If you have a new baby, saving for their 18th birthday may not be at the top of your to-do list, but with generational wealth planning becoming more topical and the advantages of starting early more widely recognised, it may be worth moving it up there.
Parents and grandparents often wish to start a savings account for a new member of the family, typically in an account specifically badged for children, a savings account of their own which is ringfenced for the child, or in a Junior ISA (known as a JISA).
The JISA was introduced in 2011 and since then the number of applications has grown steadily each year. HMRC figures have revealed the number of accounts increasing from 794,000 in the 2016–17 tax year, to 907,000 during the 2017–18 tax year*. There are two types: the cash Junior ISA and the stocks and shares Junior ISA.
A child can have one or both types and in the 2019 to 2020 tax year, the savings limit is £4,368. The main advantage of the JISA over a regular savings account is the ability to save money tax-free and long-term. The tax exemption may also be attractive to parents who have used all the tax-free savings allowances of their own in an adult ISA.
Another appeal may be the money being locked in until the child is 18, stopping either the child or parent, dipping into it. When the child reaches 16 they can become the registered contact for their JISA but cannot take any money out of it until they turn 18.
Some cash JISAs also currently offer better rates of interest than a cash ISA**. Additionally, there is the opportunity for 16 and 17-year-olds already holding a JISA to open a cash ISA as well giving them the option to save up to £24,368 each year for those two years.
Start saving as soon as you can
The accumulated interest that builds up over 18 years rather than say 15 or 10 makes a big difference to the amount available to the 18-year-old so it pays to start saving as soon as possible.
Cash or stocks and shares JISA?
This depends upon when you start saving. History shows us that long-term investments in the stock market produce a better return than relying on the interest paid in a cash account. So, if you start saving into a JISA soon after the birth of your child, and they wish to take the money out at the age of 18, there is time to weather a downturn or two in the stock market, plus hopefully enjoy some significant growth. However, if you leave it until later to start, a more cautious approach may be appropriate
Investing for your children’s future is key to your wealth management strategy and there are tax incentives to be explored. To find out more about our savings and investment services go to https://www.lighthousegroup.plc.uk/services/savings-investment/ or call 0800 085 8590 to book a complimentary initial consultation.
Important Information The value of your investments can go down as well as up, so you could get back less than you invested.