New born babies always look so innocent, but roll forward a few years to when that little bundle of joy becomes a toddler and you’re up against the tantrums of the terrible twos. Now try to picture what your little darling will be like when they hit 18; most parents hope they will have raised a prudent, responsible young adult.
Now, take that 18-year-old and hand them the £20,000 you have saved for them since the day they were born. How mature are they really? Can you predict how they would spend that cash? And, more importantly, will you approve?
If you are anything like me, there is nothing quite like cold, hard cash to focus your mind and quash unrealistic expectations.
This was the dilemma my husband and I faced when setting up our daughter’s Junior ISA. While building a meaningful investment pot is a laudable aim, as parents we must resign ourselves to the fact that Audrey, now aged two, could become considerably richer in 16 years.
Money put aside to pay for university fees or a deposit to secure a mortgage could potentially be squandered on foreign holidays and fast cars.
DIY Investing for Junior
Once we had squared the reality, we considered the tax-free investment opportunity too good to miss. After looking into our options we chose Hargreaves Lansdown’s Vantage Junior Isa as we wanted to make our own investing decisions.
We picked two funds; Artemis Global Income and Old Mutual UK Smaller Companies due to their exposure to long-term growth assets and proven track record over a market cycle. We liked the fact that the Artemis fund paid an income which we could chose to automatically accumulate, buying more units and harnessing the power of compound interest.
What the Experts Say
Morningstar analysts rate both of these funds highly, with manager Jacob de Tusch Lec at Artemis earning a Bronze Rating and Daniel Nickols at Old Mutual a coveted Gold Rating.
The fact that Junior ISA investments can not be cashed in until the unit holder reaches 18 means a longer-term strategy can be adopted, and we have committed to avoid tinkering with Audrey’s portfolio in response to market volatility.
Is Handing Teenagers Cash a Bad Idea?
Concerns have been raised regarding the structure of Junior ISAs – trusting that a teenager will make prudent long-term decisions with a sizable pot of cash is a gamble.
For Martin Bamford, a father of three and managing director at advisers Informed Choice, when it comes to Junior ISAs, the risks of unrestricted access at 18 outweighs the benefits of the tax-free status of these accounts.
“What worries lots of parents is the access to cash when their children celebrate their 18th birthday,” he said. “Few parents would want to facilitate the purchase of a fast car or motorbike for their kids at 18 years old, yet by saving into a Junior ISA you are giving them a signed, blank cheque to spend the cash as they wish.”
A better approach, he said, is to consider is using some of your own unused ISA allowance and allocating this money to your children, said Bamford.
“If you have fully used your ISA allowance, then there is little harm in investing the money in an ‘unwrapped’ account and suffering a little tax on the gains or income in return for control over the pot of money in the future,” he said.
As his eldest child qualified for a Child Trust Fund, the parents accepted the government contribution and her grandparents make a modest monthly deposit.
“Her mother and I also contribute monthly to an unwrapped investment account, invested in a global equity tracker fund, which is earmarked for her university fees,” he said.
“She is nine years old now and we are yet to pay any taxes on this investment.”
For the two youngest, a trust fund has been created from an inheritance, which is on track to pay for their higher education.
But for those considering keeping their children’s money within their own ISA, it is not as clear cut as it may seem. Should a parent die before the money is gifted, for instance, it may not be directed to whom they had in mind, especially if their wills are not up to date. In addition, as the money would remain in their estate, it could be liable for inheritance tax.
What’s more, for those who opt to ring fence the money within their cash ISA, it is vital to do the sums carefully as the rates on accounts have been dropping for quite some time and are simply not as competitive as Junior ISAs. The best Regular Saver ISA, for instance, is currently paying 2% with Buckinghamshire Building Society.
Figures from SavingsChampion.co.uk show that based on a monthly deposit of £100 over 18 years, if this rate were to remain the same, the return would be £25,973. While the best Junior ISA currently on offer is Coventry Building Society’s Junior Cash ISA, pays 3.25% and would return £29,246 on the same savings – a difference of £3,273.
Education is Key
For wealth manager Philippa Gee, a Junior ISA is a great way for parents to save for their children.
“It instils in your child that saving is a good idea, being tax efficient is equally sound and that using an ISA isn’t a scary and technical investment to set up – meaning that your daughter will be more likely to hold and invest in an ISA later on.”
Ms Gee, who uses stocks and shares Junior ISAs as savings vehicles for her two children, said that money education if more than half the battle when it comes to these accounts and avoiding problems after their 18th birthday.
“Its important that kids understand that the money is there for a purpose and that ideally they should continue the savings habit, no matter how much it is each month,” she said.
“You can include your child, as time goes by, on the reason why you chose the funds you have selected and look at what funds she would choose.”
Patrick Connolly, a certified financial planner at advisers Chase de Vere, agrees but pointed out that when it comes to saving for your children, the right decision will be determined by what you are trying to achieve, over how long and with what level of risk
“Factors such as the future access the child will have to their money, tax considerations and investment strategy are all important parts of the decision making process,” he said.
“I have a 13-year-old son and am putting monthly premiums into the Jump Junior ISA, which is invested in the Witan Investment Trust (WTAN). This is a diversified global equity trust which I’m not expecting to have to change,” he said.
