A record year for Junior ISA subscriptions – time to get started?

Nearly a million Junior ISA (JISA) accounts were paid into in the 2018/19 tax year. It was a record setting year with subscriptions totalling £974m.

Stocks and Shares JISAs are a clever and tax-efficient way to invest money for under-18s, there’s no UK income or capital gains tax to pay. With HL, you can start a Stocks and Shares JISA with £100, or from £25 per month.

With the annual allowance for JISAs recently growing from £4,368 to £9,000 – parents, grandparents and family friends can now put away more than twice as much for their little loved ones.

This makes them a practical way to plan and create a nest-egg for your child. You can choose to save in a Junior Cash ISA or invest using a Junior Stocks and Shares ISA. Once an account’s set up by a parent or legal guardian, friends and family can easily add money online or over the phone.

Find out more about the HL Junior ISA

This article is not personal advice. All investments can fall and rise in value so your child could get less than you put in. If you’re not sure about whether an investment is right for you and your child, please speak to a financial adviser. Tax rules can change and the benefits depend on individual circumstances.

Why open a Junior ISA?

Children aren’t cheap, and especially for parents who want to support kids later in life, the sums can quickly add up.

Helping with higher education costs, home ownership and other milestones requires good planning and discipline as early as possible.

Cash or Stocks and Shares?

While children can have both a Cash and Stocks and Shares JISA, they can offer very different returns. If you’re planning to save for over five years (which parents saving for their children typically are), it’s normally the case that investing into the stock market has the potential to deliver significantly higher returns than cash. Of course, with investments there aren’t any guarantees – and unlike cash, investments can fall as well as rise in value, so your child could get back less than you invest.

While cash still appears to be the preferred option for JISAs, HMRC’s latest figures suggest the gap is narrowing. In 2018-19, 57% of the money added to JISAs went into Cash JISAs, down from 75% 5 years ago (see below).

Cash vs. Stocks and Shares JISAs: total subscribed (£millions)

Source: HMRC correct as at 20 July 2020

With the base rate at the lowest it’s ever been, it’s putting more pressure on savings rates. So it’s possible that we might see this trend continue as parents look to get more from their children’s money.

Why it pays to start a Junior ISA early?

When it comes to saving for the future, the earlier you start the better. This is especially true with investing. You could achieve better returns as your money has more time to grow.

For example, with a growth rate of 5% a year (after charges), if you started investing £100 a month when they’re born, your little one could have around £34,666 when they turn 18.

If you wait until they’re ten years old to start, you’d need to be putting aside almost three times as much – £295 a month – to expect the same amount at 18.

So how does it work? It’s thanks to compounding.

By letting increases build upon themselves, the investment pot grows. Over time the returns can stack up. Little at first, but year on year the amounts gained can increase.

Investments in a JISA can only normally be accessed after the child reaches 18, so they could be quietly compounding for nearly two decades before there’s any possibility of using the money. This is music to an investor’s ears.

A lot can be learnt from the example of office secretary Grace Groner. In 1935 she purchased just three shares of her company Abbott Laboratories for $60 each. By the time of her death in 2010 her three shares had grown into over 100,000 shares that were worth more than $7 million.

While this shows the power of compounding it’s important to remember that the amount your child will get depends on the performance of the investments you choose. The value of all investments can fall as well as rise so they could get back less than you invest. This doesn't take account of inflation, which reduces the future spending power of money.

How to start investing in a Stocks and Shares JISA?

Gone are the days when the only investments available simply tracked the top companies in the market. Parents can now add a variety of funds to a JISA. This not only gives you access to more opportunities, but a diversified portfolio can also reduce risk by investing in more individual areas or markets.

Find out more about diversification

For inspiration, parents can see our new Wealth Shortlist. It’s designed to help build well-balanced and diversified portfolios. We’ve put funds under the microscope to make sure the list only contains the funds that our in-depth analysis shows have the greatest performance potential.

To use the Shortlist to build your child’s portfolio, you should:

• Be comfortable deciding if a fund fits your investment goals and attitude to risk.
• Know how to choose and maintain a diverse mix of funds to reduce risk.

For investors who don't feel comfortable building and maintaining a portfolio for their child we offer ready-made solutions, which are aligned to broad investment objectives. For anyone who wants extra help, you can also ask us for financial advice.

Find out more about the HL Junior ISA

Hannah Duncan is an investment writer, and founder of Hannah Duncan Investment Content, with years of experience producing content for global leaders in finance and retail.

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