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Junior ISAs or JISAs are long-term savings accounts, which offer tax-free benefits, and they are used by thousands each year. To secure a Junior ISA, a child must be both under the age of 18 and living in the UK. There are two types of JISA – cash or stocks and shares – and parents can choose one or both methods.
These accounts can only be opened by parents or guardians with parental responsibility, however, it is possible for grandparents, friends or family to pitch in once it is opened.
As a result, a JISA could prove an excellent way to futureproof a child’s savings.
Sorting out finances and tidying these up for children as they go back to school is top of the agenda for many parents and guardians.
With this in mind, Express.co.uk spoke to James Norton, Senior Investment Planner at Vanguard, about how parents and grandparents will be able to take action.
Mr Norton drew attention to the increase in the Junior ISA allowance that many Britons may wish to take advantage of going forward.
For the 2020/21 tax year, this allowance stands at a sizeable £9,000.
This is, however, compared to the significantly smaller £4,368 allowance last year, giving parents and grandparents better opportunities to invest more money.
Mr Norton said: “There is a calculation which can be done to see what someone may be able to receive later down the line if their parents invested the maximum amount for them each year for 18, 21 or 25 years.
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“This is, of course, dependent on how long a parent would like to put money away for, as some will not want their children to receive the Junior ISA funds when they are 18.
“Based on £9,000 a year for 18 years, assuming a really quite modest return of five percent a year, an 18 year old would end up with more than £250,000, which is staggering.”
If a person chooses to let this amount grow for an additional three years, they could also increase the amount their child ultimately receives exponentially.
Mr Norton added: “Contributors, in this instance, would be putting away another £27,000, but actually if it was left until a child turned 21, you would have £337,000.
“If you left it for 25 years, then you would ultimately have £451,000.
“Junior ISAs are always a great way for people to invest for their children if they can afford it, but these numbers are frankly incredible.”
However, Mr Norton also suggested that investing in a stocks and shares Junior ISA could ultimately prove better than investing in cash.
He stressed the importance of having a strong cash reserve before investing, but also highlighted the benefits of doing so.
He said: “If you look at a more modest investment in a stocks and shares Junior ISA, where someone is investing £100 a month for 18 years, and assuming a five percent return, they would end up with roughly £34,500 – which remains a transformational figure.
“However, a reasonable cash return at present is one percent, which means for 18 years this would create £23,500.
“The difference is huge, and a lot of parents may mistakenly think they are doing the right thing by saving into a cash ISA.”
Nonetheless, Mr Norton did stress the importance of thinking about this kind of decision carefully to ensure finances are robust enough to weather any unexpected storms.
However, he concluded that once sufficient emergency cash was considered, taking some investment risk in the long term is likely to put Britons in a much better place.
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