The Junior Individual Savings Account was launched in November 2011 as both a simple way for parents, other family members and friends to save tax-efficiently for a child's future, and to introduce children as early as possible to the 'savings habit'. They represent a decidedly attractive proposition because, as with adult ISAs, the income and capital gains generated by the underlying investments are not subject to tax. By starting to save early therefore, families can help to give their children a solid financial grounding.
To be eligible for a JISA, the child needs to be under 18 and living in the UK; the parent or legal guardian is required to open the account on the child's behalf. The account belongs to the child, but they can’t access it (other than in exceptional circumstances) until they turn 18, at which point the account is automatically rolled over into an adult ISA. They can, however, start managing their account on their own from the age of 16.
They've proved popular. According to the most recent HMRC statistics for which data is available, almost four million JISAs have been subscribed for, with the number of new accounts rising consistently every year since their launch.1 Their popularity is widely anticipated to grow however, given the recently announced substantial increase to the annual subscription limit. At launch, the maximum annual contribution to a JISA was £3,000 but this has risen steadily over the years and, for the 2019/20 tax year, up to £4,368 could be invested. Chancellor Rishi Sunak, delivering his first Budget, recently pledged to more than double the allowance for 2020/21, taking it to £9,000 – the biggest jump in the allowance since JISAs were launched.
Investing for children
Investing for children is, needless to say, a long-term exercise and, as such, investment trusts – a permitted holding within a Stocks & Shares Junior ISA – can be regarded as offering a particularly appropriate investment vehicle. As closed-ended funds, investment trusts don't experience inflows and outflows of investors' capital, and so are not required to dispose of assets, or to hold a proportion of those assets in the form of cash, in order to satisfy the needs of investors wishing to sell their shares in the trust. For other types of investment fund, speedy asset disposal can be problematic of course, and especially when markets are in decline, where those assets are illiquid in nature, such as real estate or unquoted shares.
Investment trusts therefore enjoy the benefit of remaining fully invested at all times, and the fund managers can maintain a long-term investment strategy without any disruption. For that reason, investment trusts are often regarded as having greater control over their investment decision-making and are thought to be well-suited to those with a longer-term investment horizon.
Responding to the Chancellor's recent raising of the annual JISA contribution ceiling, the Association of Investment Companies (AIC) has conducted an analysis of the effect this boost could have to an investor's accumulated funds over the long term. Given the nature of JISAs, they assumed an 18-year investment period and their analysis revealed that2:
- £9,000 invested in the average investment trust 18 years ago would have grown to be worth £44,700 at the end of February 2020, versus just £21,844 if the current £4,368 limit had been invested – a difference of over 100%;
- the difference would have been even greater if the £9,000 had been invested in the top-performing investment trust over the period, which would have returned £78,774, though bear in mind that past performance isn’t a guarantee of future results.
- for those who could have made a £9,000 investment over each of the last 18 tax years in the average investment trust – a total investment of £162,000 – their child’s nest-egg would now be worth £464,413, a truly life-changing sum.
Financial challenges for young people
Young people today face a wide range of acute financial challenges as they progress into adulthood, whether it’s repaying the heavy cost of further education or buying their first property. The average student debt among the cohort of borrowers who finished their higher education courses in 2018 was £36,000.3 Meanwhile, the average cost of a UK first-time buyer home is £220,000 … although of course this varies dramatically depending on where you live in the country – in the London Borough of Kensington and Chelsea, it's over £1.3 million!4
Some parents may understandably be apprehensive about the inherent risks of stock markets when investing for themselves, let alone on behalf of their children. One of the conditions that investors must accept when investing in equities is volatility over the short term. For example, on 19th May 2008, the FTSE 100 index of the UK's largest companies closed at 6,376. By 3rd March 2009, it had fallen to 3,512 – a fall in capital value of 45%. By 15th April 2010, it had risen back to 5,825, a 65% increase above the 2009 low point.
However, empirically derived industry data have consistently shown that, over the long term, ie 10+ years, stock market investments have had a much greater likelihood of delivering higher – and inflation-beating – returns than less volatile assets such as bank or building society deposits.5
A well-chosen basket of investment trusts – and many trusts have had an enviable track record of strong long-term performance – could therefore represent an attractive solution for parents seeking to help their children overcome the financial barriers they're likely to have to confront in the future.
1 Source: HMRC, Individual Savings Account (ISA) Statistics, April 2019
2 Source: AIC/Morningstar, share price total return to 29.02.20; annual investments are on 6th April from 2002 to 2019
3 Source: House of Commons Library, Student Loan Statistics, 16.12.19
4 Source: Zoopla, 23.01.20
5 Source: Financial Times, Investment trusts outperform open-ended cousins, July 2019
Equity: A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Shares: See equity. Also commonly called ‘stocks’.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment