Celebrating 13 years of Junior ISAs

As Junior ISAs (JISAs) enter their teenage years on 1 November 2024, it’s a perfect time to reflect on the benefits they offer for long-term investments. These tax-free accounts allow parents to save and invest for their children’s futures, but many still harbour fears about the risks associated with investing.

In this article, we will explore why parents shouldn’t shy away from investing in JISAs, the importance of understanding risk versus volatility, and how early investments can pave the way for a prosperous future.

What is a Junior ISA?

Launched in 2011, a Junior ISA is a tax-free savings or investment account designed for children under 18. The money contributed to a JISA is locked away until the child’s 18th birthday, at which point they can access the funds as they wish. Although the child can take control of the account at age 16, withdrawals are prohibited until they turn 18.

Key points to consider:

• Annual contribution limit: Parents can invest up to £9,000 per child each tax year*.
• Contributors: Anyone can contribute to a child’s JISA, not just the parents.
• Investment options: JISAs can be opened as cash accounts or invested in stocks and shares.

Opting for equity funds over cash

Junior ISAs are generally long-term investments, particularly when opened for young children, as the funds remain locked until they turn 18. This extended investment horizon provides an opportunity to invest in equity funds, which tend to offer higher growth potential than cash savings. The long timeframe means that investors can ride out short-term fluctuations and benefit from potential market rebounds over time.

While stock markets are indeed more volatile than cash savings, they offer the potential for significantly higher returns in the long run. Historical data shows that over ten-year or longer periods, stock markets tend to outperform cash and even many other asset classes, making equities a strong choice for long-term growth.

This volatility — the ups and downs in the stock market — can feel unsettling at times, especially during downturns. However, for monthly investors, market drops provide a chance to buy shares at lower prices, potentially enhancing long-term returns through a strategy known as pound-cost averaging.

For parents concerned about risk as their child nears 18, there’s an option to shift the investments into lower-volatility, lower-risk funds as the end of the term approaches. This gradual transition can help safeguard gains accumulated over time while reducing exposure to sharp market declines.

Yet, many parents mistakenly believe that putting their child’s money into cash accounts is the safest option. However, this approach can lead to disappointing returns and even greater risks in the long run. The reason for choosing equities over cash is tied to inflation. Cash held in a savings account, even with interest, often loses purchasing power over time as inflation erodes its value. By contrast, equity investments generally have a better chance of outpacing inflation, thereby preserving and growing the real value of the funds.

In essence, while stock markets may seem more unpredictable, the historical trend shows that taking on this volatility often results in higher returns. With a long-term horizon and a structured approach to managing risk, a JISA invested in equities can provide a solid financial foundation for a child’s future.

The best time to start is now

The earlier you start contributing to a Junior ISA, the better. Every pound saved today is a potential game-changer. Let’s consider how investing in a Junior ISA can lead to significant wealth accumulation for your child.

There’s no way of putting an exact figure on how much you could save, due to the unpredictability of ISA limits and rates. However, the table below gives you some idea of how your child’s money could grow over 18 years, if you started saving from birth, into a Cash ISA (assuming a rate of 3%**) versus a Stocks & Shares ISA (assuming a rate of 7%***).

Elite Rated funds to consider

As we celebrate the 13th birthday of Junior ISAs, it’s also a great time to highlight some of the best-performing Elite Rated funds over the years.

Investing in a Junior ISA can provide your child with a significant financial advantage as they transition into adulthood. By understanding the difference between risk and volatility and embracing the power of long-term investing, parents can foster a culture of financial responsibility and growth. With the right approach, the Junior ISA can be one of the best gifts you can give your child, empowering them for life’s challenges and opportunities ahead.

*as of 31 October 2024

**Calculations assume that the rate remains constant and that interest compounds monthly. In reality, Junior cash ISA interest rates are usually variable so are likely to fluctuate.

***The average annual return of the S&P 500 over the last 20 years is 9.00% and 7.7% when adjusted for inflation.

^Source: FE Analytics, total returns in pounds sterling, 1 November 2011 to 30 October 2024

^^When JISAs were introduced, the allowance was £3,600