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Starting them young: The power of 'junior' investment solutions

28 January 2019

Junior ISAs and retirement accounts can provide your clients’ children with a buffer against rising costs - and a headstart in saving for retirement…

Child riding bike

More people are having difficulty buying their first property. This isn't news: the cost of housing has outpaced average earnings for a while.

The cost of the average house in the UK in January 2005 was £150,663; in August 2018, it rose to £232,797, a jump of 64.7%. 

With the average 20% deposit in London now more than £80,000 (up £30,000 from the previous decade), we can expect the benchmark for home ownership to continue to rise for future generations.

Further complicating access to the property ladder, young adults are entering the workforce in debt after receiving higher education. University fees have increased to £9,250, causing the average student debt in England to climb to more than £50,000.  

Meanwhile, average incomes in the UK have not increased in line with these costs. A study by the Institute for Fiscal Studies found that young workers aged between 22 and 39 have seen the biggest falls in earnings since 2008.

Junior investment vehicles such as Junior ISAs and Junior retirement accounts can help the next generation from feeling the full brunt of these trends. 

Introducing the Junior ISA

With a Junior ISA, parents and family members can help to alleviate these rising costs by starting to save early for a child’s future. Up to £4,260 can be invested into the Junior ISA each year.

This table shows the potential saving within a Junior ISA given monthly contributions for 18 years:

Monthly contribution  JISA total (age 18) assuming 2%pa growth interest  Assuming 4%pa growth interest   Assuming 8%pa growth interest
 £50  £12,986  £15,719  £23,432
 £150  £38,958  £47,156  £70,297
 £355 (max)  £92,202  £111,602  £166,370

Accessible at the age of 18, these savings can help to mitigate the cost of student loans, or fund further professional training. Junior ISAs automatically become adult ISAs at the age of 18 and, if kept invested in the ISA , these funds can go on to help with housing deposits or other life milestones and can be accessed without any liability to tax.

The junior retirement account

Though a newborn doesn’t instantly conjure the image of retirement planning, utilising a junior retirement account provides children with significant benefits from compounding over the very long term, alongside an ability to take onboard a higher level of investment risk.

Simply put, a junior retirement account can afford a child an 18-year head start in accumulating a pension. With annual contributions of up to £2,880 (£3,600 gross with the government’s 20% tax relief), and accounting for the compounding of contributions and equity returns over time, these accounts could prove valuable to any clients looking to start saving on behalf of their children.

Tax planning considerations 

From a family member’s perspective, annual contributions to junior retirement accounts of up to £2,880 - or combined with contributions to the Junior ISA of up to £4,260 - can be made without the child needing to have any earnings. More could be paid into junior retirement accounts where the child has relevant earnings of more than this.

These contributions can be considered when planning an estate, as they count towards the family member’s annual gift allowance and therefore fall outside of their estate for inheritance tax purposes.

Utilising Junior ISAs and retirement accounts helps to transfer wealth to the next generation, with the gifts benefiting from near tax-free growth. Where the annual gift allowance has already been used, and the payments do not qualify under the gifts-out-of-income rules, contributions to Junior ISAs are potentially exempt transfers for IHT purposes.

In the case of Junior ISAs, these tax-efficient savings are able to save the family member’s estates from unwanted IHT and, depending on the size of monthly contributions made over the full 18-year span, the grandparents can reduce their IHT liability to various degrees. 

Monthly contribution Total contributions that reduce grandparent's estate IHT liability   Junior ISA total (age 18) assuming 2%pa growth interest  Assuming 5%pa growth interest
£50  £10,800  £12,986  £17,333
£150   £32,400  £38,958  £52,000
£355 (max)   £76,680  £92,202  £123,066