Many of us take advantage of the Stocks & Shares ISA wrapper in the UK, although maybe not as many as expected. Around 12m adults had ISA accounts in 2020 to 2021. That’s down from 13m in 2019 to 2020, and only a fraction of these are Stocks and Shares ISAs.
However, today I want to look at the Junior Stocks and Shares ISA. As the name suggests, this is an investment account within the ISA wrapper and the contents belongs to a child. I can open an account for a child as soon as they’re born, allowing for maximum compounding growth.
Why start a Junior ISA?
A Junior Stocks and Shares ISA offers tax-efficient savings, long-term investment benefits, and the potential to secure someone’s financial future.
I could start by committing to contributing £100 a month (this is essentially the value of a firstborn’s child benefit in the UK) or less. Over the course of their childhood, I’d continue contributing to the child benefit, or more money if I had it available. Thus, the pot could grow substantially over time.
Naturally, each of us will have different ideas as to how the money could be used. At the age of 18, when the portfolio becomes accessible, it could be used to fund a university degree, a house purchase (if they’re very lucky), a gap year, or even backdated school fees.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
How it works
A Junior ISA works by allowing me to save and invest money on behalf of my child in a tax-efficient account until they reach 18.
Specifically, via the Junior Stocks and Shares ISA, I can invest the money into funds and stocks. That could achieve better returns that I could normally achieve in a Junior Cash ISA.
The money inside the account can’t be withdrawn by me at all, or by my child until they turn 18. So, I can look to enhance growth by harnessing the power of compounding.
Compound returns is essentially the strategy of reinvesting any income annually. It allows the portfolio to grow by earning interest on the original investment as well as the previous years’ returns.
So here’s an example as to how I could make it work for me and my child. I’m going to contribute £200 a month with around half of that coming in the form of the child benefit.
But for the purpose of the calculation, I’m going to increase this contribution by 4% a year. And I’m assuming some increases in the child benefit allowance, and my personal earnings inflation.
For example’s sake, I’m going to run two calculations. One with a modest 5% annualised growth, and another with 10%. The only other variable is the size of the return. Of course, a portfolio can go down in value if I pick poorly. So it’s very important that I do my research and pick the right stocks.
| Portfolio value (5%) | Portfolio value (10%) | |
| Year 1 | £2,455.77 | £2,513.11 |
| Year 5 | £14,958.27 | £16,646.68 |
| Year 10 | £38,288.34 | £47,641.97 |
| Year 18 | £102,277.68 | £154,518.10 |
Naturally, inflation will mean £154,000 is worth less then than it is now. It may not be enough to fund a Swiss finishing school. But it should still be enough to fund a UK-based university education. It would almost certainly be enough for a deposit on a house too.
