Making the Most of Junior ISAs (JISAs)
Good news! Yes, it is possible even in the current situation, however small. As of 6 April, the yearly amount you can put into Junior ISAs (JISAs) has increased to £9,000. Previously you could only put up to £4,368, so it’s quite a jump. This means that the tax-saving JISAs provide now makes them an even more effective way of building up savings for your children. And we all know how expensive those gap years, university fees, or property ladder footings can be!
Which type of JISA?
JISAs come in both cash or stock and shares forms. You can choose which you would prefer. Even in times of low-interest rates (like now!), the cash ones can attract quite generous rates (compared to ‘normal’ offerings) – sometimes even as much as 3.6%. Another advantage of these is that they don’t carry the investment risk that their stocks and shares counterparts do. So, if you are looking for a good level of interest where the money is strictly ‘safe,’ then the cash option may be better suited to you. As the lower risk option, it is understandable that cash JISAs tend to be the preferred option. However, you will find that many experts see this as a wasted opportunity.
Despite the recent volatility in the markets, they will generally outperform cash savings over the long term. So, the risk needs to be weighed up in accordance with your appetite for risk as to which option suits you best. As Wealth Manager, Jason Hollands, points out, ‘if you achieved a modest 6 per cent annual return, a JISA that had £9,000 invested in it annually would be worth more than £290,000 after 18 years.’ Compounding interest is a beautiful thing! As you can see, once it kicks in, it can have a considerable effect. So if you want to use the JISA as a vehicle for long-term investment, cash is probably not the best option.
Inheritance Tax Implications
JISAs need to be opened by parents or guardians, but grandparents can pay money into the account. This can be a productive way of using up their annual gift allowance. Inheritance Tax rules, though, do need to be considered, and even more so now the JISA allowance has increased. The annual gift allowance on an Inheritance Tax-free basis is £3,000 per donor (with one year’s allowance carried forward). So, anything over this amount would use up any nil-rate band in the seven years before the donator’s death.
Gifts of up to £250 per person can be given during the tax year providing that another exemption has not been used on the same person. When your child turns 18, the JISA, of course, becomes theirs. They can either access it directly or transfer it into an adult ISA. This encourages them to get a good financial start to life while also helping them build a healthy investment discipline. So do give JISA’s a thought if you are looking at ways to save for your children’s futures – they are a good place to start!