It’s good to see that Junior ISA subscriptions are going up year on year, but it’s still a minority of parents that make use of this allowance. That’s understandable. Much as we all love our kids, giving away our hard earned cash for them to enjoy when they hit age 18 might not feel like a top priority.
But step back for a minute and think about the advantages – here are five to be going on with:
1. Investment choices
Junior ISAs can invest into both cash and the stock market, so you can choose what’s best for your circumstances. If you need something accessible and low risk, then a cash Junior ISA is fine. If you need better long-term growth potential, stocks and shares might be better. Junior ISAs can do both, but cash remains the most popular choice. A lot of parents and grandparents go for this option because it’s lower risk and easier to understand.
But if you’re putting money away for younger children, it could be many, many years before they have access to the funds at age 18. That’s where stocks and shares can make more sense. See my earlier blog about the benefits of stocks and shares ISAs compared to cash ISAs here and the graph below from Boring Money gives and idea of the difference in long term performance between cash and shares.
2. No Income Tax or Capital Gains Tax
All ISAs help to keep your money away from the tax man. This is especially attractive when investing into stocks and shares over the long term – no worries about income tax or capital gains tax with an ISA.
Investment gains outside of an ISA can be subject to capital gains tax of up to 20% and income tax up to 45%, depending on your circumstances and the type of investment. If you can, it’s best to keep things simple by maximising ISA allowances.
So when Junior ISAs automatically switch across to an adult ISA at age 18, it’s good to know that withdrawals can be made with no need to declare profits on a tax return to HMRC.
Of course, you might even be able to persuade your grown-up offspring to keep their investment running for the longer term – think house deposits, university costs and all the other expenses that crop up later into adulthood.
3. Potentially reduce Inheritance Tax
ISAs themselves are not exempt from inheritance tax. When you die, any money you have in an ISA will form part of your estate, just like any other asset. That could potentially be a tax of 40% on assets above the available nil rate band (£325,000 per person plus an additional residence nil rate band of £175,000 per person in certain circumstances).
The point here, in relation to Junior ISAs, is that if you pay money into an ISA in your children and grandchildren’s’ names, that money is no longer yours. So the concept of gifting during your lifetime can help reduce the value of your estate and Junior ISAs could be a simple way to put money in trust for children until they reach age 18.
4. Long Term Growth Potential
A Junior ISA could be in force for 18 years before any withdrawals are made, if opened upon the birth of a child.. That’s a long time to benefit from stock market growth, even if it does mean ups and downs along the way. Too many people make the mistake of being overly cautious with children’s’ savings and cash can languish for years in low interest bank accounts.
In that respect, Junior ISAs are no different to adult ISAs. Always consider the purpose of the money being invested. Unless it’s for emergencies or planned spending in the next 5 years or so, you really should look at options that provide the potential for real growth, over and above the rate of inflation.
This image from investment platform AJ Bell shows how much £50 per month could grow over 10 years at a reasonable 5% rate of growth in a Junior stocks and shares ISA.
5. Financial Education
Talking about finance with your kids is one of the best ways for them to learn. And chances are they might pay a bit more attention if you’re talking about money that belongs to them – even if they’re not able to spend it yet!
Logging in and looking at their balance or even just reviewing their annual statement can help build financial literacy. This could be especially valuable for building resilience with investing. If children and young people can see their investment fluctuate in value over the years, they will be better able to cope with the emotional rollercoaster of pensions and investments throughout their working life.
So whilst you might not feel inclined to start saving and investing on behalf of the kids, choosing not to could be something to regret years down the line. A little bit of planning now could reap rewards in the future, so why not get in touch for a chat about how financial coaching could help all the family?