Back to school: Is it worth investing in a JISA and JSIPP?
As kids get ready to return to school after the summer, it is natural to be thinking about their futures. It is never too early or too late, to be planning for your loved ones future. Especially in a world that at times seems so uncertain. We often hear in the news that millennials are struggling to tread water in the current economy, with student debt mounting and stepping onto the property ladder becoming increasingly difficult. They will also be faced with the looming burden that comes with having a wide ranging society security system and an ageing population. With this in mind, the Coalition government introduced the JISA (Junior ISA) in 2011, as a savings and investment vehicle designed for children. But what are the benefits and how do they compare with a JSIPP (Junior SIPP)?
The rules of the playground
Just like an ISA, a JISA has a subscription limit, which is £4,260 for the 2018-19 tax year and any interest made is free of tax. It is held in the child’s sole name and cannot be accessed by anyone but him or her, yet anyone is able pay into it. Even they cannot access the money until they reach 18. JISAs not only keep savings out of the reach of kids until they are adults, but also helps those who struggle to save without locking the funds away, as with pensions.
For those who worry that access at 18 is still too young, another option is the JSIPP. This is exactly like a SIPP (Self invested personal pension) but are for children under 18. The holder can receive 20% tax relief on contributions of up to £2,880 (£3,600 gross), with any interest being tax free and is only accessible at age 55.
It is always sensible to plan for retirement. This is especially important for kids today who won’t get their state pension until they reach 68. However, contributing to a JSIPP ahead of a JISA involves saving for their child’s retirement ahead of, and possibly at a detriment to, saving for the major financial roadblocks that ideally occur in young adulthood. For this reason, JISAs have proved more popular than JSIPPs, especially for those who contribute regularly.
Would your clients like to give £100,000 to their children at 18?
Subscribing the full £4,260 to a JISA each year for 18 years at a 3% real annual growth rate, works out as a cool £100,000 inflation adjusted nest egg (see graph 1 below). The actual return would be over £132,000, which when adjusted for an inflation rate of 2.5%, would equal over £102,000 in today’s purchasing power. For example, PIM Strategic Passive at risk grade 3 has had a 5 year return of 29.47% or 5.894% per annum. This shows that little risk is required to achieve this return (however, past performance is not an indicator of future returns).
At age 18, the JISA automatically becomes a fully-fledged ISA and could be used to pay for university outright, while leaving a sizeable house deposit. The fund could also create a nice income during university or in the early years of employment where wages aren’t the best, which could be especially beneficial with unpaid internships on the rise.
Graph 1. Yearly subscription at 3% p.a. real growth
However, not all clients are in a financial position where they can maximise their ISA and pension tax allowances each year, let alone the JISA allowance. Yet even a single full subscription at birth with a 3% real growth rate p.a. can leave a tidy sum of over £7,200 (see graph 2 below).
It’s also never too late to start a JISA, as a single full subscription at age 10 with the same return, can fill the piggy bank with almost £5,400 (see graph 2 below).
Graph 2. Single subscription at 3% p.a. real growth
Do your homework
The benefits of JISAs in managing future inheritance tax liabilities cannot be understated. It potentially allows you to pass on over £76,000 to each child, tax free. This could be especially relevant for grandparents who are facing impending decisions about their estate and are keen to ensure their grandchildren are able to navigate the tricky times ahead. It is important to remember that any gifts made out of income towards both JISAs and JSIPPs are tax free. Furthermore, any PETs (potentially exempt transfers) can be highly tax efficient for individuals who have a high likelihood of paying IHT (Inheritance tax).
For a young family more concerned with the baby keeping them up all night than future IHT liabilities, JISAs offer a great way of kick starting a child’s savings and takes away any temptation to dip into it. Hopefully such prudence will rub off onto the next generation and promote lifelong saving habits.
For more information about the Parmenion JISA or JSIPP please contact our Client Services team on 0117 204 7678 or email email@example.com.
“The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”
Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact your financial adviser.