If you’re saving for your future, using an Individual Savings Account (ISA) can be one of the best ways to do so.
If you’ve been paying attention to headlines in recent months, you may even have noticed several stories about “ISA millionaires”. According to a study by Hargreaves Lansdown, reported in This is Money, there are now 579 such millionaires in the UK.
If you want to give your children the best possible start in life, it’s important to think about their financial future. Read on to find out how you can make your child an ISA millionaire.
ISAs are a tax-efficient way to save
Ever since the government introduced ISAs in 1999, they have proved to be one of the UK’s most popular savings products. According to financial comparison site Finder, by the 2018/19 tax year, over 11 million Brits had active Adult ISAs.
The main benefit of this saving vehicle is that any returns are free from Income Tax and Capital Gains Tax, making them a tax-efficient way to save.
When they were first launched, there was an annual allowance of only £7,000 but the government raised this to £20,000 in 2017.
As we mentioned earlier, a Hargreaves Lansdown survey found over 500 people had managed to become ISA millionaires in the last two decades, despite the low allowance for most of that time. According to that report, those investors would have had to maximise their allowance and see an average annual return of 14% in order to reach £1 million.
There are a variety of ISA products to choose from
If you want to save for your child or grandchild, starting a Junior ISA (JISA) is a great way to start. Anyone can open a JISA on behalf of their child, as long as their child is under the age of 18 and lives in the UK.
Although only a parent or guardian can open a JISA on behalf of a child, their grandparents and relatives can also pay into it. Each year you can contribute up to £9,000 into a JISA, which works out as £750 per month.
To ensure that this wealth grows as effectively as possible, it’s important to choose the right savings vehicle for them. When opening a JISA, there are two main choices:
Junior Cash ISA
A Junior Cash ISA is a popular way to save, as it allows your child to earn interest on their savings without having to pay Income Tax on it.
While these accounts offer a high degree of flexibility, they typically tend to have a low rate of interest. This can mean that its true value can be eroded by inflation.
Junior Stocks and Shares ISA
If you are prepared to accept some risk, it might be more sensible to choose a Junior Stocks and Shares ISA.
With this type of account, you can invest money on behalf of your child, and they can take over from the age of 16. This type of account typically sees the highest returns but it’s important to bear in mind that it also has the risk of losing money.
Stocks and Shares investments do not afford the same capital security as deposit accounts. Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
By maximising their allowances, your child could be a millionaire by age 37
If you want to make your child a millionaire, then opening a JISA on their behalf is a good start. By maximising your contributions into their account, you can build up significant sums.
According to the Hargreaves Lansdown Junior ISA calculator, if you invested the full £9,000 each year into your child’s JISA then it would be worth £228,919 by the time they turned eighteen. This is assuming an average annual return of 5% and a charge of 1.25%, but not taking inflation into account.
Even though this is a large sum of money, your child would still be some way off from being a millionaire.
When your child turns 18, their JISA will be converted into a regular ISA. At this point it’s important to impress upon them the importance of keeping that wealth invested.
According to an ISA calculator, if your child keeps the full amount invested in an adult Stocks and Shares ISA, and maximised their annual allowance, it would take only 19 years for that sum to grow to £1 million. This is assuming the same rate of growth and charges as with the JISA.
As you can see, if you invest sensibly, and encourage your child to do the same, they could be an ISA millionaire at the age of just 37.
Get in touch
If you want to grow a nest egg for your children and want to know more about how ISAs can help you, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
