The gift that could prove the most valuable for your children this year

A Junior ISA can help set your children on a sturdy financial path.

In the run-up to Christmas this year, many will be feeling the pinch. As families grapple with children’s wish-lists, as well as rising energy and food costs, getting a gift that keeps on giving has perhaps never been more meaningful.

A Stocks & Shares Junior ISA (JISA) is a great way of investing for children to help put them on a sturdy financial path once they reach adulthood. Everyone wants something to open on Christmas Day. But there may also be scope for just a few less toys or gadgets that might fall into the ‘quickly forgotten about/dust-gathering’ category. A well-chosen stocks and shares Junior ISA has potential to grow year-on-year for your child, and even smaller contributions could add to a decent sum over time, tax-free.

• Learn about: Transferring a Junior ISA | the Junior ISA Annual Allowance | Friends & Family

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

At interactive investor, the UK’s second-largest DIY investment platform, there are 100 JISA account holders with a value of more than £97,000* and the average age of these account holders is 15. Of course, some of the largest JISA pots may have started out as Child Trust Funds and have been running since 2005. 

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 9% of JISA accounts are fully subscribed so far this tax year (i.e., maxed out the £9,000 annual tax-free contribution allowance).

On interactive investor, customers can open as many free Junior ISAs as they have children – there is no additional cost.

Great oaks from little acorns grow: how a JISA can kickstart children’s investment journey 

Alice Guy, Personal Finance Editor, interactive investor, explains: “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; investing a £100 lump sum into a Junior ISA could grow into £245 by the time they turn 18, assuming 5% 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 an £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. 

“A major advantage of a Junior ISA is that any capital gains or dividend income on investments will be protected from taxman. That could potentially save thousands over time, especially once a child become 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.”

Guy adds: “One thing to bear in mind is that your children will get access to their Junior ISA immediately when they reach 18-years-old. It will automatically turn into an adult ISA, and you won’t have any control over how they spend it. If that’s a concern, then a great alternative is to invest money in your own ISA and earmark it for your children. 

“Or there’s nothing to stop you 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.”

Kyle Caldwell, Collectives Editor, interactive investor agrees: “A Junior ISA is a great way to save for children or grandchildren without the worry of tax eating away at their returns. However, as a parent you need to be comfortable with how Junior ISAs work. In effect, when you take out a Junior ISA you are cutting a key for your child to use that can be unlocked when they turn 18. If they choose to, the money can be withdrawn in its entirety when they come of age. Parents who would like to avoid this happening could instead earmark some of their own adult ISA for their child or children, particularly given the ISA allowance is £20,000 a year, which not many people maximise.”

Tools available to help navigate JISAs

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “You do not need to be an expert stock or fund picker to see the benefits of opening a JISA. The investment universe is vast but there are plenty of tools available to help investors find products best suited to their investment goals. 

“All investments are for the long-term, and a JISA is a great example of this – with up to 18 years to grow. ii’s Quick-start Funds range, which offers a selection of low-cost funds, can be a great starting point when it comes to saving for your little one’s future. Our rated lists such as Super 60and ACE 40 can also help guide you through specific fund and investment trust picks that match your investment style and interests. Naturally, however, it is still investing at the end of the day, and the same risks apply; investments may go up or down, and you may end up with more or less than you originally invested.” 

JISA fund picks from ii’s experts

Dzmitry Lipski, Head of Fund Research, interactive investor, says: “For beginner investors, CT Sustainable Universal MAP Growth fund could be a good option. It is a one-stop, hybrid solution that incorporates actively managed multi-asset and sustainable investing with a focus on low cost. It is designed to provide consistent long-term capital growth by using a medium to high level of risk and targets an annualised return of 4% above inflation over five years. The fund can also hold as little as 40% and as much as 80% in equities.

“The fund is part of the CT Sustainable Universal MAP range - actively managed, combining strategic and tactical asset allocation with individual security selection and integrates ESG factors within the process and reviewed by independent Responsible Investment Advisory Council. Run by an experienced manager, Paul Niven, the CT Multi-Asset team has a successful long-term track record of producing strong risk adjusted returns in running multi-asset ESG products.”

Lipski continues: “Another option for your JISA is Montanaro Better World, which invests in small and mid-cap companies, which aim to help solving some of the world’s major challenges by supporting the United Nations Sustainable Development Goals. 

“The fund has been managed by highly regarded managers Charles Montanaro and Mark Rogers since its launch in April 2018. The managers focus on six impact themes: Environmental Protection, Green Economy, Healthcare, Innovative Technology, Nutrition and Well-being. Following a strict three-stage process the managers aim to establish if a company is making a good impact. This is done through a variety of screening tools and meeting company management regularly. The outcome is a concentrated portfolio of around 50 quality growth companies, benchmarked against the MSCI World SMID index. 

“Historically mid- and small-cap funds have outperformed their larger cap counterparts over the longer term, but they’re generally considered to be more riskier investments, so should be used mainly for satellite allocation in a global well diversified portfolio.

“Finally, in these uncertain times, F&C Investment Trust (LSE:FCIT) is as relevant today as ever, and well worthy of keeping in the bottom drawer. This globally diversified investment trust is a great one stop investment shop and is Britain’s oldest collective investment vehicle. At over 150 years old it has weathered world wars, the Great Depression, multiple boom and busts, and continues to serve investors through the generations.” 

Investing versus cash when it comes to saving for your children

Kyle Caldwell, Collectives Specialists, interactive investor, says: “Given the long-term timescale involved, investing the money rather than opting for cash is a no-brainer. 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 are 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.”