Junior ISA could prove most valuable gift this year – expert

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Martin Lewis advises on moving your savings into ISAs

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With Christmas fast approaching, many will be feeling the squeeze. As families grapple with children’s wish lists, as well as rising energy and food costs, securing a gift that keeps on giving could never be more meaningful. Junior ISAs (JISAs) could be one of the best investment options to put a child on a stronger financial path into adulthood, experts from interactive investor have said.

Only a parent can open and manage a Junior ISA account on their child’s behalf, but anyone – including grandparents – can contribute.

Alice Guy, personal finance editor at interactive investor, said: “Starting a JISA while your children are young is a great way to introduce your children to the world of investing and building wealth.

“It could also provide a valuable opportunity to talk about money, for example, getting the annual statement is a good time to talk to them about shares, dividends and, hopefully, how their savings are starting to grow.”

To illustrate the power of starting early with a JISA in numbers, Ms Guy said: “Investing a £100 lump sum into a junior ISA could grow into £245 by the time they turn 18, assuming five percent annual investment growth, which is by no means a given.

“A lump sum investment of £100 made annually over 18 years could grow to £2,843 on that same basis. If you’re able to invest £50 per month, this could grow to £17,460 over 18 years, assuming that same annual investment growth, again this is very far from guaranteed. You can invest from £25 per month.”

People can invest up to £9,000 a year into a Junior cash ISA and no tax is payable on interest or investment gains, and they’re becoming an increasingly popular route to save.

At interactive investor, there are 100 JISA account holders with a value of more than £97,000 and the average age of these account holders is 15. Some of the largest JISA pots may have started out as Child Trust Funds and have been running since 2005.

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More broadly, the value of the average JISA on ii is £12,296, with regular monthly contributions averaging £145 a month. The average age is 10 years old, and some nine percent of JISA accounts are fully subscribed so far this tax year.

Ms Guy continued: “A major advantage of a junior ISA is that any capital gains or dividend income on investments will be protected from tax. That could potentially save thousands over time, especially once a child becomes an adult and begins to pay their own taxes.

“And, with capital gains tax and dividend tax allowances reducing in 2023 and 2024, following the recent Autumn Statement, there’s perhaps never been a more important time to use ISAs to protect our wealth.”

One key thing to note is that children will only get access to their junior ISA when they reach 18 years old. It will also automatically turn into an adult ISA, meaning the parent will no longer have any control over how they spend it.

So Ms Guy noted: “If that’s a concern, then a great alternative is to invest money in your own ISA and ear-mark it for your children. Or there’s nothing to stop you from investing in both a junior ISA and your own ISA if you can afford to.

“You could invest a small amount in a junior ISA and use it as a way of talking with your children about investments, and also invest in your own ISA for when they are older and potentially more ready to make their own investment decisions.”

Considering the long-term timescale, along with the current, turbulent financial climate, investing money rather than opting for cash savings will harness much higher returns.

There are currently no cash savings accounts that beat the UK’s staggering 11.1 percent inflation rate, meaning money kept in these accounts is losing real-time value.

Kyle Caldwell, collectives specialist at interactive investor, said: “While the stock market does not offer a free lunch, an up to 18-year time period gives a very good chance of riding out short-term ups and downs that come with the territory of investing. While cash is safer than investing, its Achilles’ heel is that inflation erodes its real value over time.

“The investment trusts held for my two children invest adventurously – in emerging markets and global smaller companies.

“I am prepared to take a high level of risk due to it being a buy-and-hold investment for nearly two decades. Against that, money in a Junior ISA is held in the child’s name, so parents cannot just dip into it when they’re short of readies.”

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