How 18-year savings rule can make £265,851 | Personal Finance | Finance
For any parent racing around toy aisles this Christmas, there might be a thought worth pausing for. Instead of piling more presents under the tree, some of that money could work harder as a financial gift for your child’s future. It may not have the instant sparkle of a new toy, but money invested early and left alone to grow can turn into a meaningful financial springboard or even turn into a life-changing sum for when your child turns 18.
Of course, no parent is going to leave their child presentless on Christmas morning. Adding a small cash gift to a Junior ISA or swapping out one or two toys for a contribution, however can sow the seeds of a much more valuable gift.
Junior ISAs are long-term, tax-free savings accounts for children under the age of 18 in the UK. These accounts have an annual limit of £9,000.
According to Laura Suter, director of personal finance at AJ Bell, an investment platform, following an 18-year saving routine using the full Junior ISA allowance could grow a child’s savings to as much as £265,851 by their 18th birthday.
This is because giving money every year can significantly increase a child’s savings over time due to the power of compound growth. For example, contributing £500 each year could grow to around £2,901 after five years, £6,603 after 10 years, and £14,770 after 18 years.
Increasing the annual contribution to £1,000 would see the savings rise to approximately £5,802 after five years, £13,207 after 10 years, and £29,539 after 18 years.
Even one-off amounts can have a significant impact over time. A single £500 gift could grow to around £638 after five years, £814 after 10 years, and £1,203 after 18 years. Doubling the gift to £1,000 would see it rise to approximately £1,276 after five years, £1,629 after 10 years, and £2,407 after 18 years.
Making a larger one-off contribution, such as the full Junior ISA allowance of £9,000, could grow to £11,487 after five years, £14,660 after 10 years, and £21,660 by the child’s 18th birthday, according to AJ Bell.
But for those able to contribute the full £9,000 every year, the numbers become “extraordinary”. Ms Suter said: “An annual maxed-out JISA contribution grows to more than £265,000 by the time the child turns 18 – life-changing money.
“And parents don’t need to see this as a solo project, they could get grandparents, friends and family to all contribute to add up to a bigger pot. If everyone got a slightly smaller gift and contributed £10 to the investment pot, it would soon add up.”
These figures from AJ Bell are based on investment returns of 5% a year after charges, and assume the same investment is made each year.
A child must be under 18 and living in the UK to be eligible for a Junior ISA account, although children living abroad can qualify if they depend on a Crown servant, such as someone in the armed forces, diplomatic service, or overseas civil service.
A child cannot have both a Junior ISA and a Child Trust Fund, but existing trust funds can be transferred into a Junior ISA. There are two types of Junior ISAs: a cash Junior ISA, where interest on savings is tax-free, and a stocks and shares Junior ISA, where investment growth and dividends are also tax-free. Children can hold one or both types.
Parents or guardians with parental responsibility can open and manage the account, but the money legally belongs to the child. Children can take control of the account at age 16, but won’t be able to withdraw funds until they turn 18.
