Parents always want the best for their children.
Using a Junior ISA can be an effective way in which to save for the future, with growth and income tax-free within this savings and investment wrapper.
A new calculation by Alliance Trust Savings has illustrated how junior could become an ISA millionaire by her 43rd birthday.
According to Alliance Trust Savings, by contributing the maximum allowance into a Junior Individual Savings Account (ISA) from birth, and then continuing to pay the maximum into adult ISAs, an investment pot of more than £1m could be built by the time the child’s 43rd birthday.
Junior becoming an ISA millionaire would happen even earlier once the ISA allowance rises to £20,000 in April, as announced in the Budget.
Based on current ISA contribution limits, the £1m ISA pot for junior would be reached by the time the child is 42 years and seven months old.
Using the new ISA allowance as the basis for the assumption, today’s newborns could be ISA millionaires by their 38th birthdays.
There is a great deal of power in long-term saving or investment, and the power of compounded returns.
By continuing to save in an ISA until age 65, maximising allowances each year, a newborn today could accumulate an investment pot worth nearly £3m under current rules, or £3.75m based on the new £20,000 ISA contribution limit.
Making these calculations, Alliance Trust Savings assumed their standard product charges applied, with an average platform charge of 0.35% a year and an investment charge of 1% a year.
Annual investment growth of 5% was assumed for the purpose of each calculation.
Sara Wilson, Head of Platform Proposition,at Alliance Trust Savings, said:
“Many parents save regularly for their children’s future and, with extra contributions from grandparents, friends and relatives, the money can quickly build up. However, at current low interest rates, money held in cash accounts has less potential for long term growth than if it is invested in the stockmarket.
“By investing in the Alliance Trust Junior ISA, by the age of 18 a child could have a pot worth £106,000 at current levels and if contributions continued, by the age of 65, they could have amassed nearly £3 million in ISAs at current limits.”
When saving or investing for children, we think it’s important to consider your overall financial plan.
Using a Junior ISA to save for your children can be very tax-efficient, but not all parents are happy to hand control of a substantial amount of money over to their children on their 18th birthday.
Some of our clients who are parents prefer to give up the tax break and instead retain control, so the money saved for their children is definitely allocated to the cost of education or getting on the property ladder, rather than squandered by a fickle teenager.