I have two young children and want to invest some money for them to help with things like university fees and house deposits in the future. Are junior Isas the best way of doing this?
A new tax-free savings account for children, known as the Junior Isa, will be available from November 1, with an annual contribution limit of up to £3,000 in cash and shares. Money invested will be locked in until the child is 18, at which point the Isa will become an adult one.
It is worth noting that if your children have a child trust fund, they will not be allowed to apply for a junior Isa but the CTF investment limits will be increased to £3,000 a year so that junior Isas and CTFs will to all intents and purposes be the same thing.
There are two key points from this that we need to stress. The first is that the money is locked away until the child is 18. The second is that at age 18 it is the child’s money – you as the parents will no longer have control over it. I do not think many parents will be comfortable with either of these elements.
The starting point is to look at your own affairs. For many parents, the best move would be to make their own finances as efficient as possible and then gift money to their children when they feel that the time is right for both parties. There might be all sorts of reasons why you would not choose to lock money away into a junior Isa – the rising cost of living, the possibility of increased mortgage costs this year and beyond and job insecurity, to name but a few.
Realistically, it is only likely to be the wealthier parents who will be in a position to make full use of this allowance.
If you are not maximising your own Isa allowances, it might be more logical to invest a bit more into Isas in your own name. Why would you put money into an Isa for your child to be tied up until they reach age 18, when you could put money into the same investment vehicle in your own name and have access to it at all times? This has to be better than risking your child going on a spending spree on their 18th birthday with all of your hard-earned money.
Another instance where investing in your own name and then giving your child money might be a better option is where the child’s 18th or 21st birthday coincides with your planned retirement date. If you are a higher or additional-rate taxpayer now and are likely to be a basic-rate taxpayer in retirement, it could make more sense to increase contributions to your own pension and then use some of the pension commencement lump sum at retirement to fund the gift to the children.
What it boils down to is how much you are prepared or able to invest and lock away, whether you want your child to have full access at age 18 and what sort of sum you would like to build up for them.
Not all parents would be comfortable giving their children unlimited access to a five or even six-figure sum at age 18 but this could quite conceivably be the amount in question if a junior Isa was maximised from birth and attracted a decent annual growth rate.
Jason Witcombe is a director at Evolve Financial Planning