It’s great to get children into the savings habit early. Getting the next generation to focus on the benefits of saving and investing is crucial to help avoid a crisis when retirement rolls around. Here we take a look at the pros and cons.
Only a parent or legal guardian can open a JISA. Once open, however, anyone can contribute.
Pros
You can invest up to £4,260 a year tax free (2018). This can be either for stocks and shares or for a cash ISA. Top cash JISA savings rates are 3.5% but that is variable. When the child reaches 16 they take over management of the JIAS and at 18 they can roll the money into an adult ISA.
There’s the potential for inheritance tax planning as individuals can make gifts worth up to £3,000 in each tax year and these gifts will be exempt from inheritance tax on death. That’s £6k per couple (with the ability to roll in the previous year, if no gifts were made, so £12k in the first year, £6k after that). That easily meets the JISA max contribution.
Cons
The fact that the child has automatic access to the money at age 18 may make some people anxious, as there is nothing to stop the child withdrawing and squandering the lot.
One alternative is to use your own ISA allowance to save for your child. That way the money remains under your control until you decide to hand it over. But this means you have to eat into your own ISA allowance for the year.
If you need access to the money in an emergency then you’re stuck. The JISA is in the child’s name and the money can only be accessed by them once they reach 18. The exception to this is in the unfortunate event that the child becomes terminally ill or dies. At that point the assets are no longer tax-exempt and basic rate tax is due on any growth or income.
What to invest in?
If you invest £4,260 into a JISA each year that would total £76,680 after 18 years. Where should you invest that? There are a number of options but given the time frame it makes sense to take more risk.
Below in Table 1 we show the annualised returns for the different investments over the last 10 years. The returns are calculated based on that growth figure to give an idea of the potential growth over the next 18 years.
The savings account superficially seems to be a “safe” option. However, the 3.5% rate offered is variable, so it’s unlikely to be the same in 18 years’ time.
The FTSE 100 index return (+6.6%) is the equivalent of buying an index tracker and the return is only a little better than the savings account rate.
Index trackers attract attention because of their low cost, and many investors buy trackers based on the theory that fund managers can’t consistently perform better than the stock market.
But does this theory stand up to scrutiny? No.
One of the very positive aspects of this theory (called the efficient market hypothesis, EMH) is that it spawned a huge volume of research, much of it triggered because the theory seemed so instinctively incorrect.
The clear exceptions to “The Theory”
This research highlighted that there are well-established ways to consistently outperform the stock market index:
For retail investors, these four approaches do so consistently well that they blow a huge hole below the waterline of those who promote index trackers.
In Table 1 below you can see that all 4 approaches massively outperform a tracker, with the top spot being taken by the Dynamic Bonkers Portfolio, which is underpinned by our Dynamic Fund Ratings.
What are Dynamic Fund Ratings?
This simply means "buying winners". In the case of the Dynamic Bonkers Portfolio it means buying the single top fund from the whole universe of retail funds in the last 6 months. In 6 months’ time you review and select the new top fund from the whole universe and so on.
- If you achieved the same return in the next 18 years (as in the previous 10), the Dynamic Portfolio returns nearly 4 times that of the FTSE 100…
- …and Smaller Companies, High Yield and Value also return substantially more than the FTSE 100.
Given the timeframe, taking on more risk would make sense. However, if you feel uncomfortable with that then use an approach like sterling cost averaging (investing a set amount on a regular basis).
Again, you can use the “Bonkers” selection, which is currently Legg Mason IF Japan Equity Hgd, with the next 6 month review point coming up in September. This can be fun for the grandparents and the child as they see the profits grow!
ACTION FOR INVESTORS
- JISAs can be a great way to start saving for a child...
- ...but make sure you're aware of the pros/cons.
- Given the time frame, consider riskier approaches that have greater potential
FURTHER READING
Table 1: Investment options
| Strategy |
Investment per annum £ |
# years |
Total investment £ |
Annualised return (1) |
Total return £ (2) |
Growth in excess of investment amount £ |
| Dynamic Bonkers Portfolio |
4,260 |
18 |
76,680 |
18.9% |
574,732 |
498,052 |
| Baillie Gifford Japanese Smaller Companies |
4,260 |
18 |
76,680 |
17.7% |
506,352 |
429,672 |
| Liontrust UK Smaller Companies |
4,260 |
18 |
76,680 |
17.4% |
486,659 |
409,979 |
| JOHCM UK Equity Income |
4,260 |
18 |
76,680 |
12.4% |
277,092 |
200,412 |
| Schroder Recovery |
4,260 |
18 |
76,680 |
12.1% |
267,492 |
190,812 |
| Jupiter India |
4,260 |
18 |
76,680 |
10.9% |
236,324 |
159,644 |
| FTSE 100 index return |
4,260 |
18 |
76,680 |
6.6% |
148,053 |
71,373 |
| Savings account |
4,260 |
18 |
76,680 |
3.5% |
108,022 |
31,342 |
(1) Based on 10 years to 31 May 18
(2) Based on investing £4,260 per year and using 10-year annualised return shown