Imagine receiving a nice amount of money on your 18th birthday. That would certainly be a festive contribution. If you like this idea and if you would want to save for your first car, for your gap-year trip or towards the cost of your university degree, a junior ISA (Individual Savings Account) is a no-brainer and if you do not have one yet, ask your parents to open one for you now.
What is the difference between a normal savings account at your bank or an ISA? This is quite simple. First of all, your savings account will not allow you to use your money to invest in stocks or bonds and will only pay a puny little bit of interest on the money you save, a rate almost too small to notice. A junior ISA would make it possible to store all the happy money contributions for birthdays, school reports and passing music exams from aunts, uncles, parents and grandparents in a safe place, where you can’t touch it until you 18th birthday and – reassuringly – no one else can.
The total, combined, amount that may be put into junior ISA accounts (you are allowed one cash ISA and one stocks&shares ISA) is £9,000 each year. Let’s assume – for argument’s sake – that you manage to put in about £2,000 into your stocks & shares ISA every year and that the yield (the money you make on your money) is 5% per annum. If you start at the age of 15 (hopefully your parents started earlier, but even when not, it is not too late), you may then have:
| End year 1, age 16 | £2,000,00 | *5% | = £2,100,00 |
| End year 2, age 17 | £2,100,00 | *5% | = £4,305,00 |
| £2,000,00 | + | ||
| End year 3, age 18 | £4,305,00 | *5% | = £6,620.25 |
| £2,000,00 | + |
So, after Year 3, assuming your funds yielded at least 5% per annum, you will have made a profit of £620.25 in compound returns. The extra money you made on your notional amount, is free of capital gains tax (literally meaning the tax on your gains, aka £620.25) and the entire amount of £6,620.25 can be taken out without you incurring any taxes at all.
Parents AND grandparents each can give you and your siblings a total of £3,000,00 tax free every year. If you have two siblings, you could each receive £1,000,00 from both your parents and your grandparents. Other family members and godparents can gift £250,00 a year tax free.
Before opening an ISA anywhere, and everyone and their dog offer ISAs, do look at the fees the various ISAs charge, both for being on the platform and for buying and selling stocks or index funds. Those seemingly low fees such as a 0.50% platform fee and/or a 1% transaction fee do eat away quite substantially at your alleged yield of 5%. Look at all the fees and costs for holding an ISA, as if you were Sherlock Holmes, also at the more hidden ones, and then make your calculations to decide which platform/bank has the best deal for you. Some ISAs also offer a £25,00 sign-up bonus, which does sounds attractive. In that case, do make sure you are not paying this back via higher fees than other platforms and that the £25,00 gift is in fact a gift.
Having a junior ISA can be very rewarding. Searching for the right one will take a bit of time and might be a tat boring, but then imagine getting that lovely lump sum on your 18th birthday; it will all have been worth it.
Recommended links:
https://www.gov.uk/individual-savings-accounts
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