreaves Lansdown has this week become the latest provider to drop Jisa fees, joining Fidelity, Interactive Investor and others.
What control do parents have?
Parents are responsible for managing their child’s account until the age of 18, at which point they will be able to withdraw funds. HL says around 75 per cent of its matured Jisas remain invested a year later. This might help allay some parents’ concerns that their child could squander savings as soon as they’re allowed.
Parents of a disabled young person may wish to apply to the courts for a financial deputyship order for when the child turns 18 so their access to the funds can be supervised. But the costs can be considerable and the option of keeping the money in their own name might appeal.
Financial advisers have also suggested that parents unable to maximise their own Isa allowance might be best served keeping hold of any savings, as adult Isas are more flexible. This also ensures greater control over funds in the future.
What about cash Isas?
Most parents still opt for cash, despite the possibility of a stocks and shares Isa performing better in the long term. Figures from HM Revenue & Customs showed that 668,000 cash Jisas were opened in 2020-21, compared with 275,000 stocks and shares Jisas.
In previous years this would have appeared unwise, but rising interest rates have brought cash Isas back into the picture for some and may well offer an opportunity for any parent looking to save money for a child on the verge of turning 16, the age at which they can open an adult Isa.
“There are a few options available to tuck away a nest egg for children until they become adults,” says Rachel Springall of Moneyfacts, a price comparison site. “The best cash Jisa [available nationally] come from Coventry Building Society and Skipton Building Society that pay 4 per cent.”
Springall adds: “The downside with a parent saving any cash for a child’s future outside of a Jisa is the temptation to dip into the pot in emergencies. A Jisa removes that option.”
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