One challenge with this type of ISA however is choosing the best investments. Those putting money aside for their children and grandchildren in a Junior ISA generally have a very long time horizon in which to invest. So what’s the best approach to investing? 

The best investment for a Junior ISA?

Personally, if I was investing in a Junior ISA for my child today, I’d be focusing heavily on the technology sector. The reason is that we’re in the midst of a technology revolution that looks set to last for years, if not decades. Given this backdrop, I think tech stocks are likely to generate strong returns in the next decade and beyond.

One easy way to get broad exposure to tech stocks is through a NASDAQ 100 tracker fund such as the iShares NASDAQ 100 UCITS ETF. This is a technology-focused index that’s made up of the 100 largest non-financial companies listed on the NASDAQ Stock Exchange. One of the world’s preeminent large-cap growth indexes, it contains an attractive mix of technology companies that are driving the tech revolution and look set for strong growth in the years ahead.

The world’s best tech stocks

One thing I like about the NASDAQ 100 is that it contains both mega-cap tech stocks and smaller, more under-the-radar names. This means that it provides exposure to companies that are dominant today, as well as those that could be the giants of tomorrow.

The largest holdings in the index are Apple, Microsoft, Amazon, and Alphabet (Google). These companies are already enormous. However, I think there’s plenty of growth to come from them in the years ahead. Looking further down the list of index constituents, there are a number of exciting, high-growth companies that could turn out to be tomorrow’s heroes:

• Nvidia – which looks set to power the artificial intelligence revolution and the metaverse with its high-power computing technology

• Intuitive Surgical – a leader in the robotic surgery space

• CrowdStrike – one of the biggest cybersecurity companies in the world

• Zoom Video Communications – the leader in video conferencing technology

NASDAQ 100 Top 10 Holdings

Source: iShares. Data: 16 December 2021

Another attractive feature of this index is that it’s ‘self-cleansing’. What I mean by this is that if a company becomes obsolete, it’s likely to be removed from the index. Similarly, if a company becomes more dominant, its weight in the index is likely to increase. This means that no matter what happens in the technology space in the years ahead, investors in this index should be able to capitalise on the growth of the industry.

Risks

Of course, there are risks here. If technology stocks crash (as they quite often do in the short term), this index is likely to underperform. Similarly, if the US market falls, this index could struggle. I’d want to have other investments in my child’s Junior ISA for diversification.

Overall however, I think the NASDAQ 100 is a top index for long-term growth. That’s why I’d invest in it via an ETF within a Junior ISA.

The post 1 top investment for a Junior ISA appeared first on The Twelfth Magpie.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Alphabet (C shares), Amazon, Apple, Microsoft, and Nvidia. The Motley Fool UK has recommended Alphabet (A shares), Amazon, Apple, CrowdStrike Holdings, Inc., Microsoft, and Zoom Video Communications. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It was all simplified further when the Child Trust Fund was replaced by the Junior ISA in 2011. The initial annual limit was set at £3,600, and that’s since risen to today’s £4,128 per year. Just about any UK resident aged under 18 can have one, providing they do not have a Child Trust Fund.

Those who do have a Child Trust Fund can continue to contribute to that if they wish, though since 2015 it has been possible to convert this into a Junior ISA, and I’d say that’s definitely the way to go.

Anything up to the maximum limit can be invested every year, but money cannot be withdrawn until the holder reaches the age of 18 — except in cases of death or terminal illness. Once the child reaches 18, their Junior ISA converts into an adult ISA with a much higher annual contribution limit — currently £20,000 per year.

Cash or shares?

Just like a regular adult one, Junior ISAs exist in both cash and stocks & shares versions. I’ve explained recently why I reckon a cash ISA is a bad idea, with many of them struggling to even match inflation. For children I think a cash option is even worse — because they potentially have far more time available for the likely superior returns from investing in shares to weave their magic.

Pior to the Junior ISA, parents were somewhat limited in the amount they could give to their children, with any returns generated on gifted money being limited to £100 per parent per year under the child’s tax allowance. Anything over the £100 was taxed at the parent’s tax rate, with the rule intended to prevent less scrupulous parents stashing away their own money in their kids’ names to try to benefit from the offspring’s tax allowances.

But why do you need to worry about keeping your children’s cash safe from tax, when they’re unlikely to be paying tax anyway? Children have their own tax allowances, and without any earnings they’d need to have some seriously impressive money stashed away to get enough interest to pay tax on.

No tax, ever

The big advantage is that all the money they accumulate in their formative 18 years, and any future returns on it, remains tax-free for the rest of their lives after it converts to an adult ISA. And it could be a substantial amount.

Suppose your child has the full £4,128 invested every year until age 18 — it should rise in line with inflation, but I’ll stick to 2018 money here. If their investment in shares achieves a 6% total return each year (which I certainly see as feasible) and all dividend cash is reinvested, they’ll reach adulthood with nearly £132,000.

It’s like adding £132,000 to their first adult ISA allowance of £20,000, and what a start to adult life that would be. I’ve previously shown how you could become an ISA millionaire in 20 years, and it would be a lot easier with an initial boost like that.

The post Make your child a Junior ISA millionaire appeared first on The Twelfth Magpie.

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But how much difference might a Junior ISA make to your children’s fortunes, with the extra 18 years of investing offered? I’ll shortly show how those first 18 years can make a huge difference, but first, how does a Junior ISA work?

The Junior ISA was introduced in 2011 with an annual limit of £3,600, and that’s been lifted to £4,128 currently. Any of your child’s birthday money, pocket money, etc can go into it up to that limit — and, in fact, anyone can add to their pot. Money can’t be taken out before the child reaches 18, at which point the account converts to a normal ISA for the new adult to carry on using for the rest of their life.

But can those early years at that £4,128 limit make that much difference compared to the £20,000 available during adulthood? They sure can, and I’ll show you how:

Adult ISA

The total allowance of £20,000 per year is beyond most people’s reach, so let’s see what happens with half that amount. Investing £10,000 per year would amount to £833 per month, and while that might still not be feasible in the early years, it could easily be surpassed after a few years of career progression.

How much would our subject have by age 50?

I’ll go with a 6% annual return, which I think is achievable, especially considering the number of FTSE 100 stocks with dividends that come close to that. Over a 32-year career and spreading their investments out monthly, our intrepid investor would be able to accumulate a pot of £940,000.

Inflation will take a toll on that, but I assume the annual ISA allowance will keep on rising to compensate for that, and the long-term equivalent of these 2018 figures should be achievable.

What effect might an earlier Junior ISA have?

Junior ISA

Investing the maximum £4,128 per year in a Junior ISA from birth, again at a return of 6%, would morph into a standard ISA worth £132,000 at age 18 — and what a start to adult life that would provide!

But that £132,000 is just the start. If our subject was then able to add the same £10,000 every year, they’d reach 50 with almost £1.8m stashed away.

What’s staggering is the comparison between the two sets of contributions.

That £1.8m would consist of £940,000 generated from 32 years of investing £10,000 per year, and £850,000 from the earlier 18 years of investing just £4,128 per year. So the first 18 years at Junior ISA limits is worth almost as much as the subsequent 32 years in a standard ISA.

That really does hammer home the long-term benefits of investing as early as you can.

Full amount?

What could someone who could invest the full ISA allowance every year through their adult life achieve? Their £20,000 per year for 32 years at 6% would generate £1.88m to add to their Junior ISA accumulation, for a total of £2.73m.

In their case, 32 years of investing £20,000 per year would generate only a little more than twice the earlier 18 years of £4,128 per year. 

Earlier years in the stock market can be worth far more than later years.

The post How a Junior ISA could make your child an ISA millionaire appeared first on The Twelfth Magpie.

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Including the PEPs and TESSAs that preceded them, these tax-free investment vehicles have been in existence for 30 years now, with PEPs first introduced in the 1986 budget and the complementary TESSAs joining them in 1990.

It’s a fair guess that a good number of those ISA millionaires have been in it right from the start, transferred their PEPs and TESSAs to ISAs, and used their full allowances every year. And if that’s what can be achieved in 30 years, just imagine what heights you could reach over a full lifetime of investing!

What 30 years can bring

First, let’s think about what you might accumulate over the next 30 years and see if you could match these ISA millionaires. We’ll assume you’re able to use up your entire ISA allowance of £15,240 every year, investing it in 12 monthly installments of £1,270. How much would that bring in?

It all depends on the annual rate of return you can get, and if you stashed your savings in a cash ISA offering 2% annual interest (and a lot of them offer less than that), you’d finish your 30-year stretch with approximately £625,000 in the bag. Of that, £457,000 would be your own contributions with the remaining £168,000 coming from compound interest, and you might not think that’s too bad.

But what if you invest in shares instead, and reinvest any dividends you earn? An average annual return of 6% per year including dividends isn’t at all an unreasonable expectation (and I’d say it’s probably quite conservative). Some years you’d do better than that, others not as good, and some years you’d actually lose money — but with 30 years at your disposal, those short-term ups and downs will even-out and it’s the long-term average that counts.

With an average of 6% a year from shares, your ISA value would grow to around £1,244,000, easily getting you into the ISA millionaires club. What’s more, instead of the £168,000 in interest from a cash ISA, you’d be £787,000 in profit from share price appreciation and reinvested dividends!

A full life of investing

Now let’s extend our ‘what if?’ thinking a little further. It’s obviously unrealistic for the vast majority of us to use our full ISA allowance from the day we reach 18, so I’ll go with the following scenario…

Firstly, your parents start a Junior ISA for you when you’re born and invest the full £4,080 annual allowance, then when you reach 18 it converts to a standard ISA and you manage to invest £500 a month until you reach the age of 30. From then on, you use up your full allowance every year for the next 30 years. How much do you think you might have to celebrate your 60th birthday, assuming the same 6% return each year from shares? Go on, have a guess before you look down and find out…

Would you be surprised to learn that, through your ISA investments, you’d end up with a cool £3.35m, all tax free? The same plan, only invested in a 2% cash ISA, would fall short of the million pound target with a total of just £975,000.

Convinced yet?

The lesson is clear. If you want to reach millionaire status, invest as much of your annual ISA allowance as you can, start as early as you can — and put it in shares!

The post How To Join Britain’s ISA Millionaires appeared first on The Twelfth Magpie.

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I’ve previously explained how investing in shares is likely to get you far better rewards than cash, and a lifetime of seeing share values rise and not paying a penny in capital gains tax (and not paying any higher-rate tax on dividends) is a very attractive prospect.

Junior ISAs

It’s not just for adults either, as any child under the age of 18 has an annual Junior ISA allowance too, currently standing at £4,080 for the 2015/16 tax year. Now, you might wonder what the point is, when most children aren’t earning enough to pay any tax anyway — but there’s a very good reason.

You see, once you reach the end of each tax year, any ISA savings from that year retain their tax-protected status permanently — so even if your children aren’t saving any tax in their earlier ISA years, if they let it accumulate for the long term and don’t cash any of it in until they’re well into the tax-paying part of their lives, they could still save a bundle.

And when it comes to decades of compound returns, the early years really are best. But how much might it be worth?

Investing for life

Let’s suppose you plan to retire at 65, and once you reach the age of 18 you stash away £100 a month into your ISA (most people can’t afford to use up the full allowance) for the next 47 years — and buy shares every time you’ve built up a reasonable sum.

To get the most from your investments over the long term, you should reinvest any dividend, so we’ll assume you do that too. Returns from shares can be erratic in the short term, but over the long term, investing in shares has provided an average annual return of around 6%.

By the time you reach 65, assuming that fairly modest 6% annual return with dividends reinvested, you’ll have a tax-free pot of around £298,000. That’s not bad, but if you’d started out with a Junior ISA first, you’ll end up a lot better off.

What if your parents had started a Junior ISA for you when you were just five years old and had been able to invest £100 a month until you reached 18? Well, those extra 13 years would have more than doubled your tax-free nest egg to an amazing £660,000 — the first 13 years of your Junior ISA would be worth more than the subsequent 47 years of your adult ISA!

Can you catch up?

What would you need to do to match that £660,000 starting at age 18? You’d have to more than double your monthly investments, to £220, to achieve the same eventual result. It’s a sobering thought that, with the same annual rates of return, 47 years of investing £220 per month is matched by 60 years of investing only £100 per month.

And that’s why you should get a Junior ISA for each of your children, and start it as soon as you can.

The post Here’s Why You Should Get Your Child A Junior ISA appeared first on The Twelfth Magpie.

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