Given recent events, it’s hardly surprising that the 106% increase in the Junior ISA allowance announced by the Chancellor in his budget on March 13th may have slipped most people’s attention.
From 6 April 2020, it’s now possible for under 18s to invest up to £9,000 per annum using a tax free Junior ISA (or existing Child Trust Fund) and for those aged 16-17 to save a further £20,000 into a standard Cash ISA.
This provides the opportunity for parents and grandparents with excess capital or income to transfer wealth to the younger generation; perhaps to fund education; towards the purchase of their first property; or for their long-term future.
An important consideration is that at 18 the ability to access the funds passes to the child/grandchild. This also presents them with a further opportunity, as they become eligible to open/fund a Lifetime ISA, with the advantage of bonuses being added to subscriptions and which could be funded from assets already accumulated in their Junior ISA or Child Trust Fund.
The decision about where to invest contributions is of course significant in determining the outcome. Despite the historically low interest rates offered to savers by many banks and building societies, several institutions are currently advertising much higher rates for Junior ISAs (Coventry Building Society – 3.6%; NS&I – 3.25%). Of course it also possible to invest in stocks & shares. While this might be considered “risky” or a “gamble” by some and in the short term could well be, this overlooks the fact that despite the variability in returns, saving regularly over the long term has the effect of smoothing out the price at which funds are invested and would reasonably be expected to deliver a higher return than deposit based savings. Data from The London Stock Exchange shows the average total return (growth + dividends) from the FTSE All Share for the 18 years between 2002-2019 was 7.87% p.a.. The best year was 2009 with a total return of 30.12%, while at -29.93 2008 was the worst. If were to presume that by the end of 2020 the index finishes 25% lower this would reduce the average figure to 6.14%.
Simply using these figures to illustrate the benefits of compound growth; investing £9,000 p.a. for 18 years at a growth rate of 3.6% would produce £222,515, an overall return on contributions of 37.35%, while a rate of 6.14% would produce £281,867 and 73.99%; a monetary difference of over £59,000. While these figures take no account of any costs/charges associated with investing or advice and have no bearing on future returns they are helpful in understanding the considerable benefits that can be achieved by taking the long view.
As always, take advice from an expert who will guide you to the most suitable solution for your circumstances.