This Easter, start building a nest egg for your children

Life is becoming financially harder and harder for each successive generation with Generation X being the first cohort to be financially worse off than their parents. Student debt, high property prices and rents, and a period of high inflation are all adding to the pressure.

We always advise planning early to make sure we do everything we can to bring our goals into reach but it’s hard to ask a toddler to start thinking about their future lives. So as a parent or guardian, setting up a savings account in their name can bring them closer to what they want to do in life whatever that ends up being. And if we can make it tax efficient so much the better.

Step forward the Junior ISA.

What is a JISA?

JISAs are tax-efficient savings accounts for children under the age of 18. They were introduced in November 2011 for children born after that date, replacing the previous Child Trust Fund and extending the flexibility of ISAs to future generations.

People under the age of 18 cannot enter a contract themselves, so their parent or guardian has to open the account on their behalf. Once it’s been set up, anyone can contribute to the account.

Are JISAs the same as ISAs but just for children?

There are some similarities in that there is a choice between cash and investment ISAs and returns are fully tax free. But there are some important differences that you need to take into consideration. The first difference is the annual subscription limit is only £9,000. The second difference is that the account cannot be touched until the child turns 18 and only then by the now adult account holder.

Think of the money as being in trust for the child. Once money has been placed in the account and invested, it can only be withdrawn in exceptional circumstances, mainly the diagnosis of a terminal illness or the death of the child.

Learn more about the benefits of JISAs and how to open one

Could a JISA make your child a millionaire?

It would be nice to think so, but given the maximum amount friends and family can contribute during any one tax year, even if the account was opened before a child’s first birthday, getting to a million pounds in eighteen years would be hard. Even with the magical effects of compounding – where capital growth and interest are reinvested to generate incrementally greater returns – it could take 40 years to reach that target if we assume a constant investment return at a reasonable rate.

But it could provide a significant sum of money that could help with university fees, a new car, even the deposit on a house. It can also help you instil good habits and an understanding of the benefits of saving for the future. And this can be the best gift anyone can give a child.

Learn more about how compounding works.

How should you invest a Junior ISA?

Children’s investments usually have time on their side, and it’s therefore worth considering the higher risk and potential returns of investing in the stock market.

That said, you won’t want to put all your eggs in one basket. If you invest too much in one area you can be too reliant on its fortunes. Diversification can allow you to secure strong long-term returns but without excessive risk and reliance on one or more areas. It’s the process of dividing your investments between different investments, as well as different asset classes, such as shares, bonds, property, cash and others.

By investing in a fund, you are spreading your money and risk across dozens of different companies, either managed by an expert or designed to track an index. That’s why investors often use funds to build a very diversified portfolio quickly and simply.

A JISA could help you manage any potential inheritance tax liability

Following the 2024 Autumn Budget, many more people are likely to get caught in the IHT net with the move to include unused pension savings when calculating the size of an estate.

Paying into a Junior ISA for younger members of the family and godchildren, is an efficient way of transferring more wealth to younger generations whilst giving them a financial head start in life.

There are two ways in which gifts in the form of JISA contributions can help with IHT planning.

The first is by giving an outright gift of money. Anyone can give away £3,000 tax year free of potential inheritance tax. If you wanted to make gifts to more than one child, this would mean having to divide that sum between them. You could elect to gift more than this to any number of people but these would only be potentially exempt gifts. “Potentially” because you have to live for a further seven years to place the gifts fully outside your estate. If you die within this time frame a sliding scale is used to calculate how much tax is due. You can also make any number of smaller gifts of up to £250 per person a year.

The second is to use the “surplus out of income” rule. You can make any number of small gifts provided they do not affect your ability to fund your lifestyle. If you have to draw on any capital from your savings and investments to help you get by, the tax man will regard the gifts as having come from your reserves. And make your estate pay tax on them.

This requires good record keeping to demonstrate when the gifts were made and how they were genuinely from income you didn’t need for day-to-day spending. The best way to do this is to set up a direct debit that pays regular sums into the JISA accounts.

Read more: Junior ISAs – the secret inheritance tax weapon | Charles Stanley