Should you save towards your child’s future by opening a Junior Isa?

Saving and investing for yourself is hard enough during the cost of living, let alone thinking about your kids.

But saving or investing for a child’s financial future is still at the forefront of many parents’ minds – especially when soaring house prices, skyrocketing food costs and average utility bills that will soon reach £3,000 a year make that future look increasingly expensive.

Some parents will prepare by using their own £20,000 tax-free Isa allowance, with the intention of transferring some of this wealth at a convenient time in the future.

However, many parents will also save for their child’s financial future with a Junior Isa (Jisa).

With a Jisa, parents and other family members can deposit into a tax-free account without this being at the expense of their own personal Isa allowance. A Jisa must be set up by a parent or guardian, but anyone can contribute.

A Jisa can be opened for any child living in the UK under the age of 18 and parents can contribute up to £9,000 each tax year.

A third of people who have a Jisa do so to prepare their children for the future, according to research from Fidelity International.

About 22 percent use Jisas to save for education costs or advance their offspring’s careers, while 17 percent plan to teach their child the importance of saving.

James Hart, investment director at Witan Investment Trust plc, said: ‘With the rising cost of living, higher inflation and an uncertain economic environment, it has become more challenging for today’s younger generation to put money aside for their future.

“Choosing to invest in a Jisa is a great way to give children a head start in life. By starting to save early, you put your child or grandchild on the road to a solid financial future.’

However, one factor parents should be aware of before saving or investing in a Jisa is that once the child turns 18, it becomes their money to do with it as they please.

The child can actually take control of his account when he turns 16, but he cannot withdraw the money until he is 18.

While parents may hope that all of their hard-earned savings go toward something sensible, such as a down payment on a home or college tuition, ultimately they won’t have the final say in how the money is spent.

For anyone who fears what their 18-year-old son or daughter might do with a sudden windfall, using their personal Isa benefit is a more attractive alternative.

Should you save or invest in a Jisa?

For those who choose the Jisa, the next conundrum is whether to save or invest.

Junior Cash ISAs offer parents better returns than other savings vehicles with the added benefit of a higher interest rate, all of which are tax-free.

The average junior cash Isa pays 3.11 percent, according to Moneyfacts, while the best rates pay 4 percent or more.

Bath Building Society currently pays 5 per cent, but only for those who live or work in Bath. Also no transfers from existing Jisa’s are accepted.

Below, Bath, Coventry and Skipton Building Society are both offering junior cash Isa deals that pay 4 per cent and are open to all.

Swansea Building Society also pays 4 per cent, but again this is restricted to those living in Wales.

Whether someone chooses a cash Jisa or a stock and stock Jisa will largely depend on their approach to risk.

For those who start early – and therefore with a long-term horizon – investing is more likely to result in better returns.

Myron Jobson, senior personal finance analyst at stockbroker Interactive Investor, said: ‘Cash Junior ISAs are utterly pointless except as an option for teens approaching adulthood who may soon need to use their pot and therefore want to eliminate risk in the short term. of a sudden loss of value.

“Most junior Isa’s will be very long-term by nature because they won’t be accessible until the child is 18, there’s plenty of time to smooth out short-term stock market bumps.”

While stock markets can be volatile from day to day, a look at history shows that they have a knack for delivering returns that beat inflation over long periods of time.

“There are no guarantees in life – and that’s something long-term investors should be comfortable with.”

According to data analysis by investment firm Fidelity International, an investment of £55.50 a month from a child’s date of birth could see parents grow a pot worth more than £18,000 by the time they turn 18.

This was based on monthly contributions to Fidelity’s Jisa account, with an expected growth of 5 percent per year.

Emma-Lou Montgomery, associate director of personal investing at Fidelity International said: “Many parents want to boost their children’s finances by setting aside some money that will grow with them.

‘While it can be difficult to know exactly how much to invest, our grade analysis shows that putting £55.50 a month into a Jisa can add up to a healthy £18,000 pot once your child is an adult.

The reality is that your investments are likely to go up and down, and while you may be able to save a little more some months, you may be tempted to save a little less in other months.

“But what the numbers show is that by starting early and committing to a regular savings plan, you’re saving for their future child’s play.”

“With the end of the tax year in sight, there’s no better time to open that Jisa and take advantage of tax-free savings.”

How to start investing?

Not so long ago, investing typically required a stockbroker or financial advisor and a willingness to pay a large portion of the commission.

Now armed with a computer – or just a smartphone – investors can use a DIY investment platform or online broker and have the wealth of research at their fingertips to hopefully build a fortune for their child.

DIY investment platforms act as a place to buy, sell and hold all of their investments and to have tax friendly packaging around them if they choose to invest in an Isa.

When weighing up the right one, it’s important to look at the service it offers, including whether it includes Jisas, along with handling fees and transaction fees, plus any other additional fees.

We’ve written a comprehensive guide to the best and cheapest DIY investment platforms that can help.

Once one has chosen which platform or provider to invest through, the next daunting task is to choose what to invest in.

Many of the investment platforms allow clients to invest in a variety of funds, investment trusts and, if they’re feeling particularly daring, individual stocks and shares – although the range of choice varies by provider.

If they prefer to leave their money in the hands of fund managers, that certainly has its advantages as it takes some of the stress and research out of selecting individual stocks.

Interactive Investor has revealed which funds and mutual funds are currently the most popular among its Jisa investors.

In terms of funds, actively managed Fundsmith Equity is the most held fund among its Jisa clients.

Three mutual funds are in the top 10 most held investments. These are Scottish Mortgage Investment Trust, F&C and Alliance Trust.

For those who would rather not have to make investment decisions themselves, there are options that mean they don’t have to.

Online investment management services such as Nutmeg, Moneyfarm and Wealthify invest on behalf of consumers based on their risk appetite.