Allowance strategy: When and how much to invest for children

There’s no time like the present when it comes to investing in the future of our loved ones, but what’s the most effective strategy to get the most out of your child’s Junior ISA? 

Junior ISA savings and investments are booming in the United Kingdom, and the 2023/24 tax year saw £1.8 billion subscribed to JISAs across 1.37 million accounts. 

There’s also plenty of evidence that the ISA contribution boom is paying off, with data showing that almost 2,000 Junior ISA holders now have values worth more than £100,000, with some children possessing a wealth of more than £750,000, putting them on course to become millionaires as early as their 20s. 

But what can parents and guardians do to emulate the successes of their peers in building a nest egg for their children’s future? Let’s take a deeper look at JISAs, annual allowances, and how you may want to time your strategy:

Understanding annual allowances

The reason that Junior ISAs are so popular among parents is that they’re one of the most tax-efficient ways to save and invest on behalf of your children. 

Junior ISAs come in two forms: the savings-focused cash JISA and the investing-focused stocks and shares JISA. Both JISAs carry a shared annual tax-free allowance of £9,000 per tax year. 

Any profit your children make in their Junior ISA will be free from capital gains tax, income tax, and even dividends tax, meaning that there’s plenty of scope for building a substantial nest egg for the future. 

However, you can’t exceed the £9,000 annual allowance at any point within the tax year. While you’re free to open both a cash JISA and a stocks and shares JISA, and contribute to them at the same time for your child, the total amount of deposits mustn’t surpass £9,000 across both accounts. 

The tax year runs from the 6th of April to the 5th of April, meaning that you can continue making contributions once the new tax year begins. 

While many parents won’t need to worry about reaching their £9,000 limit each year, planning your JISA investment strategy means being aware of how much and when you should be making contributions. 

Compounding benefits early birds

Whether you choose to save using a cash JISA or invest with a stocks and shares JISA, beginning your journey earlier could bring out the best in compounded returns. 

It’s possible to open a Junior ISA for your child as soon as they’re born, and the earlier you begin contributing, the more time their money has to hopefully build.

This is because of the effect of compounding, which sees your contributions stretch further due to the amount of interest your child earns or the growth of the stocks in their portfolio. 

For example, if you invested £50 per month from the birth of your child in a stocks and shares JISA, their investment would be projected to be worth £17,874 by the time they turn 18. 

Put simply, compounding happens when any money you make on top of your original investment is invested back into your account as a form of snowball effect for your savings. Given that Junior ISAs can’t be accessed until your child turns 18, getting started early will significantly improve JISA funds, helping your kids to grow their wealth for later life. 

How much should I save or invest? 

There’s no right or wrong answer when it comes to determining how much you can save or invest in your child’s Junior ISA. However, the best solution would depend on your own levels of financial comfort and risk appetite. 

Because JISA savings can’t be accessed until your child turns 18, and even then, the money would belong to them, it’s essential that you only contribute an amount that you can afford to spare. 

If you’re looking to make your contributions stretch further, historically, a stocks and shares JISA has been shown to outperform its cash counterparts. Over the past 10 years, the average return on stocks and shares ISAs has been 9.64% per year, while cash ISAs have returned 1.21%. 

However, investing comes with a higher level of risk compared to saving, so it’s important to create a strategy that suits your goals for your children. 

Building a JISA on your terms

If you’re worried about starting too late or not contributing enough when it comes to setting up your child’s Junior ISA, don’t worry; there’s no time like the present to get started, and any money put aside can make a big difference when your kids reach adulthood. 

You don’t have to focus on turning your child into a millionaire by their 20s, and simply providing them with enough money to learn to drive or go to university can help to provide them with the freedom to take their first steps into life as an adult without unnecessary financial strain. 

The beauty of JISAs is that they empower parents to build substantial savings for their loved ones, and getting started at any time can still pave the way for significant returns.

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