Here’s Why You Should Get Your Child A Junior ISA

You can invest £4,080 in a Junior ISA for your child, and you should make the most of it.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

We’re coming up to ISA time, and from 6 April we’ll each have a whole new allowance to use, with the proceeds protected from tax — and, of course, we still have what’s left of our existing 2015/16 allowance to use by by 5 April too.

I’ve previously explained how investing in shares is likely to get you far better rewards than cash, and a lifetime of seeing share values rise and not paying a penny in capital gains tax (and not paying any higher-rate tax on dividends) is a very attractive prospect.

Junior ISAs

It’s not just for adults either, as any child under the age of 18 has an annual Junior ISA allowance too, currently standing at £4,080 for the 2015/16 tax year. Now, you might wonder what the point is, when most children aren’t earning enough to pay any tax anyway — but there’s a very good reason.

You see, once you reach the end of each tax year, any ISA savings from that year retain their tax-protected status permanently — so even if your children aren’t saving any tax in their earlier ISA years, if they let it accumulate for the long term and don’t cash any of it in until they’re well into the tax-paying part of their lives, they could still save a bundle.

And when it comes to decades of compound returns, the early years really are best. But how much might it be worth?

Investing for life

Let’s suppose you plan to retire at 65, and once you reach the age of 18 you stash away £100 a month into your ISA (most people can’t afford to use up the full allowance) for the next 47 years — and buy shares every time you’ve built up a reasonable sum.

To get the most from your investments over the long term, you should reinvest any dividend, so we’ll assume you do that too. Returns from shares can be erratic in the short term, but over the long term, investing in shares has provided an average annual return of around 6%.

By the time you reach 65, assuming that fairly modest 6% annual return with dividends reinvested, you’ll have a tax-free pot of around £298,000. That’s not bad, but if you’d started out with a Junior ISA first, you’ll end up a lot better off.

What if your parents had started a Junior ISA for you when you were just five years old and had been able to invest £100 a month until you reached 18? Well, those extra 13 years would have more than doubled your tax-free nest egg to an amazing £660,000 — the first 13 years of your Junior ISA would be worth more than the subsequent 47 years of your adult ISA!

Can you catch up?

What would you need to do to match that £660,000 starting at age 18? You’d have to more than double your monthly investments, to £220, to achieve the same eventual result. It’s a sobering thought that, with the same annual rates of return, 47 years of investing £220 per month is matched by 60 years of investing only £100 per month.

And that’s why you should get a Junior ISA for each of your children, and start it as soon as you can.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

2 lessons from the HSBC share price soaring 159% in four years

Christopher Ruane looks at the incredible performance of the HSBC share price in recent years and learns some lessons for…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

After a 2,342% rise, could this FTSE 250 stock keep going?

This FTSE 250 stock boasts a highly cash-generative business model and has been flying for years. Is it time to…

Read more »

Investing Articles

It’s up 70%, but the experts expect the IAG share price to climb still further

Why didn't I buy when I was convinced the IAG share price was likely to soar? And is there still…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

2 UK stocks with recovering profit margins

This writer considers a pair of UK stocks with very different share price trajectories following the pandemic. Would he buy…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Will Trump’s tariffs squeeze this FTSE 100 giant’s profits?

Our writer looks at how the latest news around US tariffs might impact FTSE 100 company Diageo. Should he be…

Read more »

Investing Articles

Up 95%, is this FTSE winner the best high-yield star for me to buy now?

Do we have to choose between share price growth and high-yield dividends? In this case, over the past year, it…

Read more »

Asian Indian male white collar worker on wheelchair having video conference with his business partners
Investing Articles

2 dividend-paying FTSE shares that could benefit from the AI revolution

Our writer examines two dividend-paying FTSE shares and explains some of the opportunities and risks he sees in their exposure…

Read more »

Investing Articles

Up 140% and rocketing out of the FTSE 250! Is it too late for me to buy this red-hot stock?

Miniature war games hero Games Workshop has outgrown the FTSE 250 and is hammering at the door of the UK's…

Read more »