How to Make the Most of a Junior ISA

How much you can contribute into a Junior ISA each year?

As of 6th April, the amount you can put into a Junior ISA (JISA) per annum has increased to £9,000 – quite a jump from the previous allowance of £4,368.

The tax saving this provides makes it an effective way of building up a nest egg for your children’s future to help with things such as a gap year, university fees, or to enable them to get a foot on the property ladder.

What types of JISAS are available?

You can choose to put the money into either a cash JISA or a stocks and shares one. In the current interest rate environment, the cash versions can attract quite generous rates with some as high as 4-5%. Another advantage is that they don’t have the volatility associated with the stock market, a particular issue at the current time.

Yet while the majority of JISAs tend to be in cash, this may be a wasted opportunity. Despite the recent turmoil, the stock market will usually outperform cash savings over the long term. As we have discussed in previous blogs if you can achieve higher returns , the impact of compounding can really add value. If you achieved a 6 per cent annual return a JISA that had £9,000 invested in it each year would be worth more than £290,000 after 18 years. As you can see, once compound interest kicks in, it can have a considerable effect. JISAs that had smaller sums of £50 or £100 a month invested into them would accumulate pots of £19,464 or £38,929 respectively.

So if you’re wanting to use the JISA as a vehicle for a long-term investment to give your child the best start to adulthood, cash may not the most effective way to do so.

Would a monthly contribution into a JISA be an appropriate option?

Both annual and monthly savings will have advantages and disadvantages. However, whether its monthly or annual amount, any savings are better than none at all.

What are the Inheritance Tax Implications when using JISA’s?

Parents or guardians are the only ones who can actually open a JISA but grandparents can pay money into the account. This can be a productive way of using up their annual gift allowance. They do just need to bear in mind the Inheritance Tax rules, though, especially now the JISA allowance has increased. The annual gift allowance on an Inheritance Tax free basis is £3,000 per donor (with one year’s allowance carried forward). Inheritance Tax could be charged on anything over this limit if you pass away within 7 years of making the gift and have an estate in excess of the inheritance tax allowance at the time. Gifts of up to £250 per person can be given during the tax year as long as another exemption has not been used on the same person.

What happens to the JISA when the child turns 18 and becomes an adult?

Once your child turns 18, the JISA becomes theirs. They can either access it directly or transfer it into an adult ISA. This encourages them to develop a lifelong interest in money and helps build up a great investment discipline. In fact, the Government’s decision to increase the JISA allowance was all part of its aim to create a generation of savers.

The new JISA allowance could mean that your child comes of age on a much sounder financial footing.

Sources

This is Money [How to build a £290,000 nest egg for your child with a Junior Isa: With tax-free limits doubling, here’s how to take advantage]

Express [Junior ISA allowance changes next month – but Inheritance Tax warning issued to families]

Gov.uk [How Inheritance Tax works: thresholds, rules and allowances]