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When it comes to investing for children, Junior Isas (Jisas) should be the first accounts to consider, advisers say, as they allow parents to build up a sizeable tax-free pot on their child’s behalf.
Launched in November 2011 to replace Child Trust Funds, Jisas were conceived as a long-term savings vehicle. They are tax-efficient investment accounts akin to an adult Isa. In this tax year, up to £4,128 — the equivalent of £344 a month — can be squirrelled away in a Jisa.
Money in Jisas cannot be accessed until the child’s 18th birthday, when control automatically passes to them. For some, this raises concerns that teenagers could fritter away the money their parents and relatives have saved. But the launch of a range of new Isa products designed for young people such as the Help to Buy Isa and new Lifetime Isa could help youngsters keep up the savings habit.
Keeping it in cash
Despite the fact that these are long-term investment schemes, 72 per cent of Jisas opened since their inception have gone into cash rather than shares or funds.
“It’s difficult to decide whether to opt for a straightforward cash Jisa or a stocks and shares-based Jisa. There’s no right or wrong. It’s down to each adult and their attitude to risk,” says Andrew Hagger, personal finance expert from Moneycomms.co.uk.
“With a cash Jisa you know your money is 100 per cent safe under the Financial Services Compensation Scheme and there are no management charges to pay. However, the downside is that interest rates, as per the wider savings market, are very low at present.”
If you want to stay in cash, however, there are very few accounts paying above inflation at 3 per cent. The top account comes from Coventry Building Society which pays 3.5 per cent. Alternatively, you can get a rate of 3.25 per cent with Nationwide Building Society or 3.15 per cent with Tesco Bank’s Jisa.
Alternatives to Jisas include premium bonds, National Savings & Investments’ children’s bonds, children’s savings accounts or bare trusts. Shares or funds bought under a bare trust arrangement can be accessed before the age of 18. However, with these, the income and gains are taxed on the children rather than being tax free as with a Jisa.
Choosing a stocks and shares Jisa
Most advisers recommend saving for children using stocks and shares because a long timeframe is more likely to bring higher returns. The idea is that time is on children’s side when it comes to Jisas.
Tim Bennett, partner and head of education at Killik & Co, says: “The sheer length of time over which a Jisa investment, if left alone, can compound makes it attractive. For example, at any chosen growth rate a one-off contribution of £4,128 when a child is born will be worth more, aged 55, than the savings of someone who has contributed every year for 10 years between the ages of 45 and 55.”
Which Jisa should you choose?
Maike Currie, investment director for personal investing at Fidelity International, recommends considering a “set and forget” fund such as a low-cost, low-maintenance global exchange traded fund or tracker fund. Alternatively, she says, if you prefer a global fund that adopts an active approach then consider the Rathbone Global Opportunities Fund or the Fidelity Global Special Situations Fund, both of which have a strong record.
Patrick Connolly, a chartered financial planner at Chase de Vere, an independent adviser, likes global or UK funds because most parents want to benefit from stock market returns but not take excessive risk. He likes the Jump Junior Isa from Witan Investment Trust which has been running since 1909 and invests in shares listed around the world. It uses 12 different specialist fund managers. This is the product Mr Connolly uses for his son’s Jisa.
He also likes the HSBC FTSE All-Share index, which aims to replicate the performance of the FTSE All-Share index, which is a main UK stock market index. It has a very low charge of only around 0.07 per cent a year. He also likes the Rathbone Global Opportunities fund, which focuses on out-of-favour growth companies. For those wanting to take more risk, he suggests taking a look at the JPM Emerging Markets fund.
Jason Hollands, managing director at wealth manager Tilney Group, urges parents to invest globally rather than narrowly focus on the UK. He likes Fundsmith Equity and Lindsell Train Global Equity, as well as popular investment trusts such as Scottish Mortgage or Foreign & Colonial. For children with a medium-term horizon of less than five years, Mr Hollands suggests a more conservative approach might be more appropriate than one wholly exposed to stock markets. Multi-asset choices worth considering include RIT Capital Partners or the Threadneedle Dynamic Real Return fund, he says.
Jonathan Raymond, investment manager at Quilter Cheviot, recommends a mix of growth and quality companies and has good levels of geographical diversification with exposure to UK stock markets and those from further afield. He likes Liontrust Special Situations fund, Monks Investment Trust and Janus Henderson Emerging Markets Opportunities fund
Michael Martin, relationship manager at Seven Investment Management (7IM), likes multi-asset funds such as 7IM Adventurous Fund, which he says offer globally diversified exposure to a range of sectors and asset classes. He also likes Witan Investment Trust.
Finally, Sarah Coles, personal finance analyst at Hargreaves Lansdown, says some parents might like to start with a low-cost tracker funds, including funds that track the UK All-Share index, such as the Legal and General UK Index.
“Others might prefer to rely on the expertise of fund managers, which can include global funds like the highly regarded Lindsell Train Global Equity fund, and those exposed to emerging markets like Stewart Investors Asia Pacific Leaders,” says Ms Coles. “Smaller companies are also worth considering, and we rate the Marlborough UK Micro-Cap Growth fund.”