Since their introduction in 1999, ISAs have become an increasingly familiar method of saving, offering competitive interest rates, instant access and tax breaks. With the more recent launch of the Junior ISA is it perhaps worth recapping the investment choices that are available to parents hoping to build a nest egg for their children’s futures.
The two distinguishing characteristics of a Junior ISA are that their funds are locked aways until the child turns 18 and the annual subscription limits are significantly lower. In general though, Junior ISAs will follow the broad structure of their adult counterparts in that they can be made up of a Cash ISA element and a Stocks and Shares ISA element - albeit, only one of each may be held at any given time - and benefit for the same tax breaks. Each ISA provider is likely to offer a different combination of investment options and autonomy over those decisions based upon their own specialisations and any discounts they may be able to obtain but the options will need to fall into following categories.
Cash
The most obvious ‘investment’ you can make with a Junior ISA is to simply save money for your child as cash; that is to place it into the cash element of the ISA and take advantage of the interest rates available there. In common with standard ISAs, the Junior ISA requires that cash deposits be limited to the Cash ISA only and that any cash found within the Stocks and Shares element be temporary and earmarked for investment in stocks and shares. Unlike an adult ISA the entire subscription for a given financial year can be invested into the cash element although, of course, that total stands at just £3,600 in comparison to the £10,680 allowance for adult ISAs (£5,340 of which can be cash).
Junior ISA providers aim to offer competitive interest rates and the interest your child does earn will be exempt from income tax. The factors to consider, as with any form of cash savings, are how competitive the rate is and the type of rate you’d prefer - variable, fixed or tracker for example.
Shares
Investments in shares, rather predictably, would need to be made through the Stocks and Shares element of the ISA. Shares are units of a publicly listed company that you can buy and sell. For them to be eligible for an ISA investment that company must be listed on a ‘recognised’ (recognised by the HMRC) stock exchange such as the London Stock Exchange (LSE). Your ISA provider should be able to advise and control which shares you are able to invest in but, for example, shares in up and coming companies traded on the Alternative Investment Market (AIM) will not be permitted due to the risks involved.
Funds
This will basically cover all collective investments where individual investors pool their money for that money to then be put into underlying investments such as equities and bonds. Funds like unit trusts and Open Ended Investment Companies (OEICs, see Investment Trust below) have no restriction on the number of people who can buy into them (i.e., are open ended) and therefore your return on your investment is directly reliant upon how well the fund manager invests his pot of money to make it grow.
Investing in funds would again need to be done through a Stocks and Shares ISA. All funds have associated costs for the investor, such as the initial and annual management charges, but many ISA providers will be able to offer you discounts on these because they can trade with the fund manager on a bulk scale. The provider may also have agreements in place which would give you access to certain funds that would not be available if you invested directly with the fund manager (known as institutional funds). However, it is worth being aware that this may all mean that you are restricted to a panel of fund providers with whom the ISA provider has an agreement and thus are not able to pick form the whole of the market.
Investment Trusts
Investment Trusts are essentially listed companies, in which you can buy and sell shares, who are solely designed to reinvest your money into further assets such as equities (company shares). These appear similar to and are run in similar fashion to a fund like a unit trust with fund managers at the helm, although they must always be a distinct company in their own right. As listed companies they only have a limited supply of shares available (i.e., are closed ended) and therefore the value of your shares is largely determined by their supply and demand, in turn driven by the underlying performance of the fund.
You can access investment trusts through the Stocks and Shares ISA as you would other funds, but it is possible to tie your ISA to one particular investment trust to benefit from their investment know how if you wish.
Bonds/Gilts
Stocks and Shares ISAs will also allow you to invest in corporate and government bonds (gilts). This is essentially a mechanism whereby you lend your money to a corporation or government for a fixed period of time (a term) in exchange for a pre-determined rate of interest and the return of your original investment at the end of the term. Lending you money to a government tends through a gilt is seen to present less risk than if you were to lend to a company through a corporate bond.
The world of savings and investments can be a very complex one with potential losses as well as gains so it is always a good idea to seek professional and independent advice before you make any decisions. By knowing the above options though you should be better prepared to make the most of the investment opportunities a Junior ISA can offer.
