JISAs overview

A Junior ISA can be set up by a parent or guardian for children under the age of 18, and they have a separate tax allowance of £9,000 per tax year that does not count towards the £20,000 annual allowance for other types of ISAs. They are available in both cash and stocks and shares forms, although J.P. Morgan Personal Investing only offers the latter. It should be noted that to open a Stocks and Shares JISA with J.P. Morgan Personal Investing, your child must be under 16 years old. The parent or guardian, or friends and family, can contribute to the account but only the child can access the money – and only after they turn 18.

Making the most of allowances

When it comes to investing for the future, time is your friend. Assuming a relatively conservative annualised rate of return of 5%, monthly contributions can quickly start to add up over the maximum possible 18-year holding period of a Stocks and Shares JISA. If you were to invest £250 per month in a Stocks and Shares JISA for your child, each month from their birth until their 18th birthday, they could be looking at a balance of around £87,664. This would have consisted of £54,000 of contributions over the period, with £33,664 coming from investment returns.

Up the contributions to £750 per month, which would total the maximum possible contribution of £9,000 over the course of the year, and the estimated final value on the same 5% return basis surpasses £262,000. This is quite a sum, showing the power of compound interest over a long period of time. Data shows that, historically, the probability of loss tends to decrease the longer you are invested in financial markets. However, it’s important to remember that investment returns are not guaranteed and you can lose money. Past performance isn't a reliable indicator of future performance.

Table 1: JISA contribution and return examples over 18 years

Notes: This calculation is intended as an illustration only and is not a reliable indicator of future performance. It provides an estimate of the return on investment based on the following assumptions.

• Contributions are made at the start of the contribution period and are maintained over the whole timeframe.
• All returns, including dividends, are reinvested.
• The return rate is constant over time. Return rate actually achieved will depend on the performance of the investments which can vary.
• Results do not account for inflation or any costs and charges.
• 'Annualised return' is the average yearly return on an investment as a percentage, during a specific timeframe. This helps investors compare the performance of different investments like for like, even if measured over different times.

Alternative to the JISA: the bare trust

We believe that JISAs have many attractive features as an investment product, but there are alternatives available in the market as well.

Some investors consider setting up a bare trust, where savings are held by trustees, normally a parent or grandparent, for the absolute benefit of the beneficiary (the child). The child has the right to both the income and capital of the trust, meaning they can access the assets at any time once they reach 18 (16 in Scotland). Bare trusts are commonly used to hold assets for children until they reach adulthood and for straightforward inheritance planning. In some circumstances, you can access the funds before the age of 18 for the benefit of the child, for example to pay for school fees.

Regarding tax, income and gains from the trust assets are treated as belonging to the child, which can offer tax planning advantages in certain circumstances. However, parents should note when they set up a bare trust, that income and dividends over £100 per year are assessed on the parents' tax position and the parent is required to pay any tax liabilities due. This is known as the ‘parental settlement’ rule. This rule does not apply to grandparents or other trustees, which is why grandparents often use bare trusts for grandchildren.

Bare trusts provide flexibility and access to the capital as long as it is for the benefit of the child, while JISAs offer tax advantages but restrict access until age 18. It’s important to make sure trusts are set up properly, so you may wish to seek legal advice.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down or up, and you may get back less than you invest. Tax rules vary by individual status and may change.