Laying the foundations for your child’s future financial independence can feel like a big job, there’s no denying it. But if you plan ahead and start putting money aside when they’re still little, your child could potentially end up with a decent nest egg as they enter adulthood. So, where do you start, you ask? Well, investing in a Junior ISA could be a great way to boost your child’s financial future.
Why it’s a good idea to invest for your child
Putting money in a savings account for your child is a sensible thing to do. In fact, Brits are pretty good at saving for their little ones. According to a study from National Savings & Investments, 50% of British people say they had a savings account opened for them when they were children1. And most parents are willing to continue this tradition with their own children. But are cash savings accounts the best option? When you save money, you’re guaranteed to get back what you put in, plus a little bit of interest. In other words, your money will grow at the rate your bank is paying. But in the long run there’s a potential catch. Every time the interest rate you earn goes below the rate of inflation, the value of your child’s money will drop. Put simply, your child’s money will be worth less and they wouldn’t be able to afford as much as they used to. To see real growth, their money needs to grow at least at the same pace as everything else.
If you want your child to get inflation-beating returns, investing could be a great option. When you invest, there’s a risk that you could get back less than you initially put in. However, since your returns aren’t tied to a fixed interest rate, there’s also a chance that you could end up with higher returns. In fact, over the long term, the odds should be in your favour. Indeed, people who invested in the FTSE 100 and stuck with their investments for any 10-year period, between 1986 and August 2019, have had an 89% chance of making a positive return2. Since time is on your child’s side, investing could be a great way to give them the best possible start in life. And the sooner you start investing in their future, the earlier their money could potentially flourish and compound. Compounding is when any money made on top of your original investment is reinvested and generates more money. This means that your child’s money could be piling up with time.
What are the benefits of opening a Junior ISA for your child?
If you want to invest for your child, you could either open a General Investment Account and start putting money aside on their behalf, or you could pay into a Junior Stocks and Shares ISA. Investing in a Junior ISA comes with many advantages.
A Junior ISA could help your child’s money grow in a tax-efficient way
With a Junior Stocks and Shares ISA, you can invest up to £4,368 per tax year (subject to change) and your child won’t need to pay UK tax on any potential returns they make. This means that they’ll get to keep more of their returns. So, consider taking full advantage of your child’s Junior ISA allowance. If you can’t afford to pay in big lump sums, don’t worry, you can still build a nest egg for your child by frequently investing small amounts of money. For instance, if you open a Junior ISA for your child soon after they’re born and invest £50 a month, they could celebrate their 18th birthday with a pot worth £14,9673.
With a Junior ISA, your child’s money is locked in until their 18th birthday
The other good thing about holding a Junior ISA is that the money belongs exclusively to your child, meaning nobody can dip into their pot and slow down its potential growth. Even better, your child won’t be able to access their funds until they turn 18. At this point, they’ll gain full control over their savings and their Junior Stocks and Shares ISA will automatically turn into an Adult Stocks and Shares ISA, giving them the possibility to continue their investment journey.
How to open a Junior ISA for you child
With digital investing platforms, like Wealthify, opening a Junior ISA for your child has never been easier. All you need to do is choose the risk level that suits you and the amount you’d like to invest. With Wealthify, there’s no minimum investment - you can open a Junior ISA with as little as you want. Also, you don’t need much knowledge or experience to get started. We’ll do the hard work for you, from picking your child’s investments to managing their Plan on a regular basis. And if you want to help build a better future of the generations to come, opening an Ethical Junior ISA could be a good option. Not only will you give your child’s money a chance to grow, you’ll also be supporting companies committed to driving positive change in society.
2: Data from Bloomberg
3: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £11,653. If markets perform better, your return could be £19,059. Values correct as of 17/12/19.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
