The Junior ISA Clock Is Ticking

Posted by David G. Evans

UK's tax year-end is fast approaching and for some this means a last minute "use or lose" ISA panic. For adults the decision to invest is made easier by the fact that contributions can always be withdrawn.

With children's savings products such as the JISA, the decision is not as simple. The JISA does not allow withdrawals until the age of 18, and then the money belongs to the child (now adult). Consequently there is no right or wrong - it just depends.

2015 / 2016 JISA Allowances The 2015 / 2016 JISA limit is £4,080

JISA can be either a Cash JISA that pays a rate of interest on a deposit, a Stocks and Shares JISA that generally invests in equities, or a combination of both.

Why a Junior ISA?

There are obvious, and very good reasons for investing in a JISA – getting them into the savings habit, building up a nest egg, financial education and so forth. 

There are also less obvious reasons. Why bother if they will never earn enough income from these savings to pay tax? Yes, we could come up with hypothetical scenarios, but this is not the point.

A maturing JISA will automatically convert it into an adult ISA, whereas withdrawing the money requires a conscientious decision and action. This is an important difference.

The preservation of tax status means that any income will continue to sit outside the reach of the tax man into their adulthood when they start paying tax.

In the non-JISA world, it is quite likely that the savings pot was dipped into and the returns were not as good as those offered by JISA providers. Consequently as adults, they are likely to be sitting on a smaller pot of money. However, from the age of 16 they are able to move it into an adult ISA.

"A maturing JISA will automatically convert it into an adult ISA from the age of 16, whereas withdrawing the money requires a conscientious decision and action."

Why a stocks & shares JISA?

One investing “theory” says that adults should reduce the risk in their investments as they get closer to retirement. 

Getting The Savings Bug

What is relevant from this is that children have longer time horizons and therefore can afford to take higher risk with their money. The peaks and troughs of equity markets become less concerning over longer time frames.

Of course you would be better off buying stocks the day after a market crash instead of the day before, but JISA investing doesn't necessarily work like this. Your child is only investing a fraction of their savings pot – 1 year or 1 month out of a possible 18 years of allowance – at any point.

 

Let's look at an example to illustrate :

Say your child was born in January 1987 and you immediately invested in a FTSE 100 stocks & shares ISA. The famous 1987 stock market crash saw the FTSE fall from around 2,400 to 1,600 and your child's investment lost 1/3 of its value. But that is only 1/3 of the value at that point - which represented one years allowance, or 1/3 x 1/18 of the total amount that could be invested.

The next year your child is investing their annual allowance at a cheaper level of around 1,800. In doing so they are lowering their average purchase price as they increase their investment.

Fast forward to 2005 when your child turned 18 and the FTSE is now somewhere between 4,000 and 5,000. From here either 2,400, 1,800 or 1,600 look like good entry levels and your child's portfolio looks rather healthy despite the patchy start.

"children have longer time horizons and therefore can afford to take higher risk"

Timing is more relevant when it comes to selling. Had our example child turned 18 at the end of 1987, the situation would have been completely different. In such situations it pays to hold the investments in an adult ISA until a more appropriate time to sell.

The higher risks translate into higher rewards. Shares gain value from increases in share prices and from dividends. I'll spare the numbers, but suffice to say it is generally accepted that shares tend to perform better over the long run than cash or bond investments.

2015 / 2016 JISA Allowances The 2015 / 2016 JISA deadline is 5th April

HootLoot's view is that a balanced Stock and Share ISA is generally more appropriate for a child's investment. In the current interest rate environment, cash ISAs offer little value for long term investors. The caveat is the uncertainty of a potential BREXIT, which may justify a temporary cash ISA.

What other options are there?

Depending upon your family circumstances there may be a possible compromise. If parents, grandparents or other trustworthy family members are not using their ISA allowances, these can be used to provide the withdrawal flexibility JISAs lack. More generous adult allowances (£15,240) are another benefit of this route. 

“Make the most of unused tax allowances in the family”

Alternatively if parents do not want to give their children the money, they can "lend" it to them. Children will be responsible to repay parents the "loan", but will benefit from any gains (or losses) on the investments. Arguably this will provide a more educational experience than simply being handed a sum of money.

Junior ISAs and HootLoot

Wherever you invest your child's JISA allowance, HootLoot is the perfect accompaniment. HootLoot bridges the gap between an abstract JISA account and teaching children how to save and manage money. HootLoot providing the interactive tools, resources and bookkeeping to get children and families on the right path. Learn more about how HootLoot can help your family now!

 
 
 
 
 
 

 

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