As JISAs become toddlers, are we stunting their growth?27 October 2015
For immediate release
27 October 2015
As JISAs become toddlers, are we stunting their growth?
This weekend marks the fourth anniversary of the launch of the Junior ISA - a tax efficient plan to help parents and guardians build up a long term savings pot for their children. However leading investment firm Tilney Bestinvest argues that four years on most accounts are not reaching their full potential, pointing to statistics issued by the government which show that 72%* of all Junior ISA (JISA) accounts are held in Cash, with only 28% in investments.
"The Junior ISA was developed as a long term savings scheme and the proceeds cannot be accessed until a child is 18 years old," said Jason Hollands, Managing Director of Tilney Bestinvest, "so it's a concern that most of these accounts are ending up in cash and quite ironic when you consider the fact that the schemes' inflexible predecessor, the Child Trust Fund, saw around three quarters of accounts invested in the markets.
"While we all need some cash for short term needs, and a cash based JISA might make sense for a 16 or 17 year old looking to utilise the cash shortly, it is a terrible place to park wealth for the long term as the real value of the capital will be eroded over time by inflation," he added.
“In any case cash-based Junior ISAs are arguably redundant now. Firstly, most children have no earnings so are unlikely to be subject to income tax on any interest and can receive it tax-free if their parents complete an R85 form when opening a savings account. But also in the March Budget of this year, it was announced that the first £1,000 of interest on any savings account will be tax free for non-higher rate taxpayers with effect from 6 April 2016. You need a pretty sizeable pot of cash to deliver that level of interest in the current low rate climate.
"If you want to hold cash for a child it is hard to see a compelling cash for tying this up within the time constraint of a JISA, where it can’t be accessed until the child’s 18th birthday, when it could be held ‘tax free’ in a readily accessible savings account which could be dipped into for costs such as school trips, books etc.”
Hollands suggests the following ideas for investments within a Junior ISA, “As a JISA can only be accessed at age-18, for young children these really are long-term investments and that means you might be prepared to accept greater risk for the potential of greater reward. That means investing equities.
"For those willing to take a very long term approach, we like the Scottish Mortgage Investment Trust. Confusingly this doesn’t invest in Scotland, nor in mortgages and behind the venerable name, sits a high conviction investment portfolio that backs growth companies from across the globe such as Illumina, which is using research into DNA to develop new treatment for disease, and Baidu the Chinese equivalent of Google. Pleasingly the trust also has very low ongoing charges of 0.48%.
“If you don’t have the inclination to keep a close eye on how your child’s investment is doing and whether the fund manager has retired only to be replaced by someone less skilled, a passive investment that simply tracks the general movements in markets might be a route worth considering. I would suggest such an approach might involve holding a couple of trackers with the majority of the investment tracking a developed market equity index such as the FTSE World and a smaller allocation to track an emerging market index.
“For those children who have less than five years to run until they might want to access their investments, there’s a strong case for selecting a low volatility investment approach but one, nevertheless that aims to stay well ahead of the meagre returns on cash. In the past, bond markets would be the natural home to find such an investment but bond markets are quite expensive at the moment and prices could fall once interest rates rise. As an alternative, parents might look instead at absolute return funds – those which pursue diversified investment strategies with the aim of delivering a little bit of return, often with low volatility. The Invesco Perpetual Global Targeted Return fund has 25-30 individual investment strategies running within it at any given time, which cover equities, bonds and currencies. The aim is positive returns in all market environments on a rolling basis, aiming for returns that are 5% above interest rates but with low capital volatility, although there are no guarantees."
The Bestinvest Junior ISA provides access to thousands of funds, including actively managed and passive options, as well as investment trusts for a low cost of 0.4% per annum. With UK index tracker funds now available from less than 0.1% per annum Tilney Bestinvest points out that parents whose children hold Stakeholder Child Trust Funds invested in index funds charging 1.5% pa could reduce their annual fees by two-thirds by transferring to a similar investment within the Bestinvest Junior ISA.
For more information visit www.bestinvest.co.uk/junior-ISA
We have case studies for JISA’s – please get in touch if you would like to use one
0203 818 6846 / 07989 650 604
0207 189 2492
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Current or past yield figures provided should not be considered a reliable indicator of future performance.
Investment trusts are similar to funds in that they provide a means of pooling your money but they are publicly listed companies whose shares are traded on the London Stock Exchange. The price of their shares will fluctuate according to investor demand and changes in the value of their underlying assets.
Targeted Absolute Return funds do not guarantee a positive return and you could get back less than you invested, as with any other investment. Additionally, the underlying assets of these funds generally use complex hedging techniques through the use of derivative products, which can carry additional risks which may not be immediately apparent.
This article is not advice to invest or to use our services.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
Please note we do not provide tax advice.
About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.
The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.
For further information, please visit: www.tilneybestinvest.co.uk
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.