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Our Guide to Junior Investment ISAs
As we approach the Christmas holidays thoughts turn to the giving and receiving of gifts particularly where children and grandchildren are concerned. But what if you want to do something more than buying just another toy or game for your loved ones, by say, helping to provide for their financial future, is there anything you can do?
The answer is yes and one way in which you can do this is to start a Junior Investment ISA for your child.
The Junior Investment ISA is a tax-efficient vehicle through which family and friends can save money on behalf of a child and do so from the ISA’s inception until the child’s 18 birthday, by which time they could have a nice little nest egg of their own.
So, what exactly is a Junior Investment ISA?
The Junior Investment ISA is based on the same principle as its adult peers that is it is a government-sponsored tax-free savings vehicle, within which, up to a predetermined sum of money can be invested and not be subject to either income or capital gains taxes while it remains in the shelter.
ISAs or Individual Savings Accounts were introduced by the government to encourage long term saving and the Junior ISAs were an extension of those goals.
The amount of money that can be invested in a Junior Investment ISA each year is set by the Chancellor of the Exchequer, however, for the tax year 2019/20 (which runs until April 5th, 2020) the figure is £4368.00.
Money can be invested in a Junior Investment ISA for a maximum of 18 years during which time it has the potential to compound and grow.
Note though that money invested in a Junior Investment ISA cannot be withdrawn until the child’s 18th birthday when it reverts to the child.
How can I open a Junior Investment ISA?
Applying for a Junior Investment ISA is typically done by parents, grandparents or legal guardian on behalf of their child or loved one. The parent or guardian looks after the ISA on behalf of the young person although in truth the day to day admin is largely managed by the ISA provider the application process which can usually be completed online is quite straightforward and involves some simple form filling with information such as names and addresses, national insurance numbers and bank account or debit card details.
Parents and guardians can add a lump sum to the Junior Investment ISA of up to the tax-free allowance. Or they can opt to make an initial deposit and then monthly savings thereafter Minimum contribution levels may vary between Junior ISA providers.
However, parents decide to fund the Junior Investment ISA the key point is that no more than the tax-free allowance can be invested within a given tax year.
What can you invest in through a Junior Investment ISA?
Unlike the Cash ISA, the Junior Investment ISA has a lot more freedom to invest and indeed it’s specifically designed to allow managers to invest in stocks and shares, managed funds, ETFs etc. The full list of instruments you can invest in on behalf of your child or loved one will vary from provider to provider and so it is definitely worth checking out what is and isn’t permissible with a particular manager before you apply for a Junior Investment ISA. In order to ensure the type of investments you have in mind are covered by that provider.
For example, Hargreaves Lansdown offers Junior Investment ISA accounts access to 3000 funds, UK and Overseas shares and a range of investment trusts and ETFs. Whilst Scottish Friendly simplifies matters by offering Junior Investment ISA accounts a choice of eight managed funds with varying risk profiles to invest in.
Who offers the Junior Investment ISA?
As well as the providers mentioned above there are many other companies that offer the Junior Investment ISAs. Many of these will be familiar household names including fund managers such as Fidelity and Vanguard, Legal and General and Standard Life Aberdeen for example.
Stockbrokers such as Hargreaves Lansdown, Charles Stanley, AJ Bell, Interactive Investor and Redmayne Bentley and others also offer Junior Investment ISA accounts. In fact, you can even open a Junior Investment ISA account through the Post Office.
Charges and fees and minimum investment and regular savings amounts can vary between plans and providers so it’s best to do your homework but it’s fair to say that all this competition between providers helps to keep those costs in check.
Note that unlike adult investment ISAs you can only have one Junior Investment ISA account rather than multiple plans with different providers however you can transfer funds between providers.
What are the major benefits of using a Junior Investment ISA?
The main benefit of Junior Investment ISA is undoubtedly the tax-free shelter it provides for savings. Long term capital growth could see the money invested into Junior Investment ISA appreciate over the lifetime of the account which can run to 18 years.
With regular investment and the right market, a Junior Investment ISA could grow very nicely indeed, if it’s invested correctly and all those gains will be made free of taxes. Something that would be very difficult to achieve outside of the vehicle.
What’s more, the Junior Investment ISA is specifically designed to allow minors to save money for a time in their life when they may need a lump sum perhaps to help towards university tuition fees, to fund driving lessons or the purchase of the car. The funds invested grow inside the tax-free shelter and can’t be accessed until the child’s 18 birthday and remain beyond temptations reach until then.
The Junior Investment ISA provides much more flexibility than its savings counterpart, meaning the funds invested in the ISA can be optimised for long-term capital growth which is likely to be the investment strategy most applicable for a minor investing for the future.
What are the risks of using a Junior Investment ISA?
The main risk in using Junior Investment ISA is the market risk of the investments within it. Stock and shares and associated funds can rise as well as fall in value and if financial markets take a turn for the worse then it’s possible that you could lose money rather than grow it for your children.
That said risk and reward are two sides of the same coin and regular saving for the longer term has been shown to be an effective way to grow our money and a well-diversified strategy can often outperform cash on deposit, which is usually seen as the risk-free alternative to stock market investment and saving.
The other consideration is that money invested in a Junior Investment ISA is locked away for the full term of the plan that is until the 18th birthday of the beneficiary. So, you won’t be able to dip into those funds on a rainy day and top them up later, as they are completely ring-fenced from you.
Are Junior Investment ISAs covered by the FSCS?
The FSCS or Financial Services Compensation Scheme was set up by parliament and is funded by the financial services industry and it can compensate eligible investors in the event of fraud or insolvency. Under current legislation, the scheme can payout up to £85,000 for savings accounts and £50,000 on investment accounts. A Junior Investment ISA would fall into the latter category, so in the event of the provider of the ISA or the custodian of the assets becoming insolvent, the FSCS would step in.
The implicit guarantee provided by the fund and the tax-free benefits of the shelter certainly helps to make the Junior Investment ISA an attractive proposition when considering investment for the next generation.
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