Watch your children's savings grow: Junior Isas are now more generous

Hundreds of thousands of children in the UK are set to receive a bumper cash bonus when they reach adulthood.

They have a total of about £5 billion in 954,000 Junior Isa accounts. And this is set to grow after the Chancellor doubled the annual allowance to £9,000 last April.

This cash could provide a vital financial boost for future generations facing expensive university fees and high housing costs.

Britain’s children have a total of about £5bn in 954,000 Junior Isa accounts. And this is set to grow after the Chancellor doubled the annual allowance to £9,000 last April

But most of the 12 million-plus under-16s in the UK are missing out — as they do not have a Junior Isa.

Parents do not need to be rich to get started, however. Many accounts can be opened with as little as £1. And even modest savings early on could make a big difference by age 18 – with all interest and investment returns tax-free.

WHERE TO BEGIN

There are two types of Junior Isa – cash and investment.

Banks and building societies offer cash accounts that pay an interest rate that can be fixed or variable.

The best-paying accounts are offering 2 per cent plus. Coventry Building Society pays the highest rate, at a variable 2.95 per cent. Just £1 will open an account.

Step towards children’s first home

Chris and Steph Hill have been saving for their children’s futures ever since they were born.

Rachel, 16, Olly, 12, and baby Nathanael all have a Junior Isa.

The Hills save £25 a month for each, along with ad hoc payments from grandparents.

They estimate that when their children turn 18, each will have enough for a 5 per cent deposit on their first home.

Canny investors: Chris and Steph Hill save £25 a month for children Rachel, 16, Olly, 12, and baby Nathanael, along with ad hoc payments from grandparents

Previously Rachel and Olly had Child Trust Funds – the predecessors to Junior Isas. But high fees and low returns blighted these.

The couple switched to Junior Isas after difficulties changing the correspondence address.

Chris, a chief executive of a multi-academy trust for schools, says: ‘This prompted us to look at Junior Isas instead.’ The Hills chose Beanstalk, a mobile phone app.

Its stocks and shares Junior Isa can be invested in a global shares fund and a cash fund. Fees are 0.5 per cent a year, plus annual fund fees of between 0.12 and 0.15 per cent. Relatives and friends can top-up accounts on the app.

Chris says: ‘In addition to the CTF transfers, we’ve consolidated other child savings accounts set up by their grandparents, so we’re saving on fees and gaining on growth.’

Tesco Bank pays a variable 2.25 per cent. Its phone and online account can be opened with £1, too.

The investment option known as a ‘stocks and shares’ Junior Isa is offered by insurers, investment managers and online wealth managers. They come with fees and no guarantees on returns.

But experts say parents shouldn’t fear taking more risk. Children have years ahead of them, and can withstand dips in the stock market.

Paul Kettlestring, financial adviser at NFU Mutual, says: ‘The crucial benefit of Junior Isas is the power of long-term compounded growth.’

Calculations by Interactive Investor show that investing the full £9,000 allowance annually could earn £327,411 when a child turns 18. This does not include fees and is based on a 7 per cent rate of return.

A lesser 5 per cent still gives £265,851. And 3 per cent would deliver £217,052. Even a modest £100 annual lump sum – a total contribution of £1,800 – could be worth £2,954 from a fund achieving medium results.

The average interest rate on a cash Junior Isa is 1.73 per cent, which would earn about £2,127.

Investment Jisas fees vary. For a low-cost online provider, charges are usually between 0.45 per cent and 0.75 per cent of the pot’s value each year.

KNOW THE RULES

Parents or guardians can open a Junior Isa and manage it on their child’s behalf. Friends and relatives can pay money in, too.

Children can have one cash and one investment Junior Isa. But the total invested must not exceed the annual £9,000 allowance.

Money saved belongs to the child.

Once they turn 16, they can manage their account. At 18, it matures into an adult Isa and the money is theirs. They cannot make withdrawals before then.

It’s never too early to start

I have always been a saver. I remember, as a boy, crossing the road from our home/surgery – my father was a doctor – to buy savings stamps, endeavouring to fill a book.

At age 16 I bought my first shares – £45 worth of ship owner Aviation & Shipping — a company which owned one vessel.

Sadly the ship went down, taking my investment with it! Not the most auspicious start to my investing, but thankfully my selections got better over the years that followed.

Indeed, in 2003 I was judged to be the first Isa millionaire, having taken mine out in 1987 when, as Peps, they were introduced by the then Conservative government.

I put the maximum one could invest yearly into my Pep/Isa, so by 2003 I had put in £126,000, re-invested the dividends, and so built a £1million Isa portfolio.

I have spent the whole time I have been investing – more than 60 years – trying, through hundreds of articles etc, to encourage others to become private investors and have the confidence to make their own decisions.

When my two daughters were small, three and five years of age, I invested a small inheritance they received in an investment portfolio for each of them. You can’t start too young!

In those days, in the early 1980s, we had nothing like Junior Isas to invest in. Since then, successive governments have tried to encourage young people to save and invest, with varying degrees of success.

In the early 2000s, the then Labour government launched Child Trust Funds, giving every baby born in the UK between September 2002 and January 2011 at least £250 in vouchers to start one of the funds. Lower-income families received £500.

These funds had to be held for 18 years, and from last September hundreds of thousands of teenagers have been able to access theirs.

While some will obviously encash theirs immediately, others hopefully will continue with adult Isas or start their own portfolios with them.

I see no reason why the principle of Child Trust Funds couldn’t be resurrected – giving all newborns a small amount to encourage saving, and perhaps direct into a Junior ISA which could then be added to by parents/grandparents, building up a worthwhile nest egg for young people.

While I welcomed the increase of the annual Jisa (Junior Isa) allowance to £9,000 last year, I would have been happier to see a positive move to try to encourage more new investors, rather than helping existing ones.

Parallel to this, we really do need to do much more to try to educate young people about the world of budgeting, saving, investing etc.

Sadly, so little in this area is taught in schools, and young people are leaving school in near-complete ignorance of financial matters. I would like these subjects to be compulsory – surely this would be in our national interest?

Thankfully, there is some movement in this direction. The Government has introduced T-Levels for 16 to 19-year-olds to aid them in their chosen technical and vocational careers.

The plan is for a Financial T-Level to be rolled out in 2022, which takes in budgeting and saving..

I have tried to make a modest contribution by publishing a short, easy-to-read introduction to the world of stock market investing by writing Yummi Yoghurt – A First Taste Of Stock Market Investment.

I believe it is the first book of its type focused on teenagers, although it could apply equally to absolute novices.