PARENTS can give their children financial head start with a cash pot worth tens of thousands of pounds for when they’re older.
A lump sum of cash for a child turning 18 could be used to pay for university or even be used a deposit on a first home.
Junior ISA is a tax-free savings account for those aged under 18, where you can save up to £9,000 a year on their behalf.
Unlike an adult ISA, the savings cannot be touched until the child turns 18, at which point the funds can either be withdrawn by the holder or transferred into an adult ISA.
Saving such a large sum as £9,000 a year would be a stretch for many families.
However, even putting away smaller sums regularly will make a huge difference over time.
Calculations by Rob Burgeman, investment manager from RBC Brewin Dolphin, show that starting at birth, a £50,000 pot could be built by the child’s 18th birthday on contributions of roughly £150-a-month, assuming annualised returns of 5% after charges.
A monthly investment of £50 would see a pot grow to £17,656 after 18 years.
And even saving just £25 a month into a JISA for the full 18 years, with typical annual returns at 5%, would see the pot worth £8,828 on maturity.
Rachel Springall, from data and comparison site Moneyfactscompare.co.uk, said: “Savers can choose a cash interest option or a stocks and shares, which in the long-term, may well outperform the interest rates on offer today.
“Children cannot gain access to funds until they turn 18 when it reverts to an adult cash ISA, but they can take control of the account at 16.
“The issue with a parent saving any cash for a child’s future outside of a JISA is the temptation to dip into the pot in emergencies.
“A JISA removes that option. If parents would like to keep the cash untouched by her children, say until they turn 21, they could approach a solicitor to discuss the options of locking any savings or potential inheritance money into a trust.”
As with adult ISAs you can choose between either cash or investment accounts for your Junior ISA.
If you want to set up a cash JISA you’ll want to find the top interest rate.
Currently, the top payer is Coventry Building Society with a rate of 4.95%, according to Moneyfacts.
You can open the account with as little as £1.
The second-best is offered by Nottingham Building Society with a rate of 4.85%, again the account can be opened with just £1.
The third in the list is from Loughborough Building Society with a rate of 4.8%, followed by The Stafford Building Society with 4.75%, Leek Building Society with 4.75% and Newbury Building Society with 4.65%.
Over longer periods of time, it can be worth investing cash to reap potentially bigger returns.
However, you need to understand that investments can go down and there is risk that you could lose money.
You should only invest if you fully understand the risks and also have cash savings in place too.
In this case, you need to decide if you wish to manage the investments yourself (DIY) or prefer a managed fund in which professionals make the investment decisions.
DIY ISA platforms, such as Hargreaves Lansdown, Interactive Investor and Vanguard, offer JISAs.
With these platforms, you’ll need to build your own portfolio and keep track of it.
It’s important to compare account charges, such as platform fees, fund charges, trading charges, and exit fees.
Of course, these fees will vary depending on which fund or stock you choose to invest in.
If you’re looking for a less hands-on approach, then a managed stock and shares JISA might be better suited to you.
Platforms like Nutmeg, Moneyfarm and Wealithy help customers choose an investment portfolio based on risk, while considering your investment goals.
